Understanding an MLM's Compensation Plan

Last Updated: 10 Oct 2007

By Court Shrock

The money sure is enticing, how soon will it start flowing after you join.
I recently joined ACN, an MLM because I am an entrepeneur and I like technology. I take providing for my family seriously, so I wanted to have a plan so that I could set my expectations properly. After all, they are selling a product/service, so it is obviously legitimate, right? I write this in hopes that it can help you properly determine if your new opportunity really is as good as you are being told it is. [skip to the conclusion]

A quick outline

Definitions 

The Opportunity 

You have just been told about a great business opportunity, but want to check everything out before you join. Great, lets take a quick look at how to go about doing just that.

Your first question should be "how long will it take for me to replace my current income?". This way, you can plan a smooth transition so that your family does not suffer any unnecessary hardships. Why not set the first goal to be $1,500/month--an extremely modest goal that should be easily reachable given what is being said about how great the opportunity is.

Understanding the different types of income 

In order to do this, you need to identify the different sources of income. Unfortunately, this is where it gets complicated. There are 3 types of income mentioned in the presentation:
  1. Personal Residual - generated from the customers that you sign up directly.
  2. Overriding Residual - generated from the personal customers of your downline (the representatives that sign up under you).
  3. Monthly Team Building Bonuses - generated when a representative under you qualifies by signing up a certain number of customers in a specific period of time after they join the team--normally 30 days.

So a quick formula would look something like: MonthlyRevenue = MonthlyCommissions + MonthlyBonuses We now need to figure out how to calculate commissions and bonuses. Lets start with commissions.

Personal Commissions 

We already know that you get commissions on both your personal customers and those in your downline, which looks like this: MonthlyCommission = PersonalCommission + DownlineCommission Personal commissions are calculated based on how much your personal customers pay every month--this is called billing volume. The equation looks like: PersonalCommission = PersonalCommissionPercentage * PersonalBillingVolume The percentage that you get is also based on how much money your customers spend every month.
Personal Commission Table
Billing VolumeCommission
0 to $19991%
$2000 to $29992%
$3000 to $39993%
$4000 to $49994%
$5000 to $59995%
$6000 to $69996%
$7000 to $79997%
$8000 to $89998%
$9000 to $99999%
$10000+10%
So, for example, if your customers were paying for products and/or services totalling $2400 every month, you would get a commission of 2%. So, applying the formula:
.02 * $2400 = $48
Your personal commission for the month would be $48. We will calculate how many customers that is a little later. For now, let's move on to calculating the downline commissions.

Downline Commissions 

When calculating the downline commissions, it is important to remember that the commission percentages apply only to the customers that are at a specific level within your downline.

Simple Hierarchy of 2 levelsFor example, if your downline has a total of 2 levels (you have a representative under you that also has a representative under them). The customers of your level 1 representative are different than the customers of your level 2 representative. In this case, the total downline commission would be the commission at level 1 plus the commission at level 2.

The general purpose formula is: DownlineCommission = L1Commission + L2Commission + L3Commission + L4Commission + L5Commission + L6Commission + L7Commission + RVPCommission + SVPCommission Yes, at the RVP and SVP rank, you get commissions on the personal customers beyond your downline's 7th level.

We must now calculate the commission at each level of your downline--this is really simple to do as you get started because your downline is really small.

Downline Commission Table
LevelCommission
1.25%
2.25%
3.25%
4.25%
5.25%
61%
77%
The really important thing to note here is that your commission level is no longer based on billing volume, but rather on how deep your downline is. Also take note that that the majority (76%) of the downline commission income will happen at level 7.

For example, if your cumulative billing volume for levels 1-5 is $10,000/month, your commission will only be $25 for those 5 levels.

What should be obvious at this point is that you need a downline that is at least 7 levels deep before you even have a chance at making any money from commissions. Even if your 7th level has a billing volume of $10,000 your commission would only be $700/month. Still a long way to go towards $1,500/month.

At the very least, you would have to recruit 7 representatives and stack them under each other--this is simplest way to have a downline that is 7 levels deep.

