One of the key arguments in the recent Vemma versus the FTC case was about the use of personal volume (PV) requirements for compensation qualification. The FTC contends that compensation must be paid on the sale of product and not on recruitment. But if a company requires PV for compensation, it is unclear if the “sale” of the product was made for end consumption or for compensation qualification. This draws into question whether or not the company has a distributor “Pay to Play” plan.
Both unilevel plans and binaries (which is what Vemma has used) use some sort of PV requirement. Most companies have sidestepped the “Pay to Play” problem by allowing customer (non-distributor) purchases to contribute to the PV of the distributor they buy from.
The trick with customer volume comes in a binary plan. After a customer starts buying from his or distributor, the downline of that distributor continues to build downward in the forced binary structure. Later, if the customer decides to become a distributor, he or she goes to the bottom of the tree. In other words, if a customer decides after a period of buying to become a distributor, he or she won’t earn commissions on anyone who joined after the buying began. To avoid this situation, some distributors in binary compensation plans put everyone into the tree as a distributor and not as a customer. When this happens, those distributors’ PV counts only for themselves, which makes their binary plan look more like a “pay to play” plan.
If PV is going to be a problem for companies in meeting new FTC rules, it may mean the resurgence of breakaways, or hybrid plans incorporating elements of the breakaway. A breakaway plan can survive without PV. It is based on group volume and does not count a distributor’s own purchases in the volume generated by his or her downline. Companies that started in the 1950s used breakaway plans. In that decade and through the 1980s, a top distributor had to work closely with his or her downline distributors to get orders from the company to the end consumers. A top distributor would collect the orders from the downline and then send in one big order to the company. The top distributor did just what the name implies—he or she distributed product to the downline. When drop ship and then internet ordering occurred, other plan types started to increase in numbers and success.
The following excerpt from Mark Rawlins’ book, From Commission Plan to Compensation Strategy, offers a more in-depth understanding of breakaway plans.
The Breakaway plan is the grand-daddy of modern compensation plans and, up until the mid 1990’s, it was the only type of compensation plan that had a proven track record.
There are four key identifying features of a breakaway plan:
• The baseline compensation is a level bonus paid to distributors who have achieved and maintained the breakaway rank, usually determined by group volume. The bonus is paid to breakaway distributors for the work of distributors in their downline who have also achieved breakaway.
• Breakaway distributors are paid front-end compensation on the distributors in their group who have not achieved the breakaway rank.
• When a downline distributor reaches breakaway rank, their volume is no longer a part of the upline distributor’s group volume.
• Distributors receive either the baseline level bonus or the front-end bonus on a given downline distributor, but not both.
In the mid 1990s, breakaway plans lost their popularity among startup companies due primarily to concerns over front-end loading created by unreasonably high group volume requirements to achieve and maintain breakaway group volume qualification. As binary and unilevel plans evolved and became more effective, the breakaway plan’s popularity dropped further.
But as binary and unilevel plans evolved, so did the breakaway. Modern breakaway plans have dealt with the problems that once plagued them. There is no longer any reason not to use breakaway plans in network marketing companies except for their unpopularity among distributors based on their problematic past.
One area where breakaways have never fallen out of favor is in the party plan arena. It is also the plan of choice among companies who have sales of $1 billion USD or more. Eight out of the top ten companies on the Direct Selling News Top 100 list were using some form of a breakaway compensation plan in 2012.