A company may start out doing business only in the United States, but it will quickly—usually more quickly than it’s ready to handle—get pressure from its distributors to open operations in other countries. A company must consider the issues that arise when this happens. You can’t know which countries you’ll end up doing business in, so you need to build a framework flexible enough to account for international considerations. This will affect not only product, but also culture and compensation. It is something that every company needs to consider carefully because it touches all aspects of the business.
One mistake that companies make is to assume that once they understand how to compensate U.S. distributors, they can simply replicate the model around the world. This doesn’t work; in different countries distributors have different responsibilities and the company must account for these.
In North America, network marketing has become a virtual subset of the e-commerce industry. This means that once a distributor brings in a customer, the customer buys directly from the company from that point forward. However, this isn’t true in Mexico or South Asia, where a distributor is still involved in physically distributing the product. In those countries, the distributor has much more work to do in servicing the customer and getting the product to them. The compensation plan must compensate for these activities.
At InfoTrax, we categorize markets into three groups:
E-Commerce markets. ($35,000 per capita GDP) A lot of what makes “modern” compensation plans modern is the fact that we have relieved distributors of the need to do the physical distribution and inventory maintenance. Modern compensation plans that only pay for customer acquisition—paying a higher percentage when you first get the customer and then a significant decrease going forward—flourish in e-commerce markets. E-commerce markets are consumer driven societies with universal internet access, credit cards, and secure shipping.
Examples of e-commerce markets would be the United States, Canada, Japan, and Western Europe. Most of the orders are placed by e-commerce. Commissions are paid more for customer acquisition than for servicing the customer.
Traditional markets. ($10,000-$35,000 per capita GDP) In a traditional market, some of the conveniences of an e-commerce market exist, but there is still more work for the distributor. The real difference between these two market tiers is not whether or not the technology is available, but how the technology is commonly used. It may be common for people to have credit cards and internet access but not common for people to use them for every day purchases.
In-person distribution markets. ($10,000 per capita GDP) In-person distribution markets require the distributor to go to the company office, pick up the product, and deliver it to their customers. Orders are often paid for in cash.
To roughly determine which type of market a country has, look at the per capita GDP of each country. You can find a country’s GDP and population in the CIA World Factbook. To get a country’s per capita GDP, divide the GDP by the population.
When world-wide integrated commissions first came on the scene, companies had the same compensation plan everywhere in the world. But companies soon realized that when it comes to commissions, one size does not fit all. In reality, there should be parts of the plan that are the same everywhere, but when a company moves into traditional markets and in-person distribution markets, the plan must push more money to those people who are doing the work up front. Additionally, it may need to protect the distributors’ retail profit with things such as barriers to entry, etc.
Your distributors’ needs will be determined by:
• Internet use
• Credit card use
• Access to inexpensive and secure shipping
In markets where these things don’t exist, sales people have to revert to taking orders from the consumer, picking up the product and delivering it to the consumer. It may have to be a cash transaction because of the lack of a credit card infrastructure. In cases like this, a company has to pay more in front-end commissions because the sales person is doing more work, and less in leadership commissions because the company is more about providing a base level of income.
Thinking about markets in these segments is helpful for getting a general sense of what varies, but different countries in the same tier may also have different needs from each other. Some of these needs are determined by:
• Socioeconomic issues
• Government regulations
Some countries place legal restrictions on direct sales. For example, Korea only allows a maximum 38.5% payout, and some countries frown on plans that pay too many levels.
The market types are just general guidelines to help with expansion into a new country. When a company actually expands into a new country, it needs to determine all of the actual considerations (e.g. how is a business transacted? how much is e-commerce or online? can you use the customer acquisition model or do you need to use the distributor as a sales person model?). A compensation plan needs to be flexible enough to accommodate different markets because a company never knows what countries it will end up doing business in.
This article is an adapted excerpt from Mark Rawlins’ book From Commission Plan to Compensation Strategy. Give it a read if you want even more information about the direct selling industry.