Some people get up a head of steam when they hear the term “multi-level marketing.” For some reason it conjures up for them a spectre of scams or schemes. Nothing could be further from the truth.
“Multi-level marketing” is a type of compensation plan. Everyone who earns income derives that income from some type of compensation plan. Compensation is what you are paid [in money and benefits] for work you do whether as an employee or as an independent contractor. And, in most all cases of compensation plans, they are all multi-faceted.
Take for instance:
Employee compensation plans: employees are people who are hired by a company/business to do specific job tasks – whether that person is hired as the mail room clerk or the Chief Executive Officer, they are employees. Each employee of a company/business has a compensation plan that may include a combination of:
- salary or hourly wage [depending upon the job description an employee could be offered an annual salary, paid by dividing that salary into monthly paycheck amounts to someone paid-by-the-hour worked]
- incentives and bonus plans [could be anything from a year-end bonus based on overall company profit and divided among the employees to performance-based incentives to stock shares to car allowances to health club memberships and more]
- non-payroll items [meaning you don’t take this money and put it in your bank account] such as health and/or life insurance benefits and/or retirement benefits [not seen so much anymore]
Sales compensation plans: sometimes a type of employee position may have its own compensation plan format within a company, such as for sales employees. Their compensation structure might include [following list from compensationresources.com]:
- Base Salary [sometimes a small salary, one that is small enough the salesperson would need to fullfill sales quotas in order to achieve commissions and incentives to make a livable wage]
- Periodic incentives tied to short-term goals [some companies will hold sales contests]
- Annual Incentives tied to longer-term sales activities [an example might be “x” number of type ‘A’ car sold in a 12-month time-frame]
- Commission-based incentives [a percentage of an individual product sale]
- Perquisites to facilitate sales efforts [I think this might be something like everyone getting a certain bonus who meets the sales quota on a certain product or product line]
Multi-level marketing[MLM] compensation plans are those types of plans devised by direct selling companies for the people who contract with them [as independent distributors/contractors, not employees] to sell their products or services. A simple definition of a single-level compensation plan [from directselling411.com]:
- a structure in which a representative is compensated based solely on his or her individual product sales [this is strictly commission-based and direct retail sales…as example: I buy product wholesale from the company and sell it at retail cost to you – part of my compensation is the difference between the wholesale and retail price, and part of my compensation is based on a volume-sold commission structure]
A simple definition of a multi-level compensation plan [again from directselling411.com]:
- a multilevel compensation plan pays its representatives based on the individual’s product sales as well as that of their “downline,” which refers to a group of people that consultants bring into a company to generate sales
Now here is where that head of steam I mentioned at the beginning comes from…a misunderstandingof this type of compensation structure. Direct selling companies can choose between the single- or multi-level plan. The way the multi-level plan works – very simplified – is this: let’s say I become an independent distributor for a direct selling company with a binary multi-level compensation structure. Here’s how this might look:
- the first way of being compensated is strictly retail sales – I buy the product wholesale and sell it at retail – the difference between wholesale and retail is part of my compensation.
- I interest someone else into joining the company. I DO NOT receive any incentive commission for recruitment – the signin fee goes directly to the company, not to me. So, why do I want to encourage others to become independent distributors? Because in a binary multi-level compensation structure, the person I sponsored will generate sales just like I did – that person will receive their retail portion of the compensation plan. The incentive for me is that my downline’s [the person I sponsored] sales volume will be tracked and I can earn bonuses and commissions on total sales volumeof my downline organization. [Note: my downline can do the exact same thing. Any sales volume that I generate through my retail sales is utilized by my upline sponsors for their sales volume bonus and commission structure.]
Multi-level compensation plans are attractive for direct selling companies – in my opinion – because they are in existence to sell their products. Just like McDonald’s is in the business of selling hamburgers, fries and other foodstuffs – only they chose to sell it using the franchise business model – direct selling companies are in the business to sell their products – only they choose to use the single- or multi-level business model of person-to-person selling.
Multi-level compensation plans in direct selling companies are no different in idea than multi-faceted compensation plans for employees of any other type of business. It’s just a different way to earn income.
**I chose a direct selling company to be an independent distributor with and I like it’s compensation plan very much. If you’d like to have information about it, email me – I’d love to tell you about it.
Filed under: compensation, Direct Selling | Tagged: business, compensation plans, Direct Selling, employee compensation plans, income, independent distributor, mlm, multi-level compensation, multi-level marketing |