How MLM Works
These five steps illustrate how MLM companies work when done in a first-class way.
- A sales representative (a “distributor” for an MLM company) first becomes effective at selling a product (skin care, nutrition, etc.) or a service (legal services, Internet services, etc.) to a consumer.
It is not efficient to get many more than 20 customers, as MLM companies pay you to “duplicate yourself.” If you train 5 people to get 20 customers, you’re much more effective at getting your valuable product to consumers than if you were just distributing products on your own. Other industries (such as direct sales) will reward you better for getting a lot of customers; but they don’t reward you for training others.
2. Recruit ONE person and train them how to get customers. This person would be called your downline.
3. Once your sales rep can get customers at will, then train them how to recruit another person.
4. Ensure that YOUR sales rep can train HIS new sales rep how to get customers.
5. Then, you recruit ONE other person and repeat steps two through four. Keep doing this until you’ve reached the income you desire. I did this cycle 16 times and have made millions of dollars.
Commission plans, also called compensation plans, are how MLM companies reward a distributor’s production.
Note: All the illustrations below are theoretical. There are many commission plans and each company’s plan is slightly different. The illustrations below serve as an explanation not only of how an MLM company works, but why they are designed the way they are.
Most MLM compensation plans can appear rather complicated at first glance because all companies (MLM or others) try to figure out how to get a sales rep to sell more products. The designer of the commission plan divides the money that is set aside for commissions into different “buckets.”
Bucket #1 is to motivate the sales rep to sell products to consumers. This is called a “retail commission.”
In addition, the MLM companies know that new sales reps probably do not know how to sell the product and thus need to be trained. So they (the MLM company) create “bucket #2” to encourage sales reps to properly train new people. The better the training, the more product gets sold. So bucket #2 is to reward the sponsor (which is the sales rep) for training their new rep. Which is not only logical, but quite clever.
The next commission “bucket” is to reward sales reps for becoming and/or finding leaders. The MLM company very much desires leaders, just as any non MLM company does. Non-MLM companies typically go to executive search firms to locate leaders. MLM companies use their current sales reps to find leaders. Once found, the company will reward the leader, as well as the sales rep who found or developed the leader – just as a traditional company will pay the executive search firmÃ‚Â for finding leaders.
One of the biggest challenges in creating an MLM compensation plan is paying out too much in commissions, which causes the company to go bankrupt. On the other hand, if the company doesn’t pay out enough commission, they will have a tough time retaining their sales reps and will not attract or develop true leaders.
The way successful companies are able to accomplish this difficult challenge is to make the compensation plan difficult to achieve… but achievable by those willing to meet SPECIFIC performance standards.
The contrary option is to make the compensation plan easy to achieve by everyone. But then every person would have a lid on their income because the available commissions would be spread (or dissipated) throughout everyone. Companies that use this type of compensation plan typically never grow big enough to get noticed because they are unable to attract leaders or there are not enough commissions to motivate a person to develop the necessary skills to become a leader.
Therefore it’s better to make the commission plan difficult to achieve. But everyone doesn’t have to achieve the top of the commission structure to earn a very good income. Most compensation plans are structured so that a person can replace their current salary by only achieving 1/2 of the available commissions or “buckets.”
All compensation plans are designed based on the quota or standards philosophy. The word quota means: a production assignment. The word standard means: a level of achievement. So in its most basic form, all commission plans work like this:
If you do nothing – you get nothing.
If you do a “little bit” – you’ll get a “little bit” only =bucket #1 (from illustrations above).
This creates a little extra income.
If you do a “little bit more” – you’ll get a “little bit more” = buckets #1 and #2.
This creates a good part time income.
If you do “all this” – you’ll get “all this” = buckets #1, 2 and 3.
This replaces a typical job income.
If you’re somehow able to do this “enormous amount” then you have done us (the MLM Company) an incredible service and we’re going to reward you this “enormous amount!” buckets #1 through #6!
This creates wealth.
Each person who joins an MLM company chooses what level they want to achieve, based not on a mental decision but based on results. There is not a more fair system than one that rewards someone based on results. The most unfair system would be to reward someone based on their resume, their talk, their family connections or their attractiveness.
Have you ever been passed up for a promotion because the owner of the company’s son was promoted instead of you? Maybe a girl more attractive than you? Maybe a person worked at the company longer than you? Maybe a person went to a better college than you? The only person that deserves a promotion is the one who produces the most for the company!
If you feel it is unfair that not everyone reaches the highest level of the compensation plan or that only a few reach the “top,” you might want to think about this: in every achievement or accomplishment there are standards that have to be met.
To be part of any sports team there are standards you must meet to be a part of that sport. To continue on and be great at that sport there are additional standards that must be met.
To be a golfer you simply buy some clubs for a few hundred dollars and go play golf – that is the base level “standard” to participate. To be considered a good golfer there are higher standards you must meet, to be a great golfer there are even higher standards. This is true of every sport, every business and every profession and even parenthood! Having a child doesn’t make you a great parent.
In MLM, to participate you buy an inexpensive distributor kit. This is similar to saying that you “play golf.” It takes almost NOTHING to achieve this level – therefore many (millions) can achieve this easy standard.
To be great in MLM (and enjoy the lifestyle that is offered) performance standards have been established in the compensation plan. They are not arbitrary standards; they are specific lines of achievement that ANYONE who wants that level of achievement must meet.
Meeting or exceeding performance standards is the reason someone achieves success in MLM.
In conclusion on the commission plan, when deciding on an MLM company you actually want a difficult-to-achieve compensation structure – but one that is achievable. You will, of course, have to work for it and may even have to increase your skill level to achieve it. But the rewards are worth the work – as long as you’ve chosen a good company. This of course isn’t any different than any other industry – if you pour your heart and soul as an employee into a company that gets downsized or goes out of business, you start over.
It’s the same with MLM.
Recommended next page: Is MLM legal?
About the Author
Tim’s experience in building his own downline of 56,000 network marketers helped him develop his signature training series. A public relations ambassador for the network marketing industry, Tim has also dedicated his time to debunking the false information spread about the network marketing industry.