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
- Defining the terms
- The Opportunity
- Getting Started with your business
- Honest Questions
- Devils and Details
- Conclusion
- References
Definitions
- Residual - In business, an ongoing stream of payments for the completion of past achievementsWikipedia
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:- Personal Residual - generated from the customers that you sign up directly.
- Overriding Residual - generated from the personal customers of your downline (the representatives that sign up under you).
- 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.
| Billing Volume | Commission |
|---|---|
| 0 to $1999 | 1% |
| $2000 to $2999 | 2% |
| $3000 to $3999 | 3% |
| $4000 to $4999 | 4% |
| $5000 to $5999 | 5% |
| $6000 to $6999 | 6% |
| $7000 to $7999 | 7% |
| $8000 to $8999 | 8% |
| $9000 to $9999 | 9% |
| $10000+ | 10% |
.02 * $2400 = $48Your 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.
For 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.
| Level | Commission |
|---|---|
| 1 | .25% |
| 2 | .25% |
| 3 | .25% |
| 4 | .25% |
| 5 | .25% |
| 6 | 1% |
| 7 | 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:- #PC - the number of customers that a representative directly acquires
- PBV - the dollars that the directly acquired customers spend every month
- TBV - the combined dollars of a particular downline level representatives' personal billing volume
TBV = NumberRepresentatives * AverageRepresentativePersonalBillingVolume - #Cust - the number of customers that generate a given BV (Billing Volume).
NumberCustomers = BillingVolume / AverageCustomerCommission - AverageCustomerCommission - I will use the same amount that the company presentations use; namely $38/month. So for example, a
billing volume of $400/month would require 11 customers.
$400 / $38 = 11 customers
| Scenario | #PC | PBV | Heirarchy | Commission Income | Timeframe | |||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 | 395 | $15,000/month | n/a |
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| 2 | 11 | $500/month |
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| 3 | 11 | $400/month |
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| 4 | 11 | $200/month |
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ngh |
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
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?".
| Upline | Amount | Notes |
|---|---|---|
| TT | $40 | Only paid if the upline TT joined less than 60 days ago |
| ETT | $100 - $214 | Amount grows as number of qualifying reps increase |
| ETL | $100 - $175 | Amount grows as number of qualifying reps increase |
| TC | $100 - $255 | Amount grows as number of qualifying reps increase |
| RVP3 | $60 - $80 | includes expense allowances |
| RVP4 | $80 - $100 | includes 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:- Always ask for the details behind every chart, graph, and statement.
- Don't get caught up in the glamour.
- Don't get caught up in emotional appeals.
- A solid business opportunity speaks for itself without glitz and glamour. Things should become clearer as you dig into the details, not get more confusing.
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
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PAPER: THE FIVE RED FLAGS of product-based pyramid schemes, or recruiting MLM's
- Recruiting of participants is unlimited in an endless chain of empowered and motivated recruiters recruiting recruiters.
- Advancement in a hierarchy of multiple levels of "distributors" is achieved by recruitment, rather than by appointment.
- Ongoing purchases (products, sales "tools," etc.) by "distributors" are encouraged in order for them to be eligible for commissions and to advance in the business ("pay to play").
- The company pays commissions and/or bonuses to more than five levels of "distributors."
- For each sale, company payout for each upline participant equals or exceeds that for the person actually selling the product, creating an inadequate incentive to sell products directly and an excessive incentive to recruit.
The 5 Red Flags
Five Causal and Defining Characteristics of Product-Based Pyramid Schemes, or Recruiting MLM’s
Jon M. Taylor, Ph.D.
http://www.mlm-thetruth.com/5RedFlags2column40pages2Color3-6.pdf
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ARTICLE: An extremely detailed look at ACN. A goldmine of little tidbits of advice and links to many helpful resources. Be sure to checkout the section titled "POPULATION AND YOUR NETWORK" -- the author does an excellent job of explaining exactly why the business will fail.
Don't overlook "market share" and "closing rate." These factors seriously reduce the pool of available prospects and customers. You aren't the only game in town, and not everyone will be your customer or Rep.
