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The Three Proven MLM Compensation Plans Part 4: Binary

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This is Part 4 in a series of five articles.

Note: It has become increasingly clear to me that it’s just as important for network marketing distributors to understand MLM compensation concepts as the MLM companies, themselves. Why? Because distributors invest their all into building a downline. The bottom line is if distributors understand MLM commissions, they can make better choices about the companies in which to invest their lives!

A Binary Compensation Plan features a limited-width structure that requires a distributor to specifically have two first-level distributors–two legs–in his/her organization. A leg is a portion of a distributor’s organization starting with one of his first level distributors and encompassing that individual’s entire organization. In other words, it is a line of sponsorship including each personally-sponsored distributor and all his/her downline. A Binary Compensation Plan does not pay on levels, but on the balance between the two legs. A person does not get paid on his/her downline sales, but receives commission on the sales volume of the weakest of the two legs. With a Binary Plan, depth really doesn’t matter. What matters is balance of sales volume between the legs.

The basic concepts entailed in a Binary include:

  • A distributor sponsors two people, creating two downline legs, and then builds a downline under those two legs.
  • Some binaries allow distributors to have multiple business centers—usually three, or seven.
  • Traditionally, Binaries pay their downline commissions once a week, however, some still pay monthly.
  • Distributors have to generate downline sales volume that is balanced between the two downline legs. When individuals reach specific levels of sales volume, they receive a commission check.
  • Sales volume can be accumulated in one week or across several pay periods. Binary Compensation Plans are different than any others. With most plans, whatever volume you accumulate in one pay period, you get paid on. If you don’t accumulate enough to get paid, it’s just lost. You never get paid on it. But with a Binary, you can accumulate volume of profit for several pay periods. When you accumulate enough to get paid, you get paid. Binary has that cumulative effect. For example: If you are required to earn $500 in volume in a week to get paid and you’re only accumulating $100 a week, or $100 per pay period, then on the fifth pay period—Bingo! You get paid.

Example: Binary (1 Business Center – Direct Income from Group Volume)

The challenge with a Binary Plan is trying to keep both legs balanced. If you get $100,000 on one side and $10,000 on the other side, then you’re going to get paid on the $10,000. If you have $100,000 on one side and $99,000 on the other side, you’re going to get paid on the $99,000. However, today a popular variation of this plan allows the volume to be split 1/3-2/3.

Most Binary Plans pay a pool commission in a weekly pay plan. A distributor has two first levels who must each generate an amount of sales volume. An amount of money is put aside in a pool and then is divided up among those who qualify.

The challenge the Binary Compensation Plan presented when it arrived on the industry scene was it was a completely opposite approach to commissions than the existing plans. The difference was like between night and day.

Every other compensation plan up to that point had been built on the following two premises:

1. Commissions are paid on a limited number of levels of a distributor’s downline, but on an unlimited amount of sales volume.

2. All commissions for a given product order are paid in a single commission run.

In contrast, the Binary Plan is built on the following two opposite premises:

1. Commissions are paid on an unlimited number of levels of a distributor’s downline, but on a limited amount of sales volume.

2. Commissions for a given product order can be paid across several commission runs, and in fact, it’s impossible to know when all the commissions on a single order have been paid.

Hitting the Cap

A fairly typical Binary Compensation Plan would say if you have at least $500 in volume on the weak leg, then you receive 10% of your weak leg in commission. However, one of the rules of almost all Binaries is that they have a payout cap of from 40-60%. This means if a company adds up all of its payments and the total exceeds the payout cap, then everyone’s payment is reduced enough proportionally to keep total payout under this cap. This scenario is called hitting the cap. All binaries hit the cap, so this is a very important feature to be familiar with.

Example

If a company:

  •  Has a 50% payout cap to limit payout to no more than 50% in sales
  •  Makes $1 million in sales;
  •  Pays out $550,000 in commissions, which is 10% over the set limit;

Then that company:

  • Has to reduce everyone’s commissions by 10% in order to make it. Distributors only get 90 cents on every dollar.

In the original Binary Plans, if each of the distributor’s two downline legs generated $5,000, then the distributor received $1,500. That, of course, is the simple case. In reality, if the two legs generate more volume or if it takes longer than a week, the plan becomes much more complex to understand. In the Binary Plans that allow distributors to have multiple centers or multiple positions in the downline, if they have seven centers, they can potentially earn 7 x $1,500 each week, or $10,500 per week!

Multiple-Center

A concept that allows a distributor to have more than one position in the downline tree. Multi-center trees are implemented in two ways:

1. Once distributors succeed in filling in their original matrix, they can have a new business center in the tree and build a new downline from that center.

2. All of the business centers are created at the time the distributor is sponsored, and the distributor’s entire downline is placed under these multiple business centers.

