Chapter One: How is network marketing different from other methods of distribution
In this chapter, we will review the six standard multi-level commission plans and the two standard business models that use multi-level commission plans. In more than twenty years in the network marketing industry, I have seen many hundreds of commission plans, and I don't think any two have been exactly the same. However, they're all made up of a combination of:
Over the years, from these hundreds of wide ranging commission plans, six have come to the forefront as standard commissions plans. To be considered a standard plan, it must be used by companies over a period of several years, and its payout properties, strengths, and weaknesses need to become generally known in the industry.
A frequently asked question is, "Why are there so many different plan types that are so fundamentally and philosophically different from each other?" The reason is that commission plans have evolved from two radically different concepts.
1. Focusing on paying the salesperson first and adding the multi-level commissions to pay sales leaders later.
2. Focusing on paying the multi-level commissions first and figuring out how to handle other issues such as salesperson commissions later.
As we will see, these two design methods lead to radically different commission strategies, so it's important to understand the concepts behind each of these strategies.
The sales commissions first method was spawned with the first commission plans. Companies used this strategy for two reasons. The first reason was that they were adding multi-level commissions to an existing direct sales commission plan. The second reason resulted from the technological limitations of the day. Because they did not have computers, companies simply could not deal with each and every distributor. So companies had the concept of "direct" distributors who warehoused the product and distributed it to their consumers and downline distributors. Additionally, these "direct" distributors paid the commissions due to the downline distributors directly; the company did not get involved.
In the late 1970s, the technological innovations we talked about in Chapter Two allowed companies to start dealing with all distributors, shipping the product direct from the home office and paying commissions to all distributors, taking that burden off of the direct distributors. This was the beginning of the modern network marketing industry.
Most of these companies felt that they were relieving these distributors of administrative burdens that the distributors were not very good at, and giving them more time to do the things they were good at: selling, training, and supporting their consumers.
Since all distributors were now dealing "directly" with the company, the term "breakaway" replaced the old term "direct," because when distributors went "direct" they had to "break away" from their sponsors to form their own groups. The term "breakaway" is still very confusing to people who first come into the industry.
Now that companies were dealing with all distributors, commission plans had to be modified to pay commissions to all distributors, and rules for advancement and qualifications had to be modified to make them easier for the computer to calculate. But the basic philosophy of these plans remained the same. They're built in two parts. The first part is the sales commissions, and the second part is the sales management commissions paid on the group volume of the breakaway distributor.
Over time, more of the commissions have moved from sales commissions to sales management commissions, but these plans still typically pay substantial sales commissions.
The multi-level commissions first method came along in the early 1980s, several years after the advent of the modern network marketing industry. The basic selling feature of the early versions of these plans was, "You always have more people on your sixth level than your first level, so it's a waste of money paying commissions on your first level." The reasoning continued, "If everyone sponsored only five people, a distributor would have 3,125 times as many people on her sixth level as she would on her first level."
Initially, these plans did not concern themselves with the split between sales commissions and sales management commissions. They were built on the premise that every distributor would build a large downline and therefore become a sales leader. The entire commission plan was built around that premise. Originally, these plans were built around a level commission and nothing else. Over the last twenty years, they've added other features to more effectively compensate salespeople and sales management.
It's been more than twenty years since the age of the modern network marketing company began, and these two methodologies of approaching commission plan design are still the only two methods in use. The payout models of the plans themselves have started to overlap, but the starting points for designing a plan are still as different as they were twenty years ago.
The sales commission first strategy is still a two-part method with the sales commissions portion of the commission plan designed first and then the sales management portion of the plan designed separately. These plans are "breakaway" plans, and much about them has changed in the last twenty years, but they have stayed true to this basic concept of designing a commission plan.
The strategy of designing multi-level commissions first still focuses on building a backbone downline commission percentage first and then adding on any salesperson, or sales management commissions deemed necessary to fill out the plan.
Of the six standard commission plans that we will be reviewing in this book, four are multi-level first plans: unilevel, hybrid unilevel, matrix, and binary. The two sales commission first plans are stairstep and unigen.
