Part 2 of our review on compensation plans
A quick refresher
The average network marketing company has a marketing budget devoted to training others on their compensation or marketing plan. They will spend between a few hundred dollars to a thousand dollars on this training and most of that is just for the room rental, to pay for the speaker’s time and to allow for any question and answer sessions. The company knows what they are doing and are willing to pay these fees to attract new customers.
This was probably your first experience with a compensation plan and it may or may not have made much sense to you. One thing you absolutely must do, especially If you plan to recruit professional networkers (the people who do network marketing for a living), is to know your company’s marketing plan even better than the company itself does. Unless you understand your compensation plan and can explain why the payout works at every step, your chances of sponsoring a professional networker is close to zero.
Be very clear on this. If you are building a network, you wouldn’t want to lose your people to networkers in other companies because of your lack of training. If you’re not careful, you could easily see your income slipping away.
So, let get into some specifics.
Accumulation
What is accumulation?
In typical marketing plans, accumulation is a system of rewards that allows the distributor to save up purchase products and accumulate the point value to reach the next rank. For example: If I need 10,000 points to go from 5% to 10%, I can purchase 3,000 points in the first month, 2,000 in the second and the remainder 5,000 in the final month so I would achieve the rank.
Advantages of Accumulation
- It gives the distributor a longer time frame (sometimes no time frame) to move from one rank to another giving them less pressure and less stress
- Volume gained from sales in previous months doesn’t get flushed away. Meaning, you can gather the volume, go away on a 3 month holiday, and you can start immediately again as though you haven’t left.
- Protected against the effects of demotion.
Disadvantages of Accumulation
- Encourages Front Loading and Position buying.
- No time frame means no pressure. No pressure means no incentive to go out and look for sales so giving too much time frame also works both ways.
- If there are no repeat sales in the business, you will have a hollow organization. Most people stop buying or recruiting once they hit a new level in an accumulation system. In other wards, since there are no quotas, you can have 10 Super Diamond Ambassadors in your organization who don’t buy anything.
In order to overcome the shortfalls of accumulation, you must educate your team to be good product users. This is why it is important to have a good consumable product. This encourages consumption and will result in higher repeat sales (an example would be vitamins or skin care products). In this way, you will not only have income from recruiting opportunity seekers but also when each downline has their own set of customers and are consumers themselves; they will generate volume from their own purchases as well as from recruiting a new downline.
In order to keep a business running, it must have repeat sales.
Just like a normal business, it is very important to have market demand. The reason why the government has scrutinized the network marketing industry or has so many rules and regulations is because many unscrupulous companies use the product as an excuse to run a business. How do you spot one such company? Simple. The market will saturate with many people accumulating lots of product but once there are no repeat sales, the company will collapse and those former distributors will be left with tons of product that nobody wants. A good test of a company and its products is this. If the company disappeared tomorrow, would you immediately think of how to get rid off your products, or would you find out where to get more of them and continue to do business?
For this reason, in addition to having good repeat sales, a reputable company will enforce some type of an 80/20 or 70/30 rule where 70-80 percent of the products purchased by a distributor should be sold to customers and the remainder 20-30 percent is used for personal consumption. This will keep distributors from accumulating products only for the purpose of reaching the next rank faster.
Buying a Position
In certain network marketing companies, there are some instances where the purchase of additional products and/or accounts will enable you to climb the ladder of network marketing success faster by giving you a jump start.
Some examples would be:
- Buying high volume of products in Stairstep plans to start at a higher rank
- Purchasing 3 (instead of 1) tracking centers in a Binary plan
- Buying names of multiple accounts and stacking them under each other so that income from the networks all flow back into one person’s pocket
This often has received criticisms within the industry and certain governments have outlawed extremely high entry fees (companies that encourage a new distributor to join at very high costs or purchasing insane amounts of products to start their business). Regardless, there are many, many companies that allow you to buy positions so it is very common in the industry and it is your own choice to do it or not.
Whatever choice you make, if you want to build a network of leaders, make sure their downline moves in the same direction with the same aim. People follow by example, if you started with three tracking positions, they will start with three tracking positions. If you want them to be on auto-ship (monthly purchases), you must be on auto-ship. You want to build strength and not cater to the weakness of others. It may seem harsh, but you have to be willing to pay the price. Price does not mean money alone; you must be willing to invest to a point past the line where others won’t.
