When I joined my network marketing company, the first thing I did was extensively study the compensation plan to see how I could make money. I figured that anyone starting a new business would do the same, but I was wrong!
In fact, there are many distributors who don’t even know how they get paid! They receive a check in their mailbox or a deposit in their bank account, but they have no clue how to calculate how much they have earned.
Often this is because they came into the business for the products, found themselves talking about them, and started growing a business without realizing it. Others just get overwhelmed with all the complicated math, or they have been given a very watered-down version of how the compensation plan works from their upline. Whatever the case may be, understanding how it all works for you can be very motivating and empowering!
In this blog post, I will explain a little bit about compensation plans and more importantly, the different phases of business building and the associated way that you can earn higher bonuses.
By the way, if you don’t care about the details, that’s fine. At a minimum, spend enough time to understand your company’s primary way to get paid with the phase I bonuses so you know where to focus your efforts. If you want to plan into the future, then it would be worth the time to understand the phase II and phase III bonuses.
Realize that most MLM company compensation plans are usually a hybrid of the various bonus types mentioned so money is available for new distributors, ones who have been in for a year or two, and those who are at top leadership positions. There must be something in it for all levels of distributors or there will be holes that slow or stop growth of the company.
Finally, companies reserve the right to change the plans, at will, which could either help or hurt your income. Often, the compensation plans start out with the company’s best guess of what will work to quickly build the company network and sales. But, because of “clever” distributors who find loopholes in the compensation plan or payment rules, companies change the rules so they don’t lose too much money.
Make sure to have a current copy of the company policy manual to keep abreast of any changes. Your approach to building your business will need to factor in any changes of the compensation plan.
How Much Can You Earn?
Most companies publish an Opportunity and Earnings Disclosure Summary each year. (Search the internet for it if you can’t find it in the documents supplied by your company or upline.)
Some are a few years behind, but they will show you the percentages and/or average monthly or annual earnings of each rank of the company. There are no promises you can earn these income levels, but at least you can get an idea of the approximate rank you should shoot for to achieve a targeted income level for your business.
That said, distributor income can range from just a few dollars a month, to millions of dollars a month, depending on the size and structure of your team and the company compensation plan. In 2020, the Network Marketing industry is valued at over 150 billion dollars. There is money to be made!
Compensation Plan Types
There are a variety of types of compensation plans that MLM companies have created to pay distributors. The names of the plans typically describe the required structure to receive the bonuses.
As a rule, about 50% of the sales of products is paid out in bonuses and commissions. The rest is captured for corporate infrastructure and profit.
Most of the newer company compensation plans are hybrids of one or more of the plans listed below. Note that this is not an exhaustive list but focuses on the more common ones in the industry. Your company will probably use one or more of the types of bonuses below. Review your policy manual for details about your specific company’s compensation plan. Also, search online for more details of the plan types.
I will provide an overview of the following plan types:
- Stairstep Breakaway – Distributors break away from leaders when they achieve a specific rank
- Unilevel – Single level with unlimited frontline
- Binary – Two-legged structure that pays on the shorter leg
- Home Party – Home parties to share and sell products and recruit new distributors
- Generation – Distributors get paid on generations of distributors who have reached a leader rank/sales volume
- Matrix – Paid when required distributor levels and positions are filled
- Hybrid – Combination of plan types
This plan is one of the oldest plans in network marketing. When distributors increase their rank or volume to a certain point, they “break away” from the sponsoring distributor. The sponsor will then receive a smaller fixed percentage or override of the total volume of the distributor who broke away. Distributors continue to sponsor people on their front line. When a certain number of distributors have broken away, they achieve higher levels of leadership ranks and bonuses. Example companies that use this type of compensation plan include Amway and Arbonne.
Distributors sponsor new customers and distributors on their front line and receive a fixed percentage of the sponsored customer and distributor orders. Multiple levels exist and a percentage is paid out with each level. Sometimes the percentages increase and sometimes they decrease with each level. Some companies allow distributors to place new people at levels below their top level and earn a percentage of their orders. There is usually a cap to the number of levels that companies pay out bonuses. Example companies include Melaleuca and dōTERRA.
As the name implies, each distributor has two legs. Typically, the company pays out a bonus based on the shortest of the two legs. A few companies create a formula that includes both legs. Typically, one leg is built by people above you and the other is built by you, your sponsor, and your downline. I have seen earning caps on some of them, but some companies allow you to start over again in a new position. Example companies include Herbalife and Isagenix.