All of these commission plans have been used enough to be defined as a standard commission plan; however, it's quite important to note that there are two very different business models that companies paying multi-level commissions use. These two business models are typically known as party plan and traditional network marketing. These two business models have very different needs when it comes to commission plans.
Party plans cut across many lines. For a long time, traditional party plans didn't pay multi-level commissions and therefore were not considered network marketing companies. However, many party plans are becoming part of the network marketing industry. In 2001, the oldest party-plan company of all, Avon, added multi-level commissions to its commission plan.
Party-plan companies use almost every type of commission plan; however, they usually tend to use variations of the stairstep and unigen plans because of the party plan's focus on paying the salespeople. There are two key differences in how party-plan companies use commission plans and how traditional network marketing companies use the same commission plans:
1. Party-plan companies devote much more of the commissions to paying the salespeople and less to paying sales management than a traditional network marketing does.
2. Party-plan companies use the barrier-to-signup strategy, so a distributor can make retail profit in addition to commissions earned in the commission plan.
In addition to these commission plan differences, a party-plan company is a quite different company from the ground up than its traditional network-marketing cousins. Even though the commission plan itself looks much like a traditional commission plan, there are usually rules designed around the party plan dealing with such things as hostess gifts, party order gifts, and so on. As I mentioned in Chapter Five-the chapter about rules-the percentages define what a leader earns, but the character of a plan is created by the rules the company creates. So the character of a party plan is not defined as much by the percentages as it is by the rules: the barriers to signup, the qualifying volume, the party gifts, and so on.
In 1999 and 2000, many traditional network marketing companies had slow growth years. However, several party-plan companies had very successful years, I believe this was because they place more emphasis on salesperson commissions and taking care of the consumer.
Traditional networkers have said that because these companies don't pay their dream-builders enough, they have no future. However, over the last few years, some of these companies have had the most solid growth in the industry. And I find it hard to argue with success. So if I were starting a company today, I would look long and hard at, not only the commissions, but also the incentives and promotions that traditional party plans have used.
Traditional network marketing.
Traditional network marketing companies use all six commission plan types. Most of these companies now adopt some form of the open enrollment strategy. Because almost everyone who buys product on a regular basis signs up as some form of a "distributor" and purchases product directly from the company, virtually all commissions earned by the distributor are paid out by the company.
These companies are built around products that are demonstrated one on one, or in very large meetings rather than in small groups of in-home demonstrations. One of the strengths of these companies is that distributors can participate in remote sponsoring. The business model was already set up for the Internet because everyone was already on the company's computer. In fact, as a result of the Internet revolution, these two business models have started to merge and cross over, to take the best ideas from each other. There's a new class of company that's starting to take the best ideas of both methods. This is the new mini-barrier company we talked about earlier.
As I discuss the six standard commission plans, I won't discuss the differences between how party plan and traditional network marketing companies use the plans. I've already covered most of these issues. This section is not intended to be an in-depth analysis of these commission plans, but simply a summary review.
I've never determined for certain where stairstep got its start. When I started in this business in 1980, stairstep was in its heyday. Forever Living and Meadow Fresh were some of the big players using stairstep. The stairstep plan has been the staple of modern network marketing companies from the late 1970s to the mid-1990s.
Commission types used:
The basic stairstep commission plan uses two commission types. It uses the differential commission to pay the product evangelist and salesperson for selling the product, and it uses a level commission paid on group volume to pay the sales leader and the dream-builder for sales management. Most stairstep commission plans also have some small pool commissions or an infinity commission, but these commissions are typically a very small percentage of the overall payout.
If you recall from Chapter One, the modern network marketing companies began to deal directly with all the distributors due to advances in technology. Previously, commission plans were calculated by hand and only the top sales leaders were paid by the company. These leaders then calculated what their downlines should be receiving and paid them accordingly. The stairstep evolved in this new computer age; it was designed to be calculated by the computer. It is, in fact, almost too complex to be calculated by hand. I've spent many hours recalculating a single recap.
