The Three Proven MLM Compensation Plans Part 2: Breakaway

Date: Nov 11, 09
Author: Mark Rawlins
Category:
URL: http://www.mlm.com//articles/view/the-three-proven-mlm-compensation-plans-part-2-breakaway/print

"Mirror, mirror on the wall, which is the fairest comp plan of them all?" Here's the scoop on one of today's prevalent MLM compensation plans--the Breakaway... P.S. Distributors need to understand compensation plans, too!

This is Part 2 in a series of five articles.

Note: It has become increasingly clear to me that it's just as important for network marketing distributors to understand MLM compensation concepts as the MLM companies, themselves. Why? Because distributors invest their all into building a downline. The bottom line is if distributors understand MLM commissions, they can make better choices about the companies in which to invest their lives!

A Breakaway Compensation Plan includes very defined sales force classifications: 1) distributor and 2) sales leader, and commissions are paid very differently on each of them. A new distributor is basically considered as a pre-sales leader. When he/she advances to a designated level, he/she breaks away from his/her sponsor and forms his/her own group as a sales leader. The plan then pays this distributor, called a breakaway, a new, different type of commission. It is usually referred to as a sales leader override. His/her group volume is no longer included in his/her sponsor’s group volume. Instead, the sponsor receives breakaway volume--a smaller percentage. And, the sponsor must go out and replace this person in his/her organization.

For example, last month, you had ten people in your personal group helping you qualify. This month two of them broke away, so now you don’t receive group commission on those two and you have to replace them. If you are a breakaway/sales leader, you’re always going to make more money on your group volume--on the distributors in your downline--than you are on your breakaways/sales leaders. On your group volume, you may earn as much as 15-25%, and on your breakaway volume, you may earn as little as 3-6%. Distributors make more money on their group than they do on their sales leaders because of the commission differential.

The Breakaway Compensation Plan typically uses at least two commission types:

 1.  Non-Breakaway Commission: Commission paid on group volume to: 1) non-breakaways, or 2) sales leaders on their non-breakaway group [See Figure 1]. This is typically a level or stairstep commission. A level commission pays distributors a percentage on a certain number of levels of their downline. A stairstep commission is a differential commission comprised of progressive steps with specific requirements, and as distributors meet the requirements to climb the steps, they earn increasing percentages on their personal and group volume.

Figure 1: Breakaway Pre-sales Leader or Non-Breakaway

2.  Breakaway Commission. A Breakaway/sales leader commission paid on the group volume of downline breakaways/sales leaders [See Figure 2.] This is typically a level commission.

Example: Breakaway Sales Leader

Figure 2. Breakaway-Sales Leader Commission

Many of these plans also have some small pool or infinity commissions, however, they typically make up a very small percentage of the overall payout. A pool commission is an amount of money set aside and then divided up among those distributors who meet particular qualifications. It is used to reward very specific activities. A certain percentage of sales--for example, one percent--is set aside in a pool; this money is distributed to all who achieve a certain goal set by the company. An infinity commission is a commission paid on all volume in a distributor’s organization down to the next individual with the same rank. 

Breakaway and the 5% Plus Commission Theory

 

5% Plus Theory

 

The commission payout standard in the industry today is 40-45%. That's percentage payout of the wholesale dollar--the money that actually comes in from the distributor. How do companies distribute the standard 45% commission? Today's commissions are typically based on the 5% Plus Theory.

The 5% Plus Curve observed in network marketing industry commissions provides a standard for network marketing companies to allocate commission money. The 5% Plus Theory says, in order for a compensation plan to be viable: 1) each upline distributor that receives commissions must receive at least 5%, and 2) a company must pay those upline distributors critical to its growth and stability at a higher percentage. The compensation plans that have survived have done so by implementing this theory.

             Figure 3. Standard 5% Earnings and 5% Plus Curve

 

 

 

 

 

 

 

 

 

 

The rationale behind it is, first, companies can’t pay the standard 5% commission to all distributors. Sometimes when a distributor makes a sale, he/she might have a 50-60-person upline. So, if there were 50 people in that upline and the company paid everyone 5%--5 x $50 = 250% payout! Obviously, the company has to limit and decide which individuals to give the 5% to.

