Breakage is the term given to commissions that are retained by the company due to non-performance of the network. Before you jump to conclusions, remember that commission is a trade. The company pays the network for performing specific tasks and achieving specific goals. If the member does not reach the required milestones, they do not get rewarded. This results in retained earning known as breakage.
Breakage is not a way for the company to make more money, rather it is a very effective way to pay the people who are working and achieving their goals a much higher commission. The key use of breakage is to reward leadership.
I will get into detail about leadership in a future post but for the moment, let’s assume that leadership is critical to your success.
An average compensation plan aims to pay 40% in commission. 95% of the membership will not qualify for maximum commission, resulting in an average commission of 30%. This leaves substantial breakage that can be used to pay the leadership an above average income. For example, if your company is achieving monthly sales of $10M then 95% of your members would share $3M while $1M could be shared by the 5% who are achieving all the goals and leading your network.
Promising 60% when aiming for an average of 40% can be a little risky. What happens if you hit an anomaly where everyone in your team suddenly becomes super networker and hits all the targets? Most CEOs are terrified of this scenario as it could literally sink the ship. For this reason, the concept of normalisation is coded into most MLM compensation plans.
Normalisation is a calculation that is made after the compensation plan has been run. It checks to see if the average commission exceeds 40% and if it does, it recalculates the commission, reducing every person’s commission by the amount required to reduce the average commission to 40%... what a mouthful! The bottom line is that you never pay more than the targeted average.
Most, if not all, MLM and Direct selling companies rely on breakage to ensure that their commission promises can be attractive and lucrative.