Starting an MLM Company That Will Last, Part 2 Compensation Strategy

Multilevel Marketing is big business. There are dozens of companies (including Infotrax) that sell products and services to MLMs new and old. My company has been supporting companies in the industry for decades. I have seen a lot of companies start: some fail some succeed beyond their wildest expectations, and many others fall somewhere in between.  This article is the second part of two-part series on Starting an MLM Company.   This article focuses on how distributor motivations change as a company grows and commissions should match these new motivations.

Evolving distributor motivations

As a company grows, the needs and motivations of the distributors it attracts change. Just as companies are started by entrepreneurs, the first distributors who join a company are themselves entrepreneurs. However, as a company becomes more established, it attracts distributors who are more conservative, and more risk adverse. These distributors are looking for different things from the company. Geoffrey Moore’s book, Crossing the Chasm, identifies a consistent pattern in customer behavior when it comes to types of people who will embrace a product or company depending on what stage it is in in its life cycle.

This research has been applied to everything from the adoption of hybrid corn seed in Iowa in the 1930’s to high-tech products. In my experience, it directly applies to MLM companies as well, and I believe the principles are relevant for our compensation creation purposes.

The basic theory is that any group of consumers for a specific product can be broken down into five categories from “innovators” to “laggards” (Moore, see also Rogers, 2003). Each of these groups is looking for different things from the company. As the company grows, the people who join the company will slowly move from innovator, to early adopter, and so on. If it is successful enough, the company will eventually attract the laggards

Innovators

This is important to know because when a direct selling company starts out, its first set of leaders will be innovators, those who want to get in on the ground floor. The company needs their risk-taking and reward-seeking to gain momentum. They want a lot of flexibility.  They tend to have monetary resources that allow them to handle failure.  As you start your company, they are often your early partners. They can bring resources to help you get off the ground.

This evolution through the life cycle will affect everything about how a company does business, from the type of literature created, to the importance of things like shipping error rate and flexibility in enforcing policies and procedures. For example, innovators are more tolerant of errors.

Many of your key leaders and hyper-sponsors are in this group.   If we use Everett Rogers’ numbers, then early adopters are about 2.5% of all those who will join you.

Early Adopters

Early adopters are leaders.  People look up to them and take advice about new products and services. They also tend to have a large network of people they can influence.  They also more willingly take on risk because they are financially able to handle risk.  However, they are more cautious than early adopters.  They like to be careful about how they influence people in their network.  If they see a good opportunity, they will join and they do influence their network to join as well.  This group tends to bring in a higher number of distributors, somewhere between 5 to 9. This group is about 13.5 percent of your distributors.

Early Majority

The distributors in this group will join once a product has been established.  If people are making money selling the product, or feeling better because of taking the product, these people will join.  They do not have as many people in their sphere of influence.  These distributors bring in a few people to the business.  Typically, this group is above average in status in the community.

Using Roger’s calculation, the early majority are 34% percent of those who join you.

Late Majority and Laggards

The late majority and Laggards tend to be critical of new ideas.  Laggards, on the other hand, insist on tight policies and procedures and are intolerant of errors. If the company wants to continue its growth, it must also create a slow, but dramatic, evolution in the compensation plan.  Laggards, on the other hand, insist on tight policies and procedures and are intolerant of errors.  They wait until most of the people they know have adopted a new idea before they try it. Rogers would say this is about 34% for Late Majority and 34% for Laggards.

A company must be prepared to adapt through the cycle as the types of people who are joining the company evolve from innovators to laggards.

This one trips up many growing companies because their “inner circle” of distributors continues to be comprised entirely of innovators, even though the company is now attracting early majority, late majority or even laggards. The further into this life cycle a company gets before recognizing this change, the more of a problem it becomes. This is because although innovators and early majority have a lot in common, innovators do not have much in common with laggards.

At some point, the innovators no longer represent the views and interests of the new distributors who are joining. The company culture changes and the way you train on your compensation plan must change, your training must be more detailed as far as the actions you expect them to take, and the rewards they can expect if they do those actions.

It is important to remember that late majority and Laggards are much less tolerant of mistakes, documentation that is missing or incorrect, so in order to cross this chasm a company must realize who they are bringing in and tune the message to that group.

One last point, I believe Crossing the Chasm is a must-read book for the executives of rapidly growing companies!

Moore, G. A. (2002). Crossing the chasm.

Rogers, E. (2003). Diffusion of Innovations, 5th Edition. Simon and Schuster.