How to Calculate Multilevel Marketing Commissions
If you've ever suffered the nuisance of the Avon lady at your door or a vacuum salesman pushing his wares in your neighborhood, you've encountered multilevel marketing. Also known as network marketing, multilevel marketing involves distributors selling the public products directly in most cases. These representatives then make commission on their sales as well as the sales of people they recruit.
The illegal form of this marketing plan is known as a pyramid scheme. If the money distributors make comes from how many people they recruit and their sales to those recruits, the operation is likely illegitimate. However, if distributors' money comes from sales to the public, the company has a multilevel marketing (MLM) plan, which is legal.
Along with bonuses, the commissions that independent contractors receive for their sales are their compensation. The amounts of these commissions will depend on the compensation structure of the multilevel marketing firm. Read on to learn how companies with the following multilevel marketing compensation plans calculate commission.
Arguably the simplest compensation structure, unilevel plans revolve around a first tier of distributors. Although companies can restrict the number of recruits that distributors enroll under them, a unilevel structure places no limits on width. In other words, every individual the distributor recruits will come in under them in the organizational hierarchy, and the distributor will receive a certain percentage of everything the recruits buy and sell.
Stair-Step Breakaway Plan
The stair-step MLM plan is similar to the unilevel structure in that it has no width limitations and creates a first tier of sellers. The stair-step is unique, however, in that once a distributor reaches a certain level of sales, he can break away from his tier so he keeps more of his own sales. On the plus side, stair-step plans motivate distributors to work hard. The drawback is that distributors in upper tiers receive less income every time a breakaway occurs.
A matrix plan, also known as a forced matrix MLM plan, sets specific limitations on the depth and width of distributors' networks. For example, the firm might have a 5-by-6 matrix, meaning that a distributor must bring in five people on the initial tier and will make money helping that tier do the same for as many as six layers of depth. The matrix plan is relatively simple to implement but requires constant modification to sustain.
Binary plans tightly restrict width but are very generous with depth limits. In binary plans, distributors recruit two people for the tier below them, and then each of those two recruits two more. The firm calculates distributors' sales points based on each leg of the distributor's network. The distributor receives commission based on the leg that receives fewer points. This motivates distributors to keep all aspects of their networks selling well.
Once you understand these four basic plans, you can use an online calculator to determine specific commissions for multilevel marketing. You will need to know the commission percentage as well as the number of partners/associates to determine the amount. Just remember to evaluate how the money is made in advance to ensure you are doing the right type of networking.