The purpose of the compensation plan is to drive sales and find leaders. According to international law, at least 70% of the people who purchase your product need to be retail customers. For this reason, your compensation plan will need a strong retail component. Finding leadership is the other key activity. If you become even marginally successful you will recruit over 10,000 members. How do you train, communicate and help that many people? Well, I can tell you from experience that you can’t. For this reason, a large portion of your compensation spend needs to be focused on finding leaders. 

Retail profit, by law, may not be set by the company (I will get into detail about this in a future post) but you may set a recommended retail price. The member purchases the product from the company at wholesale and sells to their client at any price they like. This normally results in a 25% retail profit. All the rest of the commission is channeled into finding and retaining the leadership. If you want to compete for networkers, you need to offer competitive commissions, and this can be expensive. For this reason, your pricing strategy is extremely important. 

Pricing is a big topic and I will cover it in greater detail in a future post but in order to design a lucrative compensation plan we do need to touch on this topic.

The MLM industry average in terms of commission payout is to promise 60% and pay an average of 40%. This means that for every $10, the company promises $6 and pays an average of $4 in commission across the entire network. Now don’t take offense. The reason that the average payout is 40% is that some people will work hard and achieve the 60% promise while others do very little and will fall well short of the 40% average. The result is an average of 40%. It is important to note that sales tax is not used in any compensation calculations. 

To achieve a 40% average payout is difficult and is one of the main reasons I recommend getting a compensation specialist help you. 

In order to achieve a 40% commission target, you need margins. Most companies mark up between 600% and 1000%. If a product's manufactured cost is $1 it will wholesale for between $6 and $10. This may seem like a lot but is not that far off traditional channels.

Let's look at a traditional retail channel. Manufacturers normally mark up 100%. If the manufactured cost is $1, they sell it to the distributor for $2. The distributor will mark up 40% giving you a price of $2.80. The wholesaler marks the product up again by approximately 40% bringing the total to $3.92. The retailer will try to get as close to 100% as possible bringing the price to $7.84. The result is that the average product lands on the retailer’s shelf with a 784% mark-up from manufactured cost. Depending on the products these values can vary drastically. If we are talking cosmetics, an industry I am very well acquainted with, the mark-ups can be as much as 3000%. If we are talking fast moving consumables, the margins will be drastically lower.

The bottom line is that if you want a lucrative and sustainable compensation plan, the first prize is a high margin product range. 

I realise, however, that high margin products are not always available and sometimes you may need to run your business on smaller margins. If that is the case, I suggest you find products with an annuity component. If your network can build a large client base that yields monthly commissions from annuity payments, even if the commission percentage is small, you will still be able to attract and retain networkers and, more importantly, network leaders.