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If you’re just getting into the world of multilevel marketing, you probably have a lot of questions about how you’re going to get paid.
Unlike in a normal business, in multilevel marketing, your pay is a result of your commissions and the commissions of the people who you recruit. A bit of everyone’s revenue flows upstream to the person who hired them into the company.
Different compensation schemes play with the number of people who have income flowing to them and flowing from them as well as everyone’s share of the pie.
In this article, I’ll walk you through 12 of the most common MLM compensation plans, give you examples of the companies who use these plans and give you a few tips on how to find the right plan for you.
To get started, let’s take a look at the history of MLM compensation plans and learn about why it matters.
A Brief History of MLM Compensation Plans
According to The Truth About MLM, compensation plans in MLM companies date back to before MLM itself. Before direct selling was a concept, the first precedents for pyramid style compensation plans were in actual illegal pyramid schemes, like the Ponzi scheme.
In the original conception of the pyramid scheme, recruits pay into the scheme, then have to recruit others to pay them for membership. While buy-in is still required for many MLMs, modern MLMs offer products for the recruits to sell in return for their buy in and don’t offer direct rewards for recruitment.
These early scams gave way to legal means for revenue distribution up the pyramid, and in the 1940s several companies experimented with selling to their distributors and then encouraging those distributors to sell to other distributors which they recruited.
By the 1960s, Amway made a legal business model out of the pyramid payments concept, though they’d butt heads with the FTC numerous times. Once Amway’s basic pyramid payout scheme was established, other companies picked up where they left off and created many of the variations of the basic idea that we’ll discuss shortly.
Each MLM Company Has a Twist on The General Compensation Plan
Before we get started on explaining the intricacies of the common MLM compensation plans, there are a few things that you should keep in mind.
First, though the plans we’ll describe are commonly used, you’ll only very rarely find a plan that is exactly one of these plans to the letter. Companies add their twist to each compensation plan to sweeten the pot for prospective associates.
Some companies add bonuses or perks upon reaching certain sales or recruiting benchmarks. Other companies offer “levels” which you can climb based off of your merits to get a larger share of commissions.
Even if you understand the basic concept of a given MLM’s compensation plan, be sure to read the fine print before making the commitment.
The 5LINX training kit material is an excellent example of a basic compensation structure that has a lot of additional bells and whistles which in turn make things a bit confusing.
What’s A Point System?
Many MLM compensation plans have a “points system” incorporated into the earnings structure. Points systems create a currency that is rewarded based off of meeting recruiting or sales benchmarks.
Points accumulate in software which the company runs. Once you’ve reached enough points, you can usually cash in your points for either cash or if the company offers products for points.
In practice, points systems are used to reward participants because it’s easier than rewarding them with cash, which would have to flow backward through the levels. Rather than arrange for a percentage based profit redistribution, a points system lets the distributors within an organization choose how to get their bonuses. It’s also makes payouts easier on an international level, since currencies change on a day-to-day basis, setting “levels” based on on sales can be difficult if you have to adjust for each country.
Not all points systems are equal, though. Some may be largely a formality and offer nothing of value. One thing is clear, though: if you’re participating in an MLM company which uses a points system, you need to be making the most out of your points by using every last one.
Unused points are like leaving money on the table, so make sure you don’t carry any. Some companies may also have policies which cause points to expire after a certain period, so be aware of the terms of their use. Read the fine print, even if it hurts, leaving money behind out of ignorance will hurt even more.
Walkthrough of the 12 Most Common Plans
Per Infinite MLM Software, the matrix compensation plan is the single most common MLM compensation plan. Most people express matrix plans with two numbers afterward like so: 1 x 3. In this case, 1 x 3 means that for every one person at a level, they have three distributors underneath them, and cannot have any others.
The defining feature of the matrix compensation plan is that the number of additional distributors per original distributor is limited. This means that when a distributor recruits another distributor, eventually the capacity is reached, and the recruit overflows to the next distributor down the line.
This means that if Alice is limited to two distributors under her wing and recruits Bob and Charlie, when Alice then recruits Dennis, Dennis will become the recruit of either Bob or Charlie.
The disadvantage of the matrix plan is that recruiting new associates is typically far more lucrative than moving product. If there are no sales, there’s no company.
Global Domains International is an example of an MLM company which uses matrix compensation.