The stairstep plan is a good match with an open enrollment strategy. The sponsor simply signs up the new distributor, and the stairstep plan provides a good automated system for allowing distributors to self-determine what type of distributor they want to be. If the distributor is a consumer, then the commission plans ensures that the sponsor always makes twenty percent on that consumer's purchases. If the distributor becomes a sales leader, the sponsor makes "generation overrides" on that person. It's all done automatically without anyone worrying about it.
These plans can then be "seasoned to taste" with commission pools, automobile funds, and other items. If you're not sure how these commissions work, the exercises in Appendix D will show you how to calculate each of these commission types.
The stairstep commission takes care of paying the product evangelists. You can configure it to provide a way for the salespeople and sales leaders to earn $500 per month relatively quickly. As noted in the earlier discussion of differential commissions, the weakness with this type of commission is that when a distributor and his sponsor both reach the top step, the sponsor never again earns any stairstep commission on that distributor. This is where the leader or generation commissions come in. At that point, the downline distributor "breaks away" and becomes a leader and becomes the sponsor's first-generation leader. As you see in Figure 15,
a typical generation commission is around five to six percent and paid on three to seven generations. It's very rare these days to see a company that doesn't do compression of unqualified leaders. Because leader commissions are paid on the group volume of leaders, thereby creating hubs of activity because it's more difficult to become a leader, and because compression is usually applied, the payline for generation commissions is typically much deeper than an equivalent number of levels for unilevel or hybrid unilevel plans.
Strengths and Weaknesses:
1. The plan does a great job of paying salespeople and automatically dividing the sales commission between product evangelists and salespeople.
2. The plan uses level commissions on group volume for paying sales leaders; it's the most successful method for paying sales management commissions ever found.
3. The fact that one commission type is used to pay salespeople and another is used to pay sales management simplifies design and the creation of qualifications.
4. The characteristics of the stairstep plan are well known. Companies and distributors alike know how it behaves, and so no one is surprised when the commission checks arrive.
5. A high percentage of the most successful companies are still using some form of it today.
6. It's an easy plan on which to pay a worldwide integrated seamless commission plan.
1. Its characteristics are very well known. It's hard to make it sexy, exciting, and the latest new thing.
2. In the past, many front-end loading schemes hid behind the skirts of stairstep; therefore, many people associate stairstep with front-end loading. It's not fair, but then, as I tell my children, life is not fair. Many great companies have stairstep plans and don't front-end load.
3. The "breakaway is takeaway" mentality. As I explained before, in a stairstep plan, there is typically a monthly group volume requirement of between $750 and $3,000 per month. When someone you sponsor climbs to the top, at that point they break away, and from then on, neither their volume nor anyone underneath them will count toward your monthly group volume requirement. In my experience, this single issue causes the most resentment against stairstep. I certainly understand the frustration people feel about having to time and time again rebuild group volume as leaders break away. It must seem like the Greek god Sisyphus, whose punishment was to every day roll a great stone up a mountain, only to have to do it all over again the next day.
4. The differential commission is the one whose workings distributors have the most difficulty understanding.
Stairstep has been out of favor for the last five years or so in North America. However, in Asia and Europe, it has never fallen out of favor. So we haven't seen a lot of companies start up with this type of plan; however, many successful existing plans still use it, and it's regaining popularity in North America again.
Some of the new stairstep commission plans that companies are creating have some modifications, and it will be interesting to see what happens over the next few years with the venerable old stairstep plan.
The unigen plan goes back about twenty-five years. It has roots that are much like stairstep. The single most successful company to use the unigen plan is Nuskin, although during the 1980s several other very successful companies also used the plan. Many people mistakenly call the unigen plan a stairstep plan. They're quite different, but interestingly enough, their payout model can be made to be almost the same.
Commission types used:
The unigen plan, in its default configuration, uses three commission types. It uses a level commission paid on personal volume and a single level commission paid on group volume to pay the salespeople. And it uses a level commission paid on group volume to pay for sales management. Like stairstep plans, many unigen plans also have some small pool commissions or an infinity commission, but these commissions are typically a very small percentage of the overall payout.