Exposing the truth about ACN MLM
http://users.tns.net/~mpat/scam/
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ARTICLE: The percentages of commission, the purchase requirements for rising to each new level, and other rules associated with the system are complex and unfamiliar to the new recruit. Few recruits engage in due diligence or ask for actual income or expense information. The scheme is not required by law and does not divulge the actual financial records of success or failure of those who have invested in the past.
Instead, the non-retail direct selling schemes present a compelling and very alluring picture to potential recruits that diverts attention from the flawed structure and its disastrous outcome. Virtually all companies of this type in every country they operate in make the same alluring and misleading promises to recruits:
1. Opportunity to earn "residual" income, that is, ongoing commissions on the purchase by others whom you recruited or whom they in turn recruit. This expands earning power well beyond ones own personal efforts. You can be freed from "wage slavery."A Disguised Pyramid Scheme
The Non-Retail "Direct Selling" Company
Robert L. FitzPatrick
http://www.falseprofits.com/Nonretail.html
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ARTICLE: MLMs work by geometric expansion, where you get ten to sponsor ten to sponsor ten, and so on. This is usually shown as an expanding matrix (just don't say "pyramid"!) with corresponding kick-backs at various levels.
The problem here is one of common sense. At a mere three levels deep this would be 1,000 people. There goes the neighborhood! At six levels deep, that would be 1,000,000 people believing they can make money selling. But to whom? There goes the city! And the MLM is just getting its steam going. Think of all the meetings! Think of all the "dreams" being sold! Think of the false hopes being generated. Think of the money being lost.What's Wrong With Multi-Level Marketing?
Pyramid Structure: An Organizational Problem
Dean Van Druff
http://www.vandruff.com/mlm.html#II
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ALERT: Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid.
Be cautious of plans that claim you will make money through continued growth of your "downline" -- the commissions on sales made by new distributors you recruit -- rather than through sales of products you make yourself.
Beware of shills -- "decoy" references paid by a plan's promoter to describe their fictional success in earning money through the plan. -
ARTICLE: The commission structure is designed, unsurprisingly, to enrich the company founders. It's not just you who gets a commission, so does the person who recruited you, and the person who recruited them, etc. That's the pyramidal nature of the system. The commissions are 0.25% for these "downline" customers until you reach 6 or 7 levels deep into the pyramid, where the commissions are 1% and 7% respectively.
The 7% commission is your reward for building a gigantic pyramid. No, let me clarify — it's the reward for the people who cooked up the system, because you'll never get there. The introductory presentation used example calculations that included customers 7 levels deep from you, which is totally unrealistic. But it's those high commissions that they use to sell the system, even though almost no-one will ever earn them. -
ARTICLE: Reputable and legally designed and implemented multi-level business opportunities provide a money making opportunity SINGLE LEVEL to those who choose not to sponsor. Of course, if one sponsors others, then ADDITIONAL money making opportunities exist when those sponsored generate sales.
Apply this test to multi-level business opportunities. Look at the plan design, and look at the way the plan is being implemented by the prospective sponsor and associates. If the ONLY WAY to make money is by sponsoring, STAY AWAY, the plan is fatally flawed. -
VIDEO: FREEDOM, FLUSH THAT STINKING JOB
A 20 minute in-depth look into MLM, Quixtar -- the similarities between this and what I was shown in a video at an ACN function about the ACN International Training Events is scary. -
ARTICLE: Whatever products they offer, MLM companies use essentially the same formula. They sign up sales representatives by offering them the opportunity to go into business for themselves with little or no start-up capital--and to make millions if they're successful. How? Mainly by recruiting other salespeople.
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SITE: Well-researched information and guides in making decisions about MLM participation and/or help with recovery. The author of these articles, has taught college classes on entrepreneurship, ethics, and communications – and founded over 40 home businesses, focusing on sales and marketing. His experience in MLM; communications with top MLM executives, law enforcement, and thousands of inquirers; consumer advocacy; and wide-ranging research on MLM/network marketing make him the premier expert on chain selling and product-based pyramid schemes. His history makes him uniquely qualified as a consultant and expert witness against pyramid and chain selling schemes.