This plan focuses on group events called home parties to recruit customers. Most of the time a host invites friends to their home and a distributor comes to do a show and tell presentation. The host then would receive free or reduced-price products if they are not already a distributor, otherwise, the new customers are placed on their front line. The distributor then gets paid immediately from the purchases at the party. This approach is more popular with women than men. Two examples of companies that use the home party approach include Pampered Chef and Tupperware.
Companies that implement generation plans pay out bonuses to people they sponsor until they reach the same leader rank. When that happens, they usually get a fixed percentage of all the people of the distributor who has reached that rank. As the sponsoring distributor continues to rank advance, they can then become eligible to multiple generations of distributors.
Companies that use a Matrix plans pay bonuses to distributors who fill in all the positions of each level of a matrix. For example, a 3×3 matrix consists of 3 levels of 3 distributors or customers each. When the first level is filled up you receive a first level bonus. As each level is completed, you earn that level’s bonus. The bonuses are usually considerably higher as the levels get deeper. BUT, if any position doesn’t get filled, then no bonuses will be paid at that level or below. Any “holes” in the structure block bonuses to all levels beyond that level. (See the section on breakage, below.)
As an example, a 3×3 matrix would imply three distributors at the first level, each with three distributors of their own, who would each have three more distributors of their own again. The total number would be forty. The math goes like this: (1 + 3 + (3×3) + (3x3x3) = 40), including your order. That’s a lot of people. Three levels of three distributors sounds easier than forty distributors, doesn’t it? If you want your matrix bonus, the end of the month can get crazy filling forty holes with orders!
Most new companies will include a combination of the above types of plans. For example, some companies are based on a Unilevel plan, but includes a matrix structural bonus along with other bonuses that kick in depending on the performance of the distributor.
Other companies pay out in a Unilevel plan but include a breakaway plan with distributors reach a certain leadership rank. Distributors above them can get paid generational bonuses on each of the legs that broke away.
Many times, compensation plans can be complex and take many hours or days to understand. Start by learning the bonuses that most directly applies to you where you currently are in your journey. There is no need to completely understand all the higher bonuses until you get to a point where it does matter directly to you. Otherwise you will waste valuable time. I’ve wasted lots of time doing this – just ask my upline!
Breakage & Compression
To prevent freeloaders from taking profits from distributors who are working hard, companies include either breakage or compression into their compensation plans.
Breakage is unearned and unpaid commissions and is usually returned to the company as increased profits. Compression occurs when distributors don’t make the minimum qualification to earn commissions. Many companies require distributors to purchase a minimum number of products each month to qualify for their bonus payment. If they don’t purchase the minimum, the commission they would have earned is taken away from them and either paid upline to the first distributor who qualifies for it or that commission goes back to the company either as more profit or the company uses it to pay some other bonuses to high performers.
As mentioned earlier, a distributor building a matrix with a missing order at level 1 would block all level 1, 2, and 3 bonuses from being paid. This lost money is kept by the company.
Three Business Building Phases
In general, bonus money comes from customers buying the company’s products and is paid out to distributors depending on their sales, rank, and structure of their personal network.
Product flow creates the money for bonus payouts.
Let’s take a high-level look at the types of bonuses that get paid out to distributors and how they can be earned.
From my experience, I see three distributor business building phases:
- Phase I: Retail Selling (Sell products to customers for a profit)
- Phase II: Business building (Sponsor other distributors who sell products to customers for a profit)
- Phase III: Team Building (Build teams of leaders who recruit more leaders)
Each of these business phases requires a deeper level of commitment to building a business.
Phase I Bonuses
Phase I bonuses can be earned by any distributor who sells products by either selling them directly or by having customers visit their retail website and making purchases online.
Distributors don’t need a serious commitment to build a phase I business. Buying some products at wholesale and selling products at retail to friends and other customers will get you Phase I bonuses. These types of bonuses typically will range between ten dollars to thousands of dollars a month depending on the company’s compensation plan and the price of the products you sell.
I call this level or bonus phase, “hobby income.” A distributor could quit at any time without any significant change in lifestyle.
Phase II Bonuses
Phase II bonuses are business builder bonuses. This phase can help a distributor earn a many thousand dollar per month income. These bonuses are earned when a distributor signs up other distributors who also want to sell products at retail.
Usually, this happens when someone you have signed up sees you making money and asks if they could do it too. They would like some income and therefore become distributors.