Second, there’s a problem with paying only the standard 5% because if the downline sales for a distributor are $10,000 and you give that individual 5%, his/her earnings are only going to be $500. Is this the appropriate amount for a distributor to earn on $10,000 of sales? If somebody else is making those sales other than that individual, then maybe it’s appropriate. But, if he/she is personally making those sales alone, he/she will soon bail and work at Wal-Mart because the MLM earnings per hour are just too low!

Applying the 5% Plus Theory, you pay additional money to the upline distributor who is responsible for those sales. So, the challenge is to create a segment of the downline that can make a higher percentage. These are the people you really want to “incentivize.” The vehicle to accomplish this is hybridization of the compensation plan—adding on additional commission types, i.e., a fast start program.

Abiding by the 5% Plus Theory enables your distributors to solidly count on:

- If I build a downline, I will have some control over my destiny.

- If I build my downline properly, I will get paid on the majority of all of my downline sales.

 

Here's an example of the 5% plus theory in a Breakaway Compensation Plan: If Mark sponsors Jerry, a new distributor, and Jerry buys a $100 worth of product, Mark earns 20% or $20. It’s worth it to Mark to deliver the product and personally answer Jerry’s questions as a retail customer. On the other hand, let's say Mark sponsors Linda and she takes the initiative to go out and sell a lot of product--as much as $2,000 worth--and becomes a breakaway/sales leader on her own. She doesn’t require a lot of management or hand holding, so she makes the 20% on all the product she sells. Mark makes 5% sales leader commission. So, instead of making 20% or $400 on her $2,000, he makes 5% or $100. And, his management responsibilities are not nearly as great as with Jerry.

Strengths of Breakaways

• Breakaway Compensation Plans are very predictable.

• One of the real advantages of this plan is that because you have two commission types specifically set aside--one for paying salespeople and one for paying sales management--it’s much easier to set the percentages and qualifications to achieve the desired results. Consequently, professional distributors can be better taken care of with this plan.

• The plan does a great job of paying salespeople. Of all of the standard compensation plans, this one has the strongest potential in this area. Once you become a sales leader, it allows you to make a lot more money on your customers and brand new distributors--those who need your help. Consequently, you have a lot more incentive to work with them. On the people who have advanced to breakaway/sales leader, you’re now earning 5%. However, since you get paid down numerous levels of sales leaders--successful people—this means you get paid on a lot of group volume.

• The plan uses level commissions on group volume for paying sales leaders, the most successful method for paying sales management commissions.

• The fact that this plan has defined a certain commission type to pay salespeople and another commission type to pay sales management simplifies the design and creation of qualifications.

• This plan encourages the registration of every consumer with the company, which has been made possible with the Internet, and this is something many companies desire.

• The Breakaway is an easy plan on which to pay a worldwide, integrated, seamless commission.

• The two commission types used in this plan are easy to understand.

Weaknesses of Breakaways

• This plan is sometimes viewed as a compromise plan.

• Since many people don’t build an organization—probably 90%--they stay in other distributors’ personal groups.

• When you get two people on the same step, the differential is zero.

• With this plan, there is a treadmill effect. When you bring someone in, you have to qualify those group volumes, and as people break away, you have to replace that volume.

Summary

Overall, in specific circumstances, this 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.

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Watch for Part 3 in this series of five articles that examine the characteristics and differences of the three proven MLM compensation plans:

• Part 1: The Three Proven MLM Compensation Plans
• Part 3: The Hybrid  Uni-level MLM Compensation Plan
• Part 4: The Binary MLM Compensation Plan
• Part 5: Breakaway, Hybrid  Uni-level, Binary MLM Compensation Plans: Differences

 Mark Rawlins, CEO of InfoTrax Systems, an MLM software and commission consulting company, will be a presenter at The Symposium in Salt Lake City. His topic will be: “Understanding Commission Plans.”  This event is an MLM start-up conference for direct selling executives sponsored by the Symposium Group--a consortium of direct selling experts dedicated to providing MLM training and strategies to entrepreneurs interested in starting a company as well as executives of start-up and existing MLM companies. Mark is a board member of the Symposium Group.

For more information on The Symposium, please visit http://www.thesymposiumgroup.com. The Symposium is a bi-annual event.