Direct Selling with the Multilevel marketing (MLM) compensation plans has become a popular business model for companies across various industries.
A crucial part of this model is the MLM compensation plan, essentially the structured methodology by which the company rewards its sales representatives/direct sellers.
An MLM compensation plan's effectiveness(apart from the right products for the right target audience- customers) can influence a business's success or failure. Therefore, creating an effective and well-balanced compensation plan is critical.
1. Understanding MLM Compensation Plans
MLM compensation plans dictate how representatives/direct sellers earn income through direct sales commission or override bonuses on downline product sales. The objective is to incentivize and reward hard-working representatives who significantly contribute to the company's success.
Designing an optimal MLM compensation plan involves considering various factors like the pricing structure of the products or services, the selling behaviours the company wants to encourage, and the balance between rewarding sales representatives and maintaining the company's profitability.
2. Types of MLM Compensation Plans
Fundamentally, all MLM compensation plans are based on the company's genealogy structure. However, companies can consider several pay-out options when building their compensation plans.
Accurate information on the types of compensation plans can be viewed here: https://www.strategyindia.com/direct-selling-compensation-plan.html.
Apart from the article, here are some standard terms the direct selling industry uses to discuss compensation plans. However, they need to be more technically correct.
- Breakaway Plans
One of the earliest MLM compensation structures is the Breakaway plan. In this model, representatives achieve personal and group volumes, "break away" from their downline and start their lines. However, this plan can be complex to explain to newly recruited representatives and may cause self-focused behaviour until they reach the breakaway rank.
- Unilevel Plans
Unilevel plans are more straightforward and typically use one genealogy to pay. Representatives can sponsor as many people on their front line as they want, but the plan limits the depth of the downline. For instance, a Unilevel plan might pay a 5% commission per level, up to seven levels.
- Hybrid Plans
Many MLM companies opt for hybrid plans, combining elements of different plans to better align with their objectives and goals. A typical example is a mix of Binary and Unilevel plans, with Binary payouts for initial sales volumes and Unilevel payouts for ongoing sales volume.
- Matrix Plans
Matrix plans offer more control over payout volumes by ensuring a fixed width and depth. For instance, in a 3-by-9 matrix, each level consists of three representatives, up to nine levels. This plan encourages strategic placement of personally sponsored reps to achieve maximum payout and downline growth.
3. Key Elements of MLM Compensation Plans
Designing a compensation plan to fit your organization is a task that takes time to complete. The implementation and execution of your payout structures require ongoing focus and adaptability. As your organization grows and changes, your compensation plan must keep pace.
- Focus on Customer Sales
For MLMs, retail sales to non-participating customers are critical for growth and compliance. The company will attract regulatory scrutiny when most sales are to the company's field representatives rather than retail customers.
Achieving the right amount of retail sales begins with product and service development. Researching and creating products that fill a gap in the marketplace and meet consumer needs is essential. Additionally, pricing should be attractive to retail customers while covering operating costs, including representative compensation.
- Provide Opportunities for Ranks and Recognition
While commission earnings are essential, the best plans also offer recognition for achievements within the organization. Opportunities for representatives to attain defined ranks with a new title and compensation can be highly motivating.
- Incorporate Compression Wisely
Compression within an MLM compensation plan bypasses ineligible or inactive representatives when determining rank qualifications or compensation. This allows active representatives to earn more. However, overuse of compression can discourage teamwork or disincentivize recruitment.
- Add Activity Requirements
Building in activity requirements to reward desired behaviours leading to increased sales, representative retention, and company profits is essential. For instance, defining a minimum amount of personal sales volume over a rolling period required to maintain active status can encourage consistent performance.
4. The Best MLM Compensation Plan
Determining the "best" MLM compensation plan largely depends on aligning the plan with the company's unique direct selling strategy. This includes factors like pricing strategy, customer vs distributor purchases, selling approach, Unique Selling Proposition (USP), auto-ship, product packs & first-timers, and leaders' roles.
- Pricing Strategy
Your pricing strategy impacts the attractiveness of your compensation plan. The prices you charge to your customers and distributors should reflect the value proposition of your products.
- Customer vs. Distributor Purchases
The percentage of monthly revenue that should come from customers (not reps) is a crucial consideration. In the USA, the legal requirement is a minimum of 51%. Balancing customer and distributor purchases can influence your compensation plan and increase your chances for success.
- Selling Approach
Your selling approach is another crucial factor. Are your representatives taught strategies to find customers and recruits? Do they conduct online or in-home parties or one-on-one Selling? Your compensation plan must align with your selling strategy.
- Unique Selling Proposition (USP)
Your USP influences how much you can charge for your products. Understanding what makes your products different from those of other companies is crucial.
Your auto-ship strategy, if any, will influence your compensation plan design. Auto-ship programs(only if legal in the country of operation) can drive customer loyalty and ensure regular revenue inflow.
- Product Packs & First Timers
The proportion of your monthly revenue from first-time orders with products also influences the design of your compensation plan.
- Roles of Leaders
Some plans pay significant amounts to a small portion of the sales force. Others aim for more balanced rewards so newer recruits have a compelling opportunity. Deciding on leaders' roles and how they are rewarded is an essential aspect of designing a compensation plan.
5. MLM Compensation Plan Building Blocks
Designing the best MLM compensation plan involves incorporating critical strategic building blocks. These building blocks can determine revenue and profit outcomes, define your field culture, and influence the plan's attractiveness for recruits to the business.
- Customer Commission or Profit
When a rep enrols a customer, they should earn a commission when the customer places an order. The commission earned should be attractive enough to motivate the rep to continue enrolling new customers.
- Fast Start Commission
A Fast Start period, typically three months, provides special incentives and rewards that create a sense of urgency and excitement for recruits. This can significantly increase the likelihood of them continuing to work on their business and achieving success.
- Career Path
Your career path is the backbone of your entire compensation plan. It reflects the behaviours and performance levels the plan will reward. Designing a good career path is essential for driving performance and ensuring the plan's overall success.
- Mentoring and Team Building
A sponsor should receive rewards for mentoring and training recruits. Every rep must see compelling rewards for building a team.
- Leadership Rewards
Rewarding your leaders for their influence and mentoring is crucial. Full-time incomes must be achievable by demonstrated results in building a sizeable downline team of competent people.
- Rank Advancement Bonuses
One-time fixed dollar bonuses are often paid when a person advances to a higher rank in the career path. This type of bonus has proven effective in driving people to stretch and advance in rank.
6. The Role of Strategy India
Designing the most innovative and mathematically viable MLM compensation plans can be daunting. This is where Strategy India (https://www.strategyindia.com/mlm-guidelines-4.html) comes in, with its team of experts who help clients choose the proper compensation plan structure based on their product category and business objectives. Strategy India tests and simulates compensation plans for scalability and strength, ensuring they are both legally tenable and commercially viable.
Compensation plans are integral to the seamless functioning of MLM companies. These plans must be designed carefully considering product pricing, sales techniques, and leadership. A well-crafted compensation plan can efficiently incentivize and reward representatives, bolster sales, and ensure the sustainability and growth of the company.