According to MLM Law, “a binary plan is a multilevel marketing compensation plan which allows distributors to have only two front-line distributors. If a distributor sponsors more than two distributors, the excess fall at levels below the sponsoring distributor’s front line.”
A vast number of the MLM companies that you’ll come across use a binary compensation plan.
Binary plans are noteworthy for their simplicity at every step of the process. Nobody has to worry about interfacing with anyone other than their one supplier and their two distributors. Theoretically, profits flow upward from downstream distributors and inventory flows back in the opposite direction.
There are a few potential catches to the binary compensation plan. The first is if the nature of the business requires excessive inventory in stock.
Anti-pyramid scheme laws will have a dim view of a binary compensation scheme MLM business that requires a massive buy-in from each new distributor, only to leave the merchandise unused.
The other potential catch with the binary plan is product pricing. The margin of profit on each product has to be greater than the cost of moving the product from supplier to distributor for every participant. If products are priced too high, the supplier at the top of the pyramid will get rich while everyone else goes out of business.
The MLM company USANA’s compensation plan directly illustrates binary pay. It also incorporates various other incentives and matching plans.
The board plan is also known as the 2×2 matrix cycle or the cycle plan and relies on a tight limit to the number of people within each unit of the compensation plan. To start with the board compensation plan, each top level person is limited to two immediate distributors and each of those to two more.
The original distributor “on the board” collects a membership fee from each of the people on the board, until the board is filled out with six people. Once the board reaches six people, the cycle pays out to the originator of the board, who leaves.
The second level members then become the “originators” of their fresh boards and can collect fees themselves. Though they don’t use the “board” term anywhere, the Zurvita company uses board compensation.
Much like the title implies, the unilevel compensation plan allows for each distributor to recruit as many people as they want, with no limits. This leaves the possibility for an aggressive person to grow a huge organization, all of which contribute directly to their lone bottom line.
Unilevel plans shine for their simplicity and the clear-cut nature of how much profit flows to the top. Commissions can be a simple percentage, and everyone can easily figure out exactly how much they stand to make from a given transaction.
Unilevel plans rule for their ease of entry for people who are new to the MLM scene.
Le-vel offers a unilevel compensation plan, though they also include a variety of other perks.
The “party” MLM compensation plan is more of an entire MLM style than it is a way to be paid. In the party style of MLM, consultants organize in-person social events to make sales of their products and rely on their distributors to be willing to purchase products frequently.
The product should sell well in retail if the party scheme is going to work. Unfortunately, the payment details of the party scheme can vary substantially from party to party, but the gist of it is that the original distributor takes most the money.
Fashion First Aid promotes a party MLM style.
Hybrid plans are also known as hybrid-unilevel plans. The primary thing in a hybrid compensation plan is time spent with the company. New recruits typically receive a lower cut of revenue, then scale up over time. It’s also common for new recruits to have a promotional rate that’s higher at the start, then scales down.
The farther you go down the line from the original distributor, the more the revenue share of each recruit becomes distorted in turn. The appeal of the hybrid compensation scheme is that potential new recruits are either more willing to sign on or more willing to stay the course after they’ve signed on.
Teclutions offers a hybrid MLM plan.
The Australian Binary compensation plan is less common than the vanilla binary plan or the matrix plan, and for a good reason: it’s way more complicated.
In the Australian binary plan, the structure of distributors to their recruits is static, but the terms of commissions between each distributor and their recruits can differ. Furthermore, when each distributor recruits new people, those people go to their distributor and not the person who recruited them.
This means that most distributors get very little out of the compensation plan, even while recruiting, as noted by betternetworker.com. Most Australian binary plans have to offer wild incentives that flow back down the line to retain their distributors.
The generation compensation plan is a variant of the unilevel compensation plan that introduces special distributor recruiting restrictions and also bonuses to certain people within the stack.
In the generation compensation plan, the original recruits are divided between those that can make recruits of their own and those that cannot make recruits. Those that make recruits do so and fill the rank of their distributor rather than their own.
There is an exception, though. One distributor can make an unlimited number of recruits-another generation-at a level lower than themselves. Thus, they open up an entirely new level of recruits who pay into their pocket, which in turn pays into the original generation’s original distributor’s pocket.
The generation compensation method is two parts exploitative and one part brilliant. The distributors who are the most skilled at recruiting remain as assets for making a new entire generation, whereas others can recruit in smaller quantities to fill the ranks of their generation.