5% Plus Theory

The 5% Plus Curve observed in network marketing industry commissions provides a standard for network marketing companies to allocate commission money. The 5% Plus Theory says, in order for a compensation plan to be viable: 1) each upline distributor that receives commissions must receive at least 5%, and 2) a company must pay those upline distributors critical to its growth and stability at a higher percentage. The compensation plans that have survived have done so by implementing this theory.

Standard 5% Earnings and 5% Plus Curve

The rationale behind it is, first, companies can’t pay the standard 5% commission to all distributors. Sometimes when a distributor makes a sale, he/she might have a 50-60-person upline. So, if there were 50 people in that upline and the company paid everyone 5%–5 x $50 = 250% payout! Obviously, the company has to limit and decide which individuals to give the 5% to.

Second, there’s a problem with paying only the standard 5% because if the downline sales for a distributor are $10,000 and you give that individual 5%, his/her earnings are only going to be $500. Is this the appropriate amount for a distributor to earn on $10,000 of sales? If somebody else is making those sales other than that individual, then maybe it’s appropriate. But, if he/she is personally making those sales alone, he/she will soon bail and work at Wal-Mart because the MLM earnings per hour are just too low!

Applying the 5% Plus Theory, you pay additional money to the upline distributor who is responsible for those sales. So, the challenge is to create a segment of the downline that can make a higher percentage. These are the people you really want to “incentivize.” The vehicle to accomplish this is hybridization of the compensation plan—adding on additional commission types, i.e., a fast start program.

Abiding by the 5% Plus Theory enables your distributors to solidly count on:

<p= style=”margin: 6pt 0in; padding: 0in;”> – If I build a downline, I will have some control over my destiny.

– If I build my downline properly, I will get paid on the majority of all of my downline sales.

Binary and the 5% Plus Theory

How does a Binary Compensation Plan create the above-referenced 5% Plus Commission? The 5% aspect of the Binary Commission is the standard 5% commission, itself. Most Binary commissions pay 10% on the weak side, so, if you balance your sales, then you’re going to make about 5% on your overall volume. Then, you’re going to make plus money on that volume.

The plus aspect of the 5% Plus Theory is really the fast start commission or a second center, for those who have a multiple center. These days Binaries use fast start commissions as well as others, like a matching bonus, which is a level commission that pays distributors a percentage of the earnings of the people In their organizations. The Binary Fast Starts are typically the same as the Hybrid Uni-level Fast Starts.You can receive fast start commissions on a new recruit not because he moved up from one class to another, but simply because he was in for his first 30 days. This constitutes a time-based division, not a rank-based division. In other words, the plus aspect of the 5% Plus Theory in Hybrid Uni-level Plans is a time-based division. With a Binary, you make your plus because while you’re in build mode when you sponsor people, you make that higher fast start commission, which can be 10%, 12%, 15%.

Strengths of Binaries

  • The initial selling feature of the Binary Compensation Plan was that it was much easier to understand and maintain qualifications for than other plans of the day. What could be simpler? You sponsor two people and build those two legs. If those legs generate business, you receive commissions. If they generate a lot of business, you make a lot of money! A major selling point is that volume never moves out of your payline no matter how many levels deep your genealogy goes. Of course, when something sounds too good to be true, it usually is, and Binary Plans turned out to be more complex than they seemed.
  • The Binary does an excellent job of paying the mid-range commissions. This is its strength and probably the reason it has survived these many years. It does not do well on very low-end commissions or high-end commissions, but does extremely well on the mid-range commissions. The Binary Compensation Plan’s behavior is very well understood.

Weaknesses of Binaries

  • Many of the original Binaries were built by promising distributors that their upline would build their downline. This created a welfare mentality.
  • Most Binaries have a maximum upper limit on earnings–the payout cap. Some distributors don’t realize this. However, Binaries may be combined with other commission types to fix this capped earnings problem.
  • Binary pays well but the structure aspects of the plan can be difficult to deal with.
  • A distributor moves through a chronology time as a leader does and moves to the other leg of the tree. If he/she doesn’t get that bubble–that plus piece configured right–then he/she starves his/her organization for earnings.

Summary

Most distributors seem to either love Binary Compensation Plans or hate them. These plans inherently reward salespeople and sales leaders better than almost any other type of plan. They pay well, but the structure can be challenging to deal with. It is a big plus that distributors no longer have to evenly balance the volume of the two legs. The focus with a Binary is to maximize success by combining it with other commission plans.

Successful Binaries

Isagenix and Synergy Worldwide are examples of MLM companies using a successful Binary Compensation Plan.

__________________________

·          Part 1: The Three Proven MLM Compensation Plans 

·         Part 2: The Breakaway MLM Compensation Plan

·         Part 3: The Hybrid  Uni-level MLM Compensation Plan

·         Part 4: The Binary MLM Compensation Plan

·         Part 5: Breakaway, Hybrid  Uni-level, Binary MLM Compensation Plans: Differences

                                           


© Copyright 2007 InfoTrax Systems 

No part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without permission in writing from the author.

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