By Len Clements © 2006, 2008

Part one of this article dealt mostly with the birth of the binary (to irresponsible parents), and its often troubled and misunderstood adolescence. We also covered its eventual maturing into a still young but promising adult, thanks to the guidance of its numerous and more ethical Foster Parents.

Today, the binary seems to be entering a midlife crisis. While remaining relatively spry, and certainly attractive enough to still stand on its own merits, the binary has once again gotten itself involved with the wrong crowd. Unreasonably convinced that it needs a complete makeover to stay attractive and relevant, the binary's handlers have done more than just gussied it up with fancy duds and a new hairdo. Yes, most binaries today are drop dead gorgeous bombshells, to be sure. But the boobs are fake, the high cheekbones are implants, the eyelashes are false, and most of that waist long, luxurious hair? Extensions. Those pearly whites are veneers, the big, blue eyes are colored contacts, and the lips are swollen with collagen.

In fact, almost, but not quite all binary programs that have come on the scene since the turn of the century (8 years ago) has had some kind of "work done". Many have been introduced with practically every attractive aspect of it being artificial. And much like a 30-something taking steroids to maintain that look of strength and vitality, some aging binaries are starting to pay the price. And it's a costly one.

In an attempt to make their binary more attractive to prospects, many companies today have employed more ruse that rouge. Here are some of the most common examples.

The "No Flushing" ruse.

Some binary programs are claiming they never flush any sales volume, which is the equivalent of saying they "pay infinitely deep." Obviously, no MLM company can pay on ALL the volume below every distributor or else they would eventually pay out more than 100% of their income. Here's a simplified example: If a plan (any kind of plan) pays an average of 10% on each person's volume on each level below you (and yes, even binaries have levels), then the company could only afford to pay down about five levels (50%). What you must remember is that as a distributor who is analyzing your potential income, you consider from the point of your position looking down. But when a company analyses their potential pay out they consider from the point of the sale looking UP. So if you purchased $100 in product and they were going to pay 10% to infinity, then wouldn't they have to pay $10.00 to every qualified person above you - to infinity? That is, isn't the person, let's say, 500 levels above you, who is getting paid on "infinitely" deep sales volume, also eligible for 10% of your purchase? After the 10th level they're paying out more that they took in (and would likely be what's called a "Ponzi Scheme").
Binaries that allegedly don't flush are saying you are going to get paid on all the volume, all the way down, right? So what's the catch? It's called a "pay out cap." Most "non-flushing" binaries do disclose this in the fine print of their Distributor Agreement, and a few openly reveal it. But even they are likely counting on the typical prospect not understanding enough compensation plan theory to realize that this is essentially nothing more than another method of flushing! Unilevel, matrix and breakaway plans block the depth they pay on based on number of levels or generations. Most binaries do so by flushing volume that exceeds a certain amount (usually $5,000 per week in each leg). Or, they block it by capping the total amount they will pay out. Every MLM comp plan MUST block the depth they pay on in some way or go bankrupt.

So how does the "cap" accomplish this? Well, the larger the company grows the more levels up from each sale they must pay a percentage of that sale to. In the beginning the lowest level sales might have only a few levels upline to pay a portion of it to (before hitting the top level of the company). As the company grows more and more sales fall deeper and deeper within the hierarchy, and more and more levels above each sale become entitled to a percentage of it. The result is what's called "Binary Creep," meaning the overall pay out creeps upward as the sales force increases in numbers. For example (hypothetically), at 1,000 reps they're paying out 35%, at 10,000 reps they're paying 40%, at 25,000 reps they're paying 60%, at 40,000 they're paying 75%, and so on. Eventually, if a binary pays too deep they will inevitably exceed their cap, which is usually around 50% - the most they can afford to pay. So what happens? Well, they must now start backing off on what they promised to pay! Or they start lowering the BVs or CVs they apply to each product. Or they have to cheapen the products, or raise their prices. Or, all of the above.

The "Humungous-Weekly-Potential-Income-Per-Sales-Center" ruse.