You don’t have to go broke doing this, make it easier on yourself. Choose products that are easy to move. In other words, if I were to come in at a high-entry level, I would select products that are very easy to retail. There are people who treat all their initial purchases when they join as an investment and neglect selecting the right products. There are some who even buy all the high-ticket products only. There is nothing wrong with doing this. Just keep in mind that in order to operate a business, you need cash flow. Retailing products gives you easy cash flow and less financial pressure. You can also choose products that come in packages because they are usually cheaper to buy in a set and you can retail those products separately and get more profit.
Emphasis on buying position is acceptable as long as the products that come with it are reasonably priced and it matches the demand in the market. As I had mentioned before, there are many unscrupulous companies who distribute useless products. A good way to give more value to people is to include a better selection of products in the form of packages so that they pay the same relative cost and have more products to use.
A good way to generate more sales is through converting your preferred customers into distributors by offering them the same incentive of a preferred customer that allows them to buy cheaper the more they consume, just like a loyalty program. Show them how to buy wholesale instead of retail. People see this in everyday life and this should be no different.
Front Loading
Front loading or inventory loading is a business maneuver where a distributor decides to buy lots of products in an effort to meet his quota or target faster or to buy his way up the ranking system.
These people are more interested in climbing the ranking and not as interested in using or selling all those products. Their decision in purchasing those products is purely to be in a better business position (higher rank means better income) and most of the time, those products sit in their basement or get thrown out. Remember, your people do what you do, do you really want to duplicate this way?
Front loading is not a crime and may not have legal consequences attached to it but the danger is that many people fail to control their finances properly and that leads to financial struggles and ill feelings towards their company and their upline.
Furthermore, many people new in this industry make a serious error after they buy up their position. They sit around thinking that their ‘investment’ will grow. This kind of thinking is extremely wrong because after you have bought your position, you are not making any income (in fact people who build their network the ‘slower’ way has a more stable income than you) and you should work even harder to build your network since you have spent more money than before.
Network marketing requires a good business mindset in order to succeed. Being able to plan your finances is one thing that should never get lost in the shuffle.
Just like people in the real world who work very hard to make a living for their families but only wind up putting more hours into their work and end up seeing less of their families; in network marketing many distributors tend to spend their hard earned money buying up more positions, volume, or tracking centers so they can earn more in the future, at the same time neglecting their families. Do not lose sight of way is trully inportant. Striking a balance is very important.
Lastly, front loading has the potential of devaluing a product if executed wrongly. Say a new distributor joins a company and buys up $10,000 worth of products. If he decides to quit the business, what is the first thing he would do? Try to cut losses of course! He might even try to sell off his products way below what he bought them for.
What would happen if everyone in the downline did the same? What happens to the value of the product? What happens is the overall value of the product will drop so much that the entire retail market will no longer be viable. Would you buy the same product from the company if your neighbor sells it for less? Remember, the point of a good downline is duplication. You do not want this type of duplication.
Some points to remember:
- Only front load if you are financially able and have a large social network.
- Have a fair assessment of your abilities and be prepared to go all the way.
- Pace yourself in your business. Don’t overspend and hurt yourself financially.
- Focus on high demand products with repeat sales.
Demotion
Demotion is a marketing plan feature that is very important to consider in evaluating a plan and in pacing yourself month after month. Demotion means dropping from one position to a lower position or rank in a network marketing company.
An example would be if a Silver Rank Producer works hard to become a Gold Rank Producer. The next month he fails to reach his target and he drops back to a Silver Rank Producer. This would result in a loss of potential income or may even reset the quota back to square one.
Demotion can also occur in certain plans where people are qualifying for a certain position in a plan that requires distributors to produce large sales volumes in a short period of time. If they fail to reach their target, they do not necessarily drop in rank but they will have to build their volume all over again. They may not lose all of their volume but may retail some of it as they begin to start qualifying again again the next month.
This is why it is so important to know your downline on a personal level. The power of network marketing is the fact that you cannot succeed alone. You need the support of your downline if you wish to beat your quotas and get to the next rank.
As a leader you must develop two very important factors within your network. Team rapport and Marketing plan education. If you or your downline is in a qualifying phase, this is the time to strategize with your entire team because volume needs to be created to achieve the target. Teach your downline that if they support their upline now, they will become a good upline and in future, their downline will support them as well. With everyone doing a little each day, achieving the target is not difficult. Remember, you want to be duplicatible.
If you educate your downline enough and they support you enough, they will realize that your success is in their hands! They don’t want you to fail and will work hard to help you reach your target; this also helps them because they will earn most of the money since they are the ones making the sales. They are merely helping to qualify for your rank. Use demotion to build the urgency in your team!