A unigen plan is built on a three-step process:
1. Create a simple plan to pay product evangelists for referrals by giving them a simple level commission for the few people they sponsor.
2. Focus on creating a solid commission for the salesperson who creates a group of product evangelists and consumers. The more consumers and product evangelists they sign up, and the more product they sell, the higher the commission they make. This is accomplished by using a variable percentage single-level commission.
3. Pay the sales leader and dream-builder for sales management using a level commission on the group volume of the salespeople.
It's a pretty straightforward concept for a commission plan. Let's walk through an example of how a unigen plan pays.
The unigen is a unilevel commission in which a distributor, Mary, makes a unilevel commission, typically down to a maximum of three levels on her downline distributors. Then at some point, a qualifier allows Mary to become a breakaway. When this happens, she typically makes a seven to fifteen percent commission on her entire group volume, which is anyone in her downline who hasn't become a breakaway or isn't under another breakaway: in other words, anyone to whom Mary is their first upline breakaway. Then when someone in her downline, John, becomes a breakaway, everyone under John is part of his group until someone in his downline breaks away, and so on. When someone becomes a breakaway, the generation aspects of this plan are paid just like stairstep.
Many of the strengths and weaknesses of the unigen plan are much the same as those of the stairstep plan. You can see this in the two examples above. The first, Figure 16, is an example of the plan used by a company called Cernitin, which was very popular in the mid-1980s. The second example is similar to a plan that Nu Skin uses. In a functional manner, the real difference between this plan and the stairstep plan is that the unigen plan does an excellent job of rewarding salespeople and sales leaders and does a good job of rewarding dream-builders.
It does have some strange anomalies that can catch you if you aren't watching. For example, a salesperson who qualifies for the single-level commission makes more money on first-level sales than on personal sales. This means that companies have a hard time encouraging distributors to make retail sales. The advantage is that now with the advent of the Internet, companies can encourage distributors to sign up their consumers as preferred consumers, and then pay them the first-level commission. This gives the company the added advantage of knowing who its retail consumers are.
The combination of unilevel and single-level commissions are not as good at auto-adjusting commissions between product evangelists and salespeople as the differential commission in a stairstep commission plan; however, it's much easier to understand than the stairstep, so who knows which is really best?
Like the stairstep plan, one of the real advantages of this plan is that, because you have two commission types specifically set aside for paying salespeople and one commission specifically set aside for paying sales management, it's much easier to set the percentages and qualifications to achieve the desired results. As a result, professional distributors can be better taken care of with this plan.
Strengths and Weaknesses:
1. The plan does a great job of paying salespeople; of all of the standard commission plans, this one has the strongest potential in this area.
2. The plans uses level commissions on group volume for paying sales leaders, the most successful method for paying sales management commissions.
3. The fact that it has defined certain commission types to pay salespeople and another commission type to pay sales management simplifies design and the creation of qualifications.
4. It encourages the registration of every consumer with the company, and, with the advent of the Internet, this is something many companies are looking for.
5. It's an easy plan on which to pay a worldwide integrated seamless commission plan.
6. The two commission types used are easy to understand.
1. It's a breakaway plan which some distributors don't like.
2. It's not new and exciting.
3. It has not been used by enough companies that people feel comfortable with the behavior of the plan
4. It's sometimes viewed as a compromise plan.
In certain circumstances, the unigen plan has a lot to offer a company. It's reasonably simple, but can be designed to create focus on getting commissions to either salespeople or sales leaders based on the needs of the company.
There's a great debate among the graybeards in the network marketing industry about what the term unilevel means. When I first started, it meant that the commission plan had no ranks. The only commission paid was a level commission and all distributors that qualified were paid the same percentages on their downline. The example I gave in the preface of this book was a true unilevel. Other people may have different definitions how unilevel came to be, but that's how I remember it, and, after all, this is my book.
Commission types used:
There are not many pure unilevels any more most of them have added the concept of ranks to receive additional levels of commissions, or higher percentages on levels, or both. But they're still called unilevel commission plans.
Unilevel plans use only one commission type, the level commission type. Since the late 1980s, most have used compression to increase payout. As a result, companies must compensate both salespeople and sales management with the level commission.