Most of the "old school" binary programs operating today flush at $5,000 is sales in each leg per week and pay about 20% on the lesser of the two legs, or perhaps 10% but also pay a matching bonus (essentially making the pay out also around 20%). So, your maximum potential income per position (usually called a "Business" or "Sales" Center) is approximately $1,000 per week. And every one of these companies pays (or has paid) between 45-50% in overall pay out. Keep all this in mind.
Within the last few years we've seen a crop of new MLM companies with binary plans that claim they'll pay as much as $5,000 per week - that's pay $5,000, not pay on $5,000 in sales. Some have even claimed maximum weekly potential earnings of $50,000 per center! That's five times more that these older binary programs, to as much as fifty times more! Five to fifty times more than companies that are already paying out 45-50%. So you may even more appreciate the absurdity of such claims, consider this: The typical binary plan pays about 5% to 9% (depending on numerous variables) of a distributor's organizational volume back to them in commissions and bonuses. Let's use 7% as a fair average. Now, if a company was going to pay you $5,000 from the downline volume below one of your Sales Centers, and that was 7% of the total volume, they would be paying on - and essentially flushing at - over $35,700 in volume per leg, per week, per center. Claiming a potential maximum earnings of $50,000 per week, per center, is tantamount to paying on, and flushing at, $357,000 per leg, per week! To place this in proper perspective, one network marketing company did a test to see what would happen if they increased their per-leg flush point from $5,000 in sales per week to just $10,000. Their pay out would have skyrocketed from 49% to 65%! So what do you suppose would happen if a company programmed their plan to pay on as much as $35,000, or $357,000, in sales volume in each leg?
How is that possible? Obviously, it's not.
The catch, once again, is the "Pay Out Cap." And sure enough, every single one of these plans claiming monster maximum weekly earnings have employed such a cap. So if so many MLM programs (including publicly traded ones with audited disclosures) are paying around 50% overall and a maximum of $1,000 per week, per center, and these new binary programs have capped their pay outs at around the same 50%, clearly they cannot pay five to fifty times more. As they inevitably reach, then exceed their payout cap (assuming they continue to grow) they will have no choice but to, once gain: A) reduce the percentages they pay each distributor; B) dramatically reduce the maximum pay out limits; C) reduce the BVs or CVs on their products, which effectively also reduces pay; D) increase product prices; E) decrease product cost; F) increase various other fees and tools prices; G) eat more and more of their profit margin; or H) a combination of any or all of the above.

Which then halts growth, which halts the "binary creep". Problem solved.

I design compensation plans (although it's no longer a focus of my consulting services) and I usually try to, if financially feasible, have it top out at about 50%, max. Anything less than 40% isn't competitive today, and more than 55% inevitably results in, well, see items A through H in the paragraph just above. Sure, I could also make up some ridiculously large, completely arbitrary number and call it the "maximum weekly pay out." How about $250,000 (so my plan will appear to pay out 50 times more than those other guys)? Of course, I'd also install a 50% pay out cap - the same amount I intend to pay out anyway - and end up paying out about the same as every one else. The same 50¢ of every sales dollar will be paid back out in commissions. And I'd fool quite a few people, I'm sure.

The "Carry Over Paid Volume" ruse.

Most binary plans will remove the sales volume they pay you on (from both legs) and allow you to carry over the extra volume still remaining from the strong leg. For example, if you have $2,000 in your left leg and $2,500 in your right leg, they'll pay you on $2,000, remove that amount from both sides and you start off the next pay cycle with $500 in your right leg. However, a very few will allow you to carry over ALL the volume to the following week, even the amount they just paid you on. Sounds like a better deal, doesn't it? It's not.

Let's say the sales volume increments they pay on are $1,000 apart, up to the industry standard $5,000 per week. You have $4,900 in your weak leg this week. Most binaries would round down to the last pay increment (in this example, $4,000) and pay you on that amount, then carry over the extra $900 to the next week. But then you find a company that pays you on the $4,000, but let's you carry over the whole $4,900 to the next week. How can that not be better? Read on. So, next week let's say $5,000 of new sales volume is generated in that leg. How much of it do they pay you on? Only one hundred dollars! Remember, they flush all volume over $5,000, right? Well, by allowing you to carry over the whole $4,900 from last week they are now going to flush everything that comes in the second week after the first $100! Had they removed the $4,000 they paid you on the previous week, and allowed you to carry over only the unpaid $900, you would have been paid on $4,100 of that new $5,000 generated the second week. You want a binary plan to remove the volume once they've paid you on it so it will make room for more new volume that you can get paid on.