Demotion is not really a worry for the distributor if he has a large customer base. Without a large base, the fear of demotion becomes very real. Demotion usually occurs quite rapidly when a distributor stops doing maintenance or cancels their auto-ship. This can happen when the distributor is having financial struggles or is not making money from their business and they decide to stop buying products from the company.
Turning Maintenance into Profit
Let’s face it, no one likes paying money if they feel there is no need to. So what is Maintenance? Maintenance is the sales volume a distributor has to buy from the company (or minimum group sales in some instances), in order to fulfill conditions set out by the company such as:
- Preventing demotion.
- Generating group sales volume.
- Entitlement for commissions or for overriding downlines.
- Eligibility for bonus pools.
- Minimum order to maintain a specific rank.
But the most important factor of all is that network marketing companies need to make money as well.
Regardless of whether the company determines maintenance to be mandatory such as an enforcement of auto-ship in order for the distributor to be in business, optional or if they have no maintenance at all, the key point to remember is in order to be successful VOLUME must be created. In other words, everybody needs to buy something!
Once you understand how maintenance works, your outlook on it will change.
Now I will share with you a little secret how to have your downline pay maintenance willingly and not grudgingly.
The secret is to work depth.
If you want all your people to do maintenance, the simplest way is to go all the way down in your organization and help the newest people to build the most volume. Don’t worry about volume in the middle. If the person at the deepest level generates a large sales volume that month, don’t you think all people inbetween will also make money? Now, if they are making money, do you think they will have trouble paying maintenance?
This works no matter what plan you are in. People get more fired up when they see people at their deepest levels moving because depth gives more security. If the company doesn’t require maintenance, then they will still willingly buy products because they will be making more money and buying products allows them to increase their percentages so they can override more.
You should never stop building depth because attrition occurs when the one at the bottom drops out and the same chain reaction occurs: only backwards. Suddenly you will have no one left in your organization.
No recruitment = No income
No income = No Maintenance
No Maintenance = No volume
No Volume = NO PROFITS!
No matter how far down your downline is or how little you are paid at that level, keep helping them generate volume and make money. Be the leader of your group, don’t pass this leadership off to your downline too early and expect them to build depth for you until you know they are truly ready.
Maintenance is usually an issue with distributors when it conflicts with their budget or lifestyle. A way to cut down on expenses is to buy the products that you would normally use anyway from yourself. If the supermarket has a product you use and your company has a similar product, buy it from yourself. Your supermarket will never give you a percentage of the products you buy from them, but your company will. If your business sells vitamins, buy from your own company instead of the pharmacy. If your business sells health drinks, buy from your own company instead of the supermarket. Once your people make the product a part of their lives, they might even buy more products from the company than the minimum auto-ship.
Other Factors to Consider
No matter how good a marketing plan may be, there is one very important thing you must remember before you consider joining a network marketing company.
Do they have a system for sponsoring new people? Plans are dead without a system for sponsoring. There is a vast difference between sponsoring and recruiting. I personally like the idea of sponsoring as opposed to recruiting. While recruiting has it place, recruiting is all about numbers. You’ve heard people say network marketing is a numbers game.
Network marketing is not about numbers, it is about people. A person is not a number, they are living human beings with dreams and goals just like you have. They have hopes and needs and are looking to you to help them succeed. Being a good sponsor is being a mentor. A recruiter never gets to know their people, a sponsor always does.
I won’t get into recruiting systems, but I would leave you with this final thought:
Think of the most famous hamburger franchise in the world. You and I know what it is. You would probably agree that their burgers may not be the best tasting burgers in the world. But then why is it so much more successful compared with say a Mom and Pop hamburger place? Those homemade burgers probably taste much better.
It’s actually quite simple. Their primary business is not selling hamburgers. It is selling a system for entrepreneurs to MAKE MONEY. It is proven. People rarely lose money there.
If you have a recruitment system that is effective in training new people, moving the products without hard selling, doesn’t require distributors to make 100 phone calls or go door-to-door and helps people generate cash flow and leads, then that company is doing the right thing. If you don’t have a system or are looking for a way to train your downline, please contact me and we can get into depth about lead generation and traffic strategies.
One thing should be very clear. At the end of the day, you have to make the plan work for yourself and your people. Don’t let anyone kid you, Network Marketing is not an automated set it and forget it business. Don’t leave home without being well equipped about everything in the industry.
Success in all your endeavors,
Fred Villareal