It has proven difficult to create a clear strategy for compensating salespeople and sales management with the level commission. As we talked about in Chapter Four, the level commission is not particularly well suited to creating the entire commission for salespeople. The second problem is that, while a level commission is well suited to sales management commissions, it works much better if it's paid on group volume rather than personal volume, and a unilevel pays everything on personal volume.
As a result of these issues, we don't see many pure unilevels anymore.
The unilevel plan is built around the principle of "simple is always better." It was created as a response to the distributor burnout caused by the very high qualifications of the commission plans of the early 1980's. The original unilevel plans were models of simplicity. The only qualifications they used were a personal sales qualification, which qualified a distributor for all commissions.
Since the late 1980s, most unilevels have looked more like the modified unilevel plan in the Figure 18. That has caused the qualifications to become more complex, but unilevels are still by far the simplest of the major commission plan types. In the example shown, it would be typical that to receive any commissions there would be a monthly personal sales requirement. Then, in order to advance from 1-Star to 2-Star, a distributor would need to have two personally sponsored 1-Stars. And in order to advance from a 2-Star to a 3-Star, a distributor would need to have four personally sponsored 1-Stars, and so on, to advance to each rank.
Unilevel plans, as the graphic shows, tend to start out paying a few levels and then add levels as the distributors build their organizations. In this example, the plan starts with five percent paid down three levels, then increases to five percent paid down four levels, and then five percent paid down five levels, and then perhaps five percent paid down six levels. In some plans, the percentage paid is increased as well as increasing the number of levels paid.
The unilevel is fine for creating middle-of-the-road commissions, but it doesn't target earnings well to specific types of distributors. It's like target shooting with a shotgun.
Strengths and Weaknesses:
1. It spreads the wealth.
2. It's not difficult plan, and therefore it doesn't burn people out.
3. It's easy to understand; distributors are not confused by it.
1. Earnings are not targeted to salespeople or sales management.
2. Distributors aren't paid a lot to work with any one consumer. A distributor once described building an organization in a unilevel plan as "throwing mud against a wall and hoping it sticks."3. Unilevels are also prone to stacking because the plan doesn't target earnings well, and the requirements aren't very high. If stacking becomes rampant in a company, then volume moves out of distributors payline very quickly, lowering overall earnings even more.
The industry hasn't seen many pure unilevels over the last few years. We see quite a few of them start up, but not very many succeed. As a consequence, anything called a unilevel is almost always a unilevel hybrid, which is the next plan we talk about.
There are two places that a pure unilevel has possibilities. One is in a barrier-to-signup company where the salesperson earns the sales commission at the time of the sale in the form of retail profit. The second possibility that people talk about is in a true "referral marketing" company, like the amazon.com referral program which we will talk about a little later.
But certainly the biggest contribution the unilevel has made to the industry is the creation of the hybrid unilevel.
Most of the plans that are called unilevels today are actually hybrid unilevels. They're unilevels with infinities, unilevels with fast starts, or unilevels with pools; some are in fact, "low-volume breakaways." All of these plans started out with a unilevel plan as the backbone, and then have added other commissions to pay salespeople and/or sales leaders. The difficulty in talking about this type of commission plan is that this is a very broad category indeed.
Commission types used:
What all of these plans have in common is that they start out with a level commission as their primary commission. Then companies use virtually every one of the other three commission types to get more money into the hands of the salesperson for taking care of the consumer. Then a company must also deal with the issue of creating incentives for the dream-builders to keep building their organizations. These are the two major weaknesses of the traditional unilevel.
The hybrid unilevel starts where the pure unilevel leaves off; the plan has added additional commission types to build on the simple appeal of the unilevel. The first hybrids appeared on the scene in the mid-1990s, and there were a couple of very notable successes.
One of these early successes was New Vision International, an open-enrollment company headquartered in Scottsdale, Arizona. They opened their doors in 1995 and signed up more than a million distributors in their first three years in business. Just a year or two later, another success story with another variation of the hybrid unilevel was Morinda, who in their first three years in business grew from zero to $30,000,000 per month in business.