Smart generational MLM compensation plans offer a way for the originator of a generation to let rewards trickle back down to their rank and file.
Stair Step Breakaway
The stairstep plan is another variation of the unilevel plan which allows for enterprising distributors to “break away” from their supplier once their team has grown to a sufficient size and met sufficient sales benchmarks.
The benefit of the stairstep plan is that each distributor has a huge incentive to try their hardest to recruit new members and make as many sales as possible. After all, breaking away from the supplier means that they end up with a much larger share of the profit than before.
The incentives of the breakaway system often incentivize distributors to egg their recruits into massing inventory, as it both prepares them for their subsequent breakaway and also artificially pumps up their revenues.
One of the largest and oldest MLM companies, Amway, still operates using a stairstep breakaway plan to this day.
The monoline MLM plan is a basic matrix plan that is only 1 x 1. For instance, if Alice recruits Bob and then also recruits Charlie, Charlie becomes Bob’s recruit. If Alice then recruits Dennis, Dennis becomes Charlie’s recruit. The mechanism of profit sharing will vary from company to company.
In general, the line is segmented such that commission percentages are static throughout the line, and relatively equitable. This means that the originator of the line won’t benefit as much from making new recruits of their own after the first few are recruited, which may stifle growth.
Conversely, the monoline incentivizes the last people in the line to recruit like wild before easing off, thus leading to the monoline’s reputation for rapid growth spurred by those at the end.
The monoline is simple and can work with any volume of profit or any number of recruits. The line can extend indefinitely, and profits split via simple commission percentage. MyItWorks uses a monoline compensation method, which they call a “single leg” method.
The spill over compensation method is similar to the binary method and relies on restricted level size and upward profit sharing. Each distributor recruits another, who fills the rank beneath the distributor until there is no more space.
Once there’s no more space, additional recruits spill over to the next level down.
The spill over method is favored by many because it’s easy, cleanly extends to any organization size, and makes it easy for every recruit to become fully established as a distributor of their right. The downside of the spill over method is that the share of profit for each recruit is quite small. Most revenues flow directly to the distributor.
The commissions schedule of the spill over method is thus the most sensitive part of the plan. If there are too steep commissions, recruits will not join. If the commissions are too poor, dropouts from the middle ranks of the company may leave the rigid structure a complete mess.
The Australian X-Up is a bit like the unilevel compensation plan. Many have decried the Australian X-Up as unworkable because sales are passed upwards to a supplier as well as recruits. The “X” part of the compensation plan refers to the conditions under which recruits pass from one person to another.
At first, recruits are passed from the distributor upwards to their supplier, along with the majority of commissions from sales. After a certain benchmark passes, recruits are held by the distributor rather than their supplier, though profits continue to flow upward.
Once each distributor’s new recruits have passed their revenue and recruitment benchmarks, they can then recruit other new recruits, who become theirs. Thus, the people at the top of the Australian X-Up get rich first, and always receive recruits first.
Those at the bottom have a very long way to go before they can reverse their fortunes. Eventually, the people at the bottom of the Australian X-Up scheme have enough recruits and enough revenues that they can reverse the flow of commissions such that they no longer contribute the majority of their earnings upward.
Needless to say, the complication and inequality of the Australian X-Up prevent it from being widely used in all but the least reputable of MLMs.
Which Plan Should I Opt To Join?
The exact compensation plan that will make you the most money isn’t going to be the same for every MLM venture that you operate. Different products and different commissions schemes result in drastically different outcomes, so don’t assume that there’s any one plan that’s always going to work well.
Try playing around with the MLM income calculator at calculators.org to see what might get you the best results. If I were you, I’d stay away from the Australian and Party plans, though.
The outrageous inequality of the Australian plans isn’t sustainable if you’re one of the founders, and if you’re a late addition, it’s all but assured that you won’t make any money.
As far as the party plan goes, it seems like a nightmare to me because of the difficulty involved in repeated small-scale retail opportunities that hinge on social skill. If you think that you’re a slick operator, the party plan might be right for you, though, so don’t let me dissuade you.
Remember to read the fine print of the compensation plan whenever you are thinking about joining an MLM venture. There will be a lot to digest, but you’ll be able to see exactly how long it’ll take you before you’re profitable, and how realistic it is for that to happen.
Being armed with this knowledge walking in the door can make all the difference.