In the MLM world, a commission plan is about figuring out how to create a framework where distributors do the least amount of work—the most important work—for the maximum amount of earnings. The plan must be designed to allow distributors to reasonably meet qualifications and rank advancement rules. The goal is to find that illusive state of nirvana out there where distributorships are viable, where distributors make enough money that they’re willing to continue to do the work it takes to maintain their business month in and month out. Let’s call it the Viable Distributor Point.
Viable Distributor Point
The Viable Distributor Point has never been documented; nobody really understands exactly what it is. Is it $35 for 10 hours of work? Probably not. Is it $150 for that same 10 hours of work? Maybe. The question we have to address is, “Where do we get viability?” There has to be enough of a market, the distributor has to be able to spend few enough hours, make enough money, etc. What’s the correct balance to achieve success?
Distributor retention is much higher when distributors are earning $500 a month than when they are earning less than $100 a month. There is not an exact, magic figure, and the amount is different for each company. However, there always seems to be a point in the few hundred-dollar range where retention takes a dramatic turn upward. A statement I heard at a convention once struck me: “The different between the life a person is leading and the life he wants to lead is usually a few hundred dollars a month.”
The income a person makes, as a distributor for an MLM company is often a second income, on top of a full-time job. Suppose that your day job isn’t necessarily something you want to give up, but you’re not satisfied with the level of income it produces, the challenge it presents, or the level of growth it offers. How much additional income will it take to keep you involved in a second income-producing effort? It will have to be worth the free time you’ll have to sacrifice. You might, for example, wind up going to a sales meeting or delivering products rather than watching the playoff game for whatever sport. For most people, the answer to, “How much will it take?” currently seems to be around $500 a month.
Why that amount? Because our society demands that whatever a person earns on the job should go to the family—car payments, mortgage, the children’s education—but often the money earned on a side business is that person’s own money—mad money. That extra few hundred a month means that now people can achieve what they want. They may not be able to believe they could earn ten times what they’re making now, but they may be able to visualize a life of making ten to fifteen percent more. The extra money allows them to have the extras they want without having to fight the family budget for it. That ability makes a huge difference in network marketing because it motivates people to work as distributors and to stick with an MLM company.
A company’s commission plan should enable distributors to reach this level as quickly as possible. If they work and struggle for many months without earning more than a few $50 or $100 commissions, they often quit. That small, additional income isn’t worth the time and effort required to earn it. To retain distributors, a company needs a commission plan that pays those distributors who are committed to this critical mass of approximately $500 as soon as possible.
How does an MLM company design a plan to do this? By making sure that after they’ve proven they’re serious by moving past the product evangelist role to the salesperson role, the percentage they earn on their downline increases. For example, if the commission plan pays out five percent on downline sales, a distributor needs $10,000 in sales to earn $500. But, if the commission plan allows distributors to make twenty percent instead of only five percent on downline sales, they can start bringing in $500 a month with only $2,500 in sales. Obviously, many more people can reach this level of sales than can reach $10,000. That means more people will be motivated to continue because they’ve reached a level of additional income that’s meaningful to them.
Allowing people to make $500 a month isn’t all an MLM company needs to be concerned about. Many people become involved with network marketing companies because they have a big dream. Some people can see themselves making a whole lot of money, and that’s their intention when they sign up as a distributor. A commission plan must allow for the dream-builders as well as for the people who only want a few hundred extra dollars each month.
Balancing Degree of Difficulty with Reward
Sometimes MLM companies think that if they pay 2% commission to 10 individuals, then it would be even better to give 1% to 20 individuals. However, for some reason they’re forgetting how little money that is. Companies need to consider the degree of difficulty to reward ratio when designing their commission plans.
Distributors get really excited about someday receiving an 8% commission on their Sixth Level. This is serious money, but it takes a long time to get there. What’s going to keep them in the company long enough to reach that wonderful Sixth Level? It’s going to take them two years to get there and they’re not going to give a company two years of their time unless they’re making good money—enough money to make it worthwhile during the interim. Realistically, most people are not ever going to get there.
In conclusion, a commission plan must be designed to define how much work an MLM company will have to do to retain distributors and consumers, and how much work its distributors will do. We must create distributor viability using our commission plans to make and compensate the largest crowd of people. Most importantly, a company’s distributors need to perceive its commission plan as giving them a fair opportunity to seize their own destinies and meet their own financial goals.
Source: Understanding Multi-Level Commissions and Their Role in a Successful Company, Mark Rawlins.