These successes with a hybrid unilevel commission plan have insured that this commission plan would be with the industry for a long time.
One of the difficulties in talking about the hybrid is the fact that there are wide variations in the plans from company to company. In fact, if you look at the plans of the two companies I just mentioned, some people would argue that they're not the same commission plan at all! I certainly understand that argument, but when you break down commission plans into their component pieces, they're in fact the same basic type.
Hybrid unilevels typically deviate from unilevels in three areas.
These differences are:
1. Hybrid unilevels tend to have more ranks and the qualifications tend to be much more difficult for the higher ranks. This is because these companies are trying to increase the earnings potential for the dream-builders, typically a problem in traditional unilevels.
2. In addition to the level commission, they tend to have other commissions or other methods to increase earnings for the sales leaders and dream-builders. Some of the common things companies do are to:
1. Create pool commissions for the top ranks
2. Create infinity commissions for the top ranks
3. Actually convert from a level commission paid on personal volume to a level commission paid on group volume, which can make a tremendous difference in the amount of money earned.
4. Implement dynamic compression
3. Hybrids create methods for increasing the earnings of the salesperson, Common methods of doing this are:
1. Fast start commissions
2. Giving salesperson rebates on all sales over a certain amount each month (for example, all purchases over $100 per month are paid under a different commission plan)
3. Creating a "mini-barrier plan" that has everyone sign up as preferred consumers and then automatically advance to distributors when they qualify (see Chapter Eight on barriers-to-signup).
4. Adding a small differential or single-level commission on the front of the plan. Typically, this is done as overlapping infinity commissions at the intermediate ranks (for example, the 3-Star thru 5-Star in a 7-Star plan)
5. Have the level commission percentages change as a distributor's ranks change.
I realize that it seems as though these techniques are all wildly different But actually, depending on the percentages used and the qualifications created for each commission, it's surprising how similar the payouts end up even using different methods.
Most hybrid unilevel plans have sales volume qualifiers to reach the higher ranks that are often as high as contemporary breakaway plans. The big difference between the hybrid unilevels and the breakaways comes from the monthly qualifiers. In breakaway plans, once distributors achieve the rank of breakaway, their sales volume no longer helps their sponsors achieve their monthly qualifications. In many hybrid unilevels, that isn't true. Sponsors achieve their monthly qualifying volume either by total organizational volume or by the volume within some number of levels. The sponsor, therefore, never has volume "breakaway" and he never has to replace that volume.
The other major difference is that percentages in the hybrid unilevels are paid on the personal volumes in the downline. The generation commissions in the stairstep are paid on the group volumes of the downline sales leaders. This means that the generation commissions are typically much larger and the distributor is paid much deeper into his or her organization. In other words, the payline is much deeper.
Strengths and Weaknesses:
1. The hybrid retains much of the mystique and popularity of the "simple, easy to understand" original unilevel.
2. It has been used by two very successful companies, and it's not burdened down with the baggage of having been around for many years with distributors getting to know its weaknesses.
3. Because of the many variations, companies truly can create a unique commission plan for themselves.
1. It starts with the unilevel commission, which is neither a sales commission nor a sales management commission. So companies have to build up both ends.
2. The behaviors of the plan are not well understood, so distributors may be expecting one thing and have another thing happen. This often requires the company to spend more time training distributors on the commission plan.
3. People expect unilevels to be simple and easy, and many hybrids are as complex and difficult as stairsteps and unigens. This can create distributor frustration.
The hybrid is the newest of the commission plans, which means that there are lots of new things to be tried and lots of innovations to be made. But as the old saying goes, "The trouble with being a pioneer sometimes is you end up dead by your wagon." If a company isn't careful with a hybrid plan, this can happen to them.
If you're thinking about starting a company using this type of a commission plan, spend the time and energy to create realistic data models with lots of variations of the plan. Run dozens of commission runs before you decide on a final commission plan so you know exactly what you have when you're finished.
As we have seen, companies who do this and can confidently tell their distributors how the plan is going to pay can have real success with thi