Chapter Eleven: What is the Future of Commission Plans?
Published: Jun 09, 2014
By: Mark Rawlins

Chapter One: How is network marketing different from other methods of distribution

Starting in the late 1990s, the Internet started to have a dramatic effect on how network marketing companies did business. It was a time very much like the early 1980s, when the modern network marketing industry was created. Not that the fundamental business of one person selling product to another person changed, but instead, the tools available to a company for dealing with its distributors and customers dramatically changed because of technological innovation.

In Chapter One, I talked about the fact that in the late 1970s five technologies-fast, inexpensive computers, video and audio tapes, rapid package shipment, inexpensive long distance/toll free calling, and conference calling-allowed network marketing companies to begin the transition of dealing directly with every distributor. This changed the operations of companies to their very core, and these changes brought about the modern network marketing industry. It's interesting that every multi-level commission plan in use today came into existence in the ten years following this technological revolution. These new commission plans were a response to new requirements created by the changes in the network marketing industry.

So how do these facts relate to a discussion about the future of commission plans?

I believe that the Internet is in the process of causing just as dramatic a change in the way network marketing companies operate as those that happened in the late 1970s and early 1980s. And as these changes begin to take hold, commission plans will once again go through a period of evolution. It's important that the industry manage these changes better than we did the last time around. In many ways, some of the new commission plans were designed and tested like airplanes in the early 1900s, built in garages and taken out and flown. If they flew, fine; if they crashed, build another one and find anther pilot.
Why are we at this point now if the Internet has been around for years? I mentioned several times in the book that eighty-seven percent of distributors now use the Internet in their business. This opens a huge door for network marketing companies because they can now deal not only with their distributors over the Internet, but with customers as well. In some respects, companies may soon be able to require their leaders to have access to the Internet in order to transact certain types of business with the company. Some already have.

To understand how a network marketing company can best use the Internet to fulfill its overall corporate mission, you must look back at what traditionally makes a network marketing company successful, and then see how the Internet can help a company do those things better.

One of the pioneers of modern direct sales was the Hoover Vacuum Company. Why did they sell via direct sales rather than through the established retail channel? Unless a housewife saw a demonstration of the vacuum cleaner, she would never believe that a vacuum cleaner could clean her floors and rugs better than sweeping or beating them. It certainly wouldn't be worth the money she spent. Product demonstration was the way to sell that product. They were simply going to have to prove the product worked, one housewife at a time.

Times have not changed. Today it seems there are two basic methods companies use to sell products. One is by lowering the cost of getting the product in the hands of the customer, also known as lowering physical distribution costs. The second is by improving the quality and effectiveness of motivating, educating, training, and supporting the customer, known as the intellectual distribution model. Sam Walton revolutionized the first method when he founded Wal-Mart. He threw down the gauntlet and relentlessly drove down the cost of getting product into the hands of the customer. From that day forward, it seemed every store had to decide whether to compete on price or compete on service. There was no longer a middle ground.

The concept of the discount superstore has been wildly successful at lowering the cost of everyday items. However, this success has left a tremendous opportunity for companies to sell products that require intellectual distribution, because if a product does not require some form of intellectual distribution, it will eventually be sold by the "Wal-Marts" of the world. Since these superstores are never going to sell products that require intellectual distribution, this becomes our industry's "ace in the hole".
So what does all this mean? Helping network marketing companies to sell products that require more intellectual distribution or doing a better job of intellectual distribution of the products they currently sell is the greatest untapped potential of the Internet today.

Web tools like web conferencing, online learning libraries, and downloadable documents can help the distributors understand and teach their customers about product. A company can make best use of their top motivators, best trainers, and best educators to inform and educate. Internet services can mean distributors no longer have to wait until they feel comfortable with the entire presentation before talking about product.

Why is the Internet uniquely suited to this task? Because it allows each distributor or customer to view customized information, based on their own unique needs and on a very cost-efficient basis. There has never been anything like the Internet for doing this task. A company can create hundreds of presentations, product sheets, and other means of conveying product information, and design their Internet site to show a distributor only those items they're interested in, based on what they've ordered, a survey they've filled out, or many other criteria.

The great competitive advantage the direct sales industry has always had is intellectual distribution. And, as an industry, we pay a tremendous amount in sales commissions for that advantage. So just like Sam Walton, who was relentless in improving his competitive advantage by perfecting the physical distribution model, we as an industry must be relentless in improving the intellectual distribution model. And now, for the first time in history, the Internet gives us the almost perfect tool to do it.

Why do I think this will cause the industry to go through a round of changes in commission plans? It's really quite simple when you think about it:

Commission plans reward distributor activities.
When companies ask distributor to engage in different activities, the company must reward them for those new tasks.

This may seem like a contradiction, because I've said several times that the basic structure of a plan should not change. Both statements are true. If a company's plan encourages sales leaders and dream-builders to build their downline organizations in a certain way, there is no reason to change how the downline structure is rewarded, because the distributors cannot change their downline organization structure. But there are many changes that can be accommodated without destroying the value of a downline organization. It's a balancing act, to be sure; however, if you look back in the 1980s, many "direct distributor" companies did not change because they didn't want to hurt their distributors, and the changing tide of the industry washed over them. Most of the big companies survived and ultimately adapted, but some of the smaller ones did not survive. And going out of business really did hurt their distributors. A company needs that important balance between having enough consistency in its commission plan to create stability and taking advantage of improvements as they come along.

