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The effect of compensation plans
There is a wide range of mlm compensation plans. Some of these plans are designed to pay relatively high compensation to the person actually selling the product, and less money in "downline compensation." In other mlm companies, the compensations focus is more on downline compensations and less on compensations to the person selling the product. We'll discuss the differences between the two, and the pros and cons of each.
In a sales-oriented mlm company, it's possible for distributors to make good money simply by selling product. Suppose, for example, that at one company selling cosmetics, distributors earn fifteen to twenty percent on product they sell. By offering a reasonably high percentage, that particular company encourages its distributors to build a good retail sales business. However, in a true direct sales company, the compensation would more likely be in the forty percent range. So why have so many companies of the last twenty years chosen mlm instead of direct sales as their method of product distribution?
There are two reasons. One is that sales alone, with no recruiting, leads to a lack of growth. Companies have found that taking on the responsibility of recruiting enough distributors nationwide to keep the company growing has become too difficult and expensive to handle internally. It's easier and more effective to assign that responsibility to the distributors. For example in 2001, Avon, one of the oldest and most successful direct sales companies, converted to a multi-level compensation plan.
The other reason is that the prospect of earning downline compensations in addition to sales compensations is very powerful. Even for successful salespeople who are not sure they can build a large downline, there are two benefits. One is the fact that a mlm compensation plan can create a group of paid referral agents to refer business to the distributor. The second benefit is the possibility of one of these referral agents building a big mlm business is very attractive.
But some mlm companies have also become unbalanced in the other direction. There have been companies with tens of thousands of distributors who are consistently recruiting new distributors, but who never get around to selling any product. These mlm companies create a big problem for themselves, and there have been several over the last few years. Companies with a high percentage of downline compensations, but little, if any, sales compensations, have sometimes grown quickly, but then had difficulty sustaining their momentum. This is because all of these distributors have little incentive to sell much product because they only may make a small percentage on product sales and it isn't worth the time. If you have an entire mlm company doing this, all you have is a huge downline.
The important thing is to create a compensation plan that encourages and compensates the activities a company wants its distributors to perform. For most mlm companies, this means that distributors should be encouraged to spend a significant amount of time in both recruiting and selling, but a company must design its compensation plan to elicit the balance it believes is best.
Obviously, the type of compensation plan a company designs has a strong influence on how distributors work to build their business. Keep in mind what kind of balance between sales compensations and sales management compensations you think is appropriate.
In a traditional sales organization the role of a salesperson is to sell product, period. It isn't the responsibility of the salesperson to bring in new people to perform this task. In a mlm organization, however, a distributor has the dual responsibility of both selling and recruiting. When a company chooses a compensation plan, it must be sure the plan rewards the balance of distributor activities it believes is correct.
One last thought. Recruiting exists to build the capacity for sales-to create the infrastructure. With that in place, mlm company must promote sales, because that's what brings in the money. The more a company promotes recruiting, the faster its sales force grows. But that growing sales force is only a potential means to increase sales; no one earns any money if the distributors aren't selling. You may have heard the old expression about someone who is "too busy sawing to sharpen the saw." Or in this case, sometimes companies are "too busy recruiting to stop and sell the
product."
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