The "Upline Reentry" ruse.

Since each position in a binary plan can be "maxed out" (reach a maximum commission limit), most binaries allow distributors to earn "reentry" centers. These are positions you can place anywhere in your downline and begin building under, thus creating another source of commission. A few binaries have tried the gimmick where they allow you to place the reentry directly above your original position. By doing so, this new position immediately has one "maxed" leg with a large amount of sales volume flowing through it, so you only have to build the other leg (as opposed to building both legs). In theory, this sounds great. But let's dig a little deeper.

Let's say a standard binary plan, with downline reentries, is designed to pay out 50%. Not a penny more. Then they decide to begin allowing reentries to be placed upline instead of downline. You earn a reentry, place it above your first position, and start building the other leg. By having one leg already built your commission on the reentry increases faster as opposed to having to build both legs. But where is this extra income coming from? Not the company. It's paying 50%, remember? If distributors all start getting pay raises under the new reentry system, how can the company still be paying out the same amount? Actually, some do benefit under the new system, but at the expense of other distributors! This upline reentry system is only a benefit if you are the only one benefiting from it. What if your sponsor, and everyone else in your upline is doing the same thing? Under the old system, once your sponsor earns a reentry he or she would have placed it downline, under other distributors below them (perhaps you). But now, they place it upline and no one below them benefits. And what happens to all the subsequent people your sponsor enrolls? Won't they likely go in the weak leg of his or her reentry? What could have been downline partners to you under the old system are now cross line competitors. What you gain by placing your reentries upline you could very likely lose by your upline doing the same thing and placing people cross line that would have went under you. It really defeats one of the greatest benefits of the binary concept. The fact that your upline can place distributors or reentries below you, which is called "spill over", is perhaps the most powerful profit accelerating, attrition dropping aspect of the binary plan (and yet, some still manage to overrate it). Allowing your upline leaders to place reentries above themselves, and thus every subsequent person they enroll across from you, completely kills any reasonable opportunity to receive this "spill over" benefit from those upline leaders, from that point forward.

Indeed, all the Upline Reentry gimmick does is simply redistribute the same commission. Some gain, some lose, some break even. But overall, it all comes out even and the company is still paying the same 50%.

Birth to BS to…

… Beauty? Brilliance? Perhaps. The potential is certainly there. In any other industry I'd believe that the tricks and gimmicks being employed in so many binary programs today will eventually work their way out of fashion. Inevitably folks are going to discover from experience that the games these companies are playing don't really add to their incomes, and may be even costing them money. But, alas, the change over in this industry is such that those who discover they've been deceived (or their company sincerely didn't know what they were doing when they designed their pay plan) will probably quit, only to be replaced by a whole new set of people who haven't, well, read an article like this one.
But in what ever form, the binary will endure. Enough companies with binary plans have had Temporary Restraining Orders against them lifted, who all still had binary plans, to ever believe regulators had a problem with the plan itself. And the benefits to building in depth as opposed to width are too strong to ignore.

However, the con side of the binary outweighed the pro side for the first few years after the binaries birth. Then, in the mid-90s, some innovative visionaries found ways to flush the con side of most of its content.

Now, if we could just stop filling it back up again…

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As the founder and CEO of MarketWave, Inc., an MLM research and analysis company, Len Clements has concentrated his full-time efforts over the last 18 years on researching and analyzing all aspects of Network Marketing. He is a professional speaker and trainer, and currently conducts "Inside Network Marketing" seminars throughout the world. Len is the author of the controversial book "Inside Network Marketing" and the best selling cassette tapes "Case Closed! The Whole Truth About Network Marketing" and "The Coming Network Marketing Boom." He is a court certified expert in the field of network marketing.

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