This income level could be enough to leave a lower-paying job or provide a nice way to cover a car payment, house payment, or even the cost of a vacation. Although higher income can be made at this level, it will generally be better to transition into the next phase if you want to make the big bucks MLMs can provide.
Phase III Bonuses
Phase III bonuses are for distributors who have committed themselves to become network team leaders in their MLM company. Phase III bonuses can reach into the millions of dollars a month for leaders with huge teams in some of the more established MLMs. Tens of thousands of dollars a month for newer MLMs is a very practical goal, though.
These bonuses are for people who have decided to put their business front and center of their financial future. As network leaders in their MLM company they can reap the rewards that come with that role. This phase requires not only time and energy to build your business, but always comes with some personal growth. For example, they discover success is about their team, not themselves.
To be a good leader, you get to become a good servant. You get to put your team’s goals ahead of your own. You receive personal joy from their achievements and triumphs as they push past their limiting beliefs. Most of your time is spent mentoring, coaching, and inspiring your team to greatness rather than selling products.
For me, the greatest skill I have developed as a Diamond is infinite patience. This is an all-volunteer army so you can’t manage your team. You get to lead them, which is a lot more fun for everyone.
Are You Spinning Plates?
If you are a distributor who is working to earn Phase III bonuses, it can feel like you are spinning plates at the end of each month. If this is the case, make sure you are leading others to build a team, rather than managing them to sell products. If you are managing them, spend the money and time to learn how to lead and inspire. Otherwise, you will have a stressful life and never really get your time back. You’ll become a slave to your business, and it will own you, instead of you owning it. You might as well have a job. Check out secret #1, “Lead, Don’t Manage,” for more help in this area.
Companies Selling Like MLMs
If you just want to sell products for commissions and don’t care about the networking aspects of MLM companies, there are a couple of types of MLM companies that could provide a higher income that can reach into the tens of thousands of dollars per month:
- Some companies are direct sales companies masquerading as MLMs which sell high-end products costing hundreds to thousands of dollars and therefore don’t really provide long-term residual income. (e.g. How many $150 water filters or $1500 water filtration systems do you sell per month… to the same customer?) This forces you to have to be constantly looking for new customers if you want to keep making money.
- Some companies sell programs, not just products (like weight-loss) that cost hundreds of dollars a month. Eventually, most of the high-end subscriptions end and the residual income from them lowers or disappears completely. (e.g. customers lose the weight and don’t need as much of the product to maintain the weight loss.)
Both company types tend to require higher level skills in direct selling or weekly/monthly customer support. Both are really trading time for money in the long run. In the short run, though, each could provide much needed income via direct product sales.
Don’t Lose Money When Selling Retail
If you are a distributor who buys products at wholesale and sell at retail, make sure you don’t lose money. You may be buying the products at a 20% to 30% discount from the retail price but short-changing yourself when calculating the “retail” price you charge your customers. Also, don’t forget to factor in your shipping and any taxes, if appropriate.
The math below will show you how to convert wholesale to retail. Don’t simply multiply your retail discount percentage when converting it back to retail price.
Engineering geek/math warning: Skip below if you hate math. But, if you don’t want to lose money selling stuff for a retail price that you buy at wholesale, then plod through the next section to determine your retail price markup multiplier.
Don’t fall into the false math argument that if you save 25% as a distributor you would only add 25% (.25 times the cost of what you paid) to get the retail price.
In this example, the retail price you should sell at is calculated by multiplying your wholesale price by 1.33 rather than 1.25. If you make the mistake of selling it at 1.25 times the wholesale price, then you will lower your profits by 6 percent. For example, a product selling for $50 wholesale should be sold for 1.33 x $50 or $66.50. If you multiplied it by 1.25, you would sell it at $62.50 and lose $4.
The selling price would be your total cost (including shipping) divided by (100% minus your wholesale discount percent). This is what the equation looks like:
For example, if the total cost of the products you want to sell is purchased for $100 (with a 25% retail discount from your company), then you would calculate your retail selling price as follows:
But 25% = 0.25 (and 100% = 1) so completing it, you have:
33 = $133.33
(Your markup multiplier is 1.3333)
So, your selling price would be $133.33 for your $100 purchase, not $125. You would have lost $8.33 if you sold it for $125!
Just plug in your normal retail to wholesale discount percentage into the above formula to get your “markup” price formula you will sell it to your customers. Again, don’t forget to add your costs for shipping and sales tax, if appropriate.
Sorry for the math, but my engineering geek had to come out somewhere! Maybe you’ll make a little more money now.