Downline Commission Scenarios 
Let's look at some possible scenarios with what we have learned so far. First, we need to define the terms that I use and also state the assumptions used for the calculations:
Various Income Scenarios
Scenario #PC PBV Heirarchy Commission Income Timeframe
1395$15,000/monthn/a
PersonalDownlineTotal Income
$1,500--$1,500
WorkDays/yrTime to reach goal
Wknd1043 years 11 months
Part1562 years 7 months
Full2601 year 7 months
24/73651 year 2 months
211$500/month
Level#RepsPBVTBV#Cust
13$500$1,50039
29$400$3,60095
327$300$8,100213
481$200$16,200426
TOTALS120--$29,400774
PersonalDownlineTotal Income
$4.00$70.50$74.50
ngh
311$400/month
Level#RepsPBVTBV#Cust
12$300$60016
24$300$1,20032
38$300$2,40063
416$200$3,20084
532$200$6,400168
664$200$12,800337
TOTALS127--$26,600700
PersonalDownlineTotal Income
$4.00$162.50$166.50
ngh
411$200/month
Level#RepsPBVTBV#Cust
12$200$40011
24$200$80021
38$200$1,60042
416$200$3,20084
532$200$6,400168
664$200$12,800337
7128$200$25,600674
TOTALS255--$50,8001337
PersonalDownlineTotal Income
$2.00$1951$1953
ngh
NOTE: I assume the best case scenario that you can signup 1 customer every day that you work.
work weekends = 2 days/week = 104 days/year
work part-time = 3 days/week = 156 days/year
work full-time = 5 days/week = 260 days/year

WHAT DOES THIS MEAN? - Despite it being mathmatically possible to achieve a $1,500/month income selling the product/service, it just isn't feasible, given how much time it would take. On the upside, though, it is residual income. Take special notice that it will take a considerable amount of time and effort just to get to scenario 2 or 3, probably at least 1.5 years; If 1 rep joined each week, it would take 120 weeks, or 2 years 4 months, to reach scenario 2. At this rate, scenario 4 would take just under 5 years.

Ask your upline what percentage of their income is actual residual income from product/service commissions and what percentage comes from the monthly Team Building Bonuses. Ask their upline the same question. Keep going until you find someone that is actually earning the amount of residual income that you had in mind the first time that you heard the word "residual". How many levels up does it take before the residual income is what you want it to be? Whatever it is, ask them how big their downline is--this is the organization that you must now build. How long did it take them to do it?

There obviously needs to be another source of income. The residual income just isn't there, even after several years.

Bonuses 

But there is one more component that comprises your total monthly income--the monthly Team Bulding Bonus. You get this bonus when a representative in your downline qualifies within their first 30 days. If they don't qualify in that time, there is no bonus. Furthermore, there are no bonuses for reaching certain levels of billing volume. The bonuses are based solely on how many representatives join and then qualify within their first 30 days.

How do you qualify? Simple, you get a personal billing volume of approximately $160/month.

1 Customer Point = $20/month
8 Customer Points = $160/month
NOTE: The company uses points instead of dollars to further simplify or complicate things, depending on your perspective. For the sake of this document, I assume that 1 point equals $20. I can provide the details of this calculation if you care, but changing this assumption by several dollars does not affect the calculations much, if at all.

For you to understand the bonus structure, it is more helpful to approach it from a different angle: "Who gets a bonus when you qualify?".

Bonuses Paid Per Qualifying Representative
UplineAmountNotes
TT$40Only paid if the upline TT joined less than 60 days ago
ETT$100 - $214Amount grows as number of qualifying reps increase
ETL$100 - $175Amount grows as number of qualifying reps increase
TC$100 - $255Amount grows as number of qualifying reps increase
RVP3$60 - $80includes expense allowances
RVP4$80 - $100includes expense allowances
SVP$15 - $30--
TOTAL$495 - $894 

WHAT DOES THIS MEAN? - When a representative qualifies by bringing in $160, the rep's upline gets paid anywhere between $495 and $894. It is pretty obvious that the revenue generated from the products/services that the representative sold is not even close and cannot justify the bonuses paid out. Did I mentioned that the representative pays a fee of $499 to join the company.