As I said, commission plans must reward distributor activities. In the past, certain distributor types performed certain functions such as training, motivation, and so on. Those distributors were compensated through the commission plan for performing these activities. Now, because of the Internet, the distribution of tasks is shifting. For example, if a salesperson previously did all the training because she lived locally, now with the Internet, web conferencing, and other means, the person best qualified may perform training functions. The commission plans must therefore evolve to pay this new person to perform the work he or she has now taken on.

So if the commission plan needs to change to pay distributors for the new activities they're performing, how does a company make the changes in their plan without "crashing the plane"? In other words, how do you take a plan currently being used and change it without destroying it?

This question used to be almost impossible to answer; however, two things have made it a little easier: experience and testing.

In the early 80s, everyone had experience with one type of plan. Now, those of us who have been in the industry have become familiar with many different plans using all the commission types. Understanding how each commission type works, helps us to anticipate how one might change the behavior of a commission plan.

The other way to make change less painful is to create data models and test commission plans as they are designed, and before they are put into production. Often, one of the most important steps in designing a commission plan is testing the plan. It's also one of the most overlooked steps because of the difficulty testing a plan properly.

Why is it important to test commission plans? Over the last twenty years as plans have become more innovative, they have also become much more complex. Variations, such as fast start and infinity commissions, have appeared, and new types of commission qualifications have been added.
The goal of any commission plan is to ensure that as a distributor's downline sales volume increases, his commissions also increase. But in some commission plans, as a distributor's downline grows and he begins to move between these commission types, a commission plan hits flat spots,-places where downline volume is growing but commissions are declining. A company needs to know this is going to happen before it opens for business so management can deal with it.

Many people wonder how you can test a commission plan. It isn't easy, because the only way to test a commission plan is with an actual distributor downline database. And even more importantly, that distributor downline must be built around the qualifications of the commission plan it's designed to test. Many companies try to test commissions using the same downline for every commission plan, but that simply can't work. If a commission plan rewards building wide, then you must have a downline database that is built wide; if a commission plan rewards building deep, then the database needs to be built differently. In addition, the orders in the database must be of the right size for the qualifications of the commission plan.

Enough distributors and orders must be created to test each commission type from simple retail commissions to overlapping infinity commissions reserved for the very top dream-builders. As a result of all of this, a company typically needs several thousand distributors with accompanying orders in a test downline, and run commissions for several months.

There are several benefits to testing a commission plan. The most important benefit is to find any flat spots, or other unexpected behaviors so a company can decide how it should fix them. The second advantage is that there is simply nothing like knowing that a commission plan does what you expect it to. It's amazing to realize how many network marketing companies have created great momentum and lost it never to get it back because their commission plan did not do what they expected it to do.

Two other benefits are the ability to fine-tune the plan and the ability to train corporate staff on how to explain and support the plan before the company opens for business.

Conclusion

I love network marketing because there is nothing like working side by side with people who are building a dream. But sometimes, we tend to overlook the strengths and weaknesses of a commission plan when moving toward our dream. Swept away by all the excitement, we don't step back and evaluate why some plans work and others don't.

The dream of network marketing is the dream of freedom, prosperity, autonomy, and flexibility. For this reason, it's time for those of us who have spent decades in the industry to step back and better understand what works and why, because without a commission plan that satisfies the needs of the distributors involved, the dream we all hope for is unachievable. And after all my years on the inside of the industry, every now and then I see the magic of the right commission plan matched with the right product and the right company at the right time. And that is a great thing to be a part of!

At one point in my life, I thought I would write a book on commission plan design. But then I realized that would be a little like writing a book on do-it-yourself brain surgery. So I settled on a more reasonable goal: trying to explain the basics of commission plans. I originally thought it would take maybe six weeks; two years later I am finally finished, and I didn't even touch on the important issue of creating a commission plan that's integrated with a company's marketing strategy, and creating a marketing strategy that interfaces with an integrated product line. If you're starting a company and you're new to running a network marketing company, you should invest some money with one of the industry consultants that can help you create an integrated product-marketing-commission-sales strategy. If you don't know one, we can recommend a couple of good consultants we've worked with in the past. Give us a call at InfoTrax (801-802-8729), or go to our web site (www.infotraxsys.com).

Also, InfoTrax sponsors an industry website MLM.com which contains lots of good information about starting and growing a network marketing company. Every week, MLM.com chooses a topic of interest to the industry and publishes a daily article from industry leaders on that topic. If you register on the site, you will receive an email summary of each day's article. Because we hate spam, we will never sell or give out your email address to anyone. We only use it to send you this daily article summary.

Now let's talk about what I hope you have gained from reading this book. If you are a distributor, obviously, you should now understand the basics of what goes into the design and implementation of commission plans for the network marketing industry. I hope that you feel informed enough to make intelligent choices about the commission plan you want for the company you want to join.

If you are a company owner or are thinking about starting a company, I've tried to give you an overview of commission plan design. I've explained the building blocks, I've pointed out the advantages and disadvantages of a variety of approaches to the process, and I've tried to warn you against the mistakes I've seen other network marketing companies make.

Does that mean that it should now be easy for you to say, "This is the best commission plan for my company"? No, of course not. But I hope this book gives you the information you need to keep you from accidentally creating and implementing a plan that may prove disastrous.

I wish you all the best in growing your company or your downline, recruiting the best distributors available, and helping them to build successful businesses. Network marketing offers a wonderful opportunity for personal and financial growth for its participants. It this book helps you maximize that opportunity as smoothly and effectively as possible, I'll feel like I accomplished what I set out to do.

2003, Mark Rawlins. Reprinted with permission from Mark Rawlins. 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.