Science Behind the Pay Plan - Page 4

Company leaders must proportion the proceeds between the various areas of operation. They must balance their investment between the following: the products, packaging and marketing materials, product research & development, management salaries, salaries of service and support personnel, investment returns, facility, equipment, commissions to distributors, and marketing support systems such as toll-free hotlines, and Internet tools. A strategic balance of these investments is vital to long-term success. You must invest in quality corporate leadership that can create the right strategies and provide the visionary leadership that will be best for the overall opportunity. At the same time, the company must invest enough money into the compensation plan so marketers can earn incomes that are competitive at various levels with programs within the same marketing arena. The competitive issue here is not the theoretical pay plan but the actual incomes earned at various levels within the distributorship.

The pay plan is one of the factors involved in producing compensation. There are two fundamental aspects of a pay plan that determine its effectiveness. First, you have the structure of the pay plan. The breakaway, binary, matrix, Australian two-up, multiple phase, and the uni-level are examples of the different pay structures available in the industry. Secondly, how the bonuses are appropriately placed throughout these structures is important. Each of these structures have features that favor the heavy hitter, the company, or the part-timer. Pay structures that balance the potential commissions between these three categories provide a more secure income for all three. Traditionally, pay structures have favored the company and a few heavy hitters. Gradually, network marketing is maturing and a number of programs are providing a better balance between these segments. In my personal opinion, I believe the uni-level provides the greatest opportunity and balance for the majority of its participants. I will thoroughly expound on the different pay structures in another expository at a later date.

When reviewing pay plans, look for balance. An effective pay plan should place a significant percentage of bonuses on the first two levels to support the less experienced part-timer. A significant percentage of the commissions should be placed on the next couple of levels and into the infinity bonuses to adequately compensate the moderate part-time to full-time marketer. There must be deeply penetrating bonuses to sufficiently compensate the leaders. The bonuses at the beginners' levels should be easier to reach, while the bonuses at higher levels must be protected by qualifications that restrict the number of individuals that can obtain them. If higher levels are too easily reached, the experienced networker will be blocked from deep penetration and will migrate to another program. Balance is the key to overall success. Imbalanced programs lead to attrition and failure. If too much money is placed at the beginning levels, the program will attract an imbalance of inexperienced networkers. Without a sizable number of experienced leaders who have previously achieved success, your organization will be weak. The marketing strategies and training skills they bring to the program can be very important.

The largest segment of part-timers and the least experienced networkers will benefit more from the first two levels. Within our industry, there is a wide range of payout on these levels. Traditional programs generally pay 5-10% per level on these levels. Recently, "compressed" pay plans have appeared in the market paying 15-50% on the first two levels. There are serious drawbacks to each of these extreme positions. Smaller percentages up front create an unfavorable break-even ratio. Placing too much money in the first two levels will attract a greater number of networkers who are more likely to drop out. Secondly, examine how many levels are guaranteed. Traditional programs guarantee 5-7 levels. A program that guarantees more levels generally will pay less per level. This will create a poor break-even ratio that can lead to higher attrition. Programs that pay too much on the first couple of levels, generally include appropriate "breakage" and BV factors that disguise the true payout. These programs "steal back" the misplaced percentages from other levels within the pay plan. The most effective pay plans will balance the first two levels with deeper levels. A pay plan should allow the part-timer to get into profit with 4-6 purchasers. There must be enough income available to the experienced networker in order to attract quality leadership into the program and produce the type of checks that will hold them.

When examining pay plans look for "breakage" and BV features which affect true earnings. The term BV (sometimes referred to as CV, PV, and LP) ratio refers to the figure from which you are actually paid in relationship to the actual cost of the product. The term breakage generally refers to qualification requirements within the pay plan, which "not so obviously" affect the true payout of the program. In response to competition, there is a trend toward offering high bonuses and then diluting these bonuses with low BV and excessive breakage. In order to find the true bonus, divide the BV by the wholesale price. For example, a BV of $30 divided by the wholesale cost of $40 gives you a 75% ratio. If the plan claims a 40% payout, multiply the 40% by 75% and you find that the true payout is 30%. To discover how breakage affects true payout, find out what percentage of individuals can achieve that bonus level. For example, if a bonus requires $50,000 volume to achieve, divide the $50,000 by the expected average purchase. This will give you the total number of individuals required to reach that qualification. If the average purchase is $100, in the above example, the $50,000 qualification will require 500 people to reach it. Overlap can be figured by dividing 500 by the width requirement.

Once you carefully analyze the pay plan and understand its theoretical potential, you will need to analyze the potential of other compensation features to influence earnings and retain distributors. As I stated earlier, there are several factors other than the pay plan that influence actual income potential. In order to clearly understand the balance between the dynamics that affect success in network marketing, we must examine the history of our industry. History teaches us that a great majority of networkers respond to products and other related factors before they consider the pay plan. This is a reality that must be addressed in order to select a program that will produce residual income. Since 75% of a healthy organization will primarily be product users, the fact that the majority of networkers are attracted to the product first is a healthy scenario. One such reality is that products in network marketing have a tendency to cost more than products in the conventional market. In order to keep product users, the company will have to offer unique products that are not easily duplicated in the conventional industry. With the inevitable ratio of three out of every four networkers not breaking even on product purchases, a balanced product and marketing strategy becomes vital to attracting enough product users to maintain success.

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