Getting Started in your new business 

When you get started, all that is required is to get the experienced representatives in front of your "warm market"--in other words, the people that you know personally. Pretty simple...
You: "...but don't I have to go out and get customers right away?"
Them: Don't worry. You invite your friends over and your upline does the presentation.
You: "Awesome, that means that I don't have to know all of the details about the products and services--wait, what presentation? Is there a really cool product presentation too?"
Them: No, it is the same one that you just saw; don't worry, we will ask those that don't want to join the company to do you a favor and help you out by trying the service.

At this point, you should be asking yourself a key question -- "if this really is a product-based company, why is the primary goal to recruit representatives, with customers being an afterthought?" If you ask that very question, you will receive an answer like this: "The business is all about leveraging other people's time, like a normal business". Right. Follow up with some more questions...

Honest Questions 

UNLIKE MONTHLY COMMISSIONS, MONTHLY BONUSES ARE ONE-TIME AND NOT RESIDUAL. If you are serious about the products/services and the resulting residual income, better start signing up those customers. But wait just one second...you are smart. You've already figured out where the real money is...

As a new recruit, each new recruit equals $40 in your pocket. If you had a personal billing volume of $2,000 your commission would be $40. Which is easier to do, sign up 53 customers or convince 1 representative to join the company? Both result in you making $40.

$2000 / $38 = 53 customers

Q:What are most of the representatives spending their time doing? Selling the product/service or recruiting representatives?

Q:Ask your upline how much it is costing them on a monthly basis to be in the business? How much are they spending on recruiting materials? Have they broken even yet? How long have they been in the business?

Q:If you were to open a random slide of any of the presentations that you have seen, what would the subject of the slide be? Income opportunities or details/nuances about the products/services?

Q:How long are the "training" meetings and where is the majority of the time spent? Teaching representatives about the intricacies of the product/service or repeating how good the opportunity is and how motivated you should be about getting others to join the company?

Q:If everybody is taking the easy path, who is actually selling the products/services?

If every representive is "leveraging" the work of the people in their downline, who gets around to actually doing the work? In other words, if no real money is made until after you reach a specific height--that is only attainable by getting others to join the business under you--there will come a point in time that the people at the lowest level of the company will not be able to make any money as representatives will stop joining.

This WILL happen and each city/town will have it's own unique cause so don't get stuck rationalizing why what happened in Johnstown won't happen in Littletown--it is a mathematical certainty and WILL happen.

When it does happen, those at the bottom will have to drop out because the business is costing them more money than they can make just selling the products/services as there is no one left willing to join the company. This is called the saturation point and is when every pyramid scheme starts collapsing from the bottom up.

Not to worry! I am sure someone will start up another MLM and those that get it will jump ship like rats leaving a sinking ship. Those that jump first get to ride the pyramid and make a little more money then they did the last go-around.

Devils and Details (look closely at their materials) 

What you should always keep in mind:

Look REALLY carefully at the details of any graphs that you are shown. In my case, one of the first things that you see is a graph showing the revenue of the company. The graph looks similiar to the following: It is labeled with "Revenue Growing!!" and "In the last 5 years revenue has quadrupled". In the presentation and on the handout, look closely at the largest bar on the graph, you will notice that it is labeled 2004. Last time I checked, 2004 was 3 years ago--how should you interpret the "last 5 years" claim? What happened in 2005 and 2006? Isn't it a little odd that such a "technical" company would accidently "miss" that tiny detail for 2 straight years?

Conclusion 

Yep, ACN is a scam. Because the majority of income is tied to signing up new "representatives", it meets the federal government's definition of a pyramid scheme. I am not the first to suggest that ACN or other MLM's like it are scams. The term "shadow pyramid scheme" also applies quite well because the pyramid scheme is obscured by a seemingly legitimate business. But don't just take my word for it; read up on what others besides me have written [below]. Or you can [browse the files related to ACN during this research]

References