Chapter One: How is network marketing different from other methods of distribution
Overview. This is a rather broad topic for a chapter. These commissions are so diverse that I call the chapter “miscellaneous” commissions, but they’re still important to discuss. The matching, automobile, and fast start commissions are sort of like dessert to a meal. You can live without it, but, in some cases, it’s what makes the meal appealing. I typically recommend that companies not rely solely on these commissions for the backbone of their plan.
Matching Commissions. The term matching commissions refers to a system that pays distributors a percentage of the earnings of the people in their organizations rather than paying a percentage based on personal or group sales, as in the other commissions. Matching is a type of level commission. Matching commissions can be paid on either the sponsor tree or the enroller tree.
A company can add matching commissions to almost any plan. In some plans, it makes the most sense for distributors to place the new people they sponsor down in the organization, where they may not earn as much, because of a need to meet certain group volume or downline leg requirements. Doing so may put them out of a distributor’s payline. Companies may use a matching commission to compensate distributors and to continue to motivate them to recruit new people.
When we say matching commissions it means that the company matches a percentage of one or more of the commission types. For example, a company may have a level commission and is paying a 10 percent matching commission to the enroller. If a distributor earns $1,000, this distributor’s enroller would earn $100. Typically the company does not pay a matching commission on the matching commission a distributor earns.
Automobile Shared Pool Commissions. These commissions have been a staple in network marketing since the 1970s. The most famous car program in direct sales history is Mary Kay’s pink Cadillac. In fact, the branding that Mary Kay associates with the pink Cadillac is so strong that General Motors actually has a shade of pink specifically branded for Mary Kay.
Why do companies create car programs? The first reason is that it turns their distributors into walking (actually driving) billboards. The car can also be a powerful reward for a distributor who has “crossed the desert” and become a sales leader.
Another reason is to create the perception that the distributor is earning more money. Instead of paying a distributor $1,000 per month, a company can pay $500 per month and give the distributor $500 per month for a payment on a car. Now, when that distributor’s friends ask what he makes in his little side business, he can say, “About $500 a month, but the company also gives me that new Acura.” In some people’s minds, that adds up to more than $1,000.
This method of reward is especially powerful because getting a new luxury car is one of the signs that you’ve made it. You’re a success. You might ask, “What’s the definition of a luxury car?” In this context, it seems it’s any car that’s a step up from what the distributor’s friends drive. If they all drive used cars, it’s any new car. If they drive $15,000 cars, it’s a $30,000 car, and so on.
The last major reason for a car incentive program is the sense of commitment to the company it encourages in distributors. If working their business earns them the money that pays for a new car that impresses everyone they know, that’s a powerful incentive.
Technically, how do these programs work? There are two primary methods. The first method has been around for a long time. The company buys or leases the car, and the distributor earns part or all of the payment based on defined performance criteria. If sales performance drops below certain levels, the distributor no longer is entitled to the car. This is where this method can create a problem. What happens when the distributor no longer qualifies for the car? The company has to repossess it. Not surprisingly, people don’t like it when you repossess their car. All the work the company has done to make the distributor feel part of the family can be pretty much blown away.
The advantage to this method is that it’s simple and hassle free for the distributor. She either qualifies for the car or doesn’t. If she does qualify, the car shows up on her doorstep. You will notice that the explanation of the other method of automobile program is significantly more complex.
One of the reasons companies started running the program this way because getting a car loan used to be much more difficult than it is today, especially for self-employed people. But now that the automobile manufacturers offer attractive financing programs, this problem is mostly gone.
Today there is a second method of automobile programs. They’re actually pool commissions
There are two types of these car programs generally used today. One is quite simple. If a company has ranks of 1-Star through 9-Star. When the distributor achieves the 5-Star rank, he or she receives a certain dollar amount car commission, say $300, in any month that he or she is qualified. When they achieve the 6-Star rank, the car commission might go to $500 per month, and so on as the distributor advances in rank.
The second form of car commission is more complex. Distributors who qualify for the car program decide what car they want, then fill out a form that determines the amount they qualify for. For example, a company might take the price of the car, plus twenty percent for interest and taxes, plus a certain percentage for maintenance, and then divide that number by 36 months. That amount determines the maximum payment the distributor can receive every month. Qualifying distributors send in the calculation, proof of purchase, and a photo of themselves and their new cars. The actual amount they receive is determined by some formula. There are rules, for example, about how a distributor earns “car points.” Each dollar of group sales volume is one point, each dollar of first-generation sales volume is half a point, each dollar of second-generation sales volume is a quarter of a point, and so on. At the end of the month, the company adds up all the points earned by all the distributors and divides it by the amount the company has designated for the car program.
The company normally sets aside one or two percent of sales to fund the car program. This amount determines the value of each point. Then for each distributor, they multiply the point value by the number of points the distributor received. The company may have other rules that cover what to do if the distributor earns less than the maximum and how they can make it up later when they earn more than the monthly maximum.
The strong points of this type of a program are:
- The company never has to repossess the car;
- Distributors can actually buy more expensive cars than they qualify for and have their commissions grow into it;
- The car leases are not liabilities for the company;
- It’s easy to administer;
- The photos are great for the company to post on their “hall of fame.”
The pros and cons of the two approaches are pretty obvious. The first type of program is simple, and distributors like that. The second type of program allows distributors to earn more money as their downline grows, and distributors also like that.
The only real negative about the second type of car program is that if a company sets up its point system so that the new leaders can get enough points to get a car, sooner or later, the top distributors will be getting enough points to get several thousand dollars a month toward a car. But not many cars cost that much. Then the company gets pressure to allow them to use “their” money for more and more things: homes, vacations, boats, and so forth. This problem leads to devaluing the point so that new leaders can no longer qualify for enough money for a car.
Fast-start commissions. These commissions have come into their own over the last few years. Commissions can be unilevel, stepped infinity, or coded. The concept is that when a distributor signs someone up, certain products, product packs, or the first certain amount of product they buy are paid not under the standard commission plan, but rather under a different commission plan. The purpose is to get higher sales commissions to the upline on the first few sales to someone new in the program. (see Figure 13 for the difference between a standard unilevel plan and a fast-start unilevel plan)
More money goes to the sponsor and less goes to the upline on each new recruit’s sales. A distributor can earn fast start commission each time they recruit someone for as long as he or she is in the company, but it’s only paid for the first few months or for a certain amount of each recruit’s sales volume.
Another variation is for the company to pay half of the new recruit’s volume under the fast start and half under the standard plan.
The advantage of the fast start is that it not only gives sponsors incentive to work with the new distributors to build their business, but also gives them incentive to work quickly because they receive this commission for only a limited time; three months is common.
The disadvantage of fast start is that if someone comes in and recruits a lot of people in the first three months, in the fourth month their commission can drop by as much 75 percent as these recruits move back to the normal plan. This drop in income can be very discouraging. The distributors seem to feel that the company has taken something away, rather than feeling that the company gave them something extra for three months. A commission plan can solve this problem somewhat by having the fast start phase out over time rather than abruptly end.
Another disadvantage is that in some plans, after the three-month period, the amount a distributor makes on a consumer can be so little that it no longer makes economic sense to spend time taking care of the customer. Additionally, fast start is open to some forms of manipulation. Distributors, for example, can put all of their volume under their new distributors in order to receive the higher percentage.
Creating big-paying, fast-start commissions has not proven to create long-term growth. A moderate fast start can work well, but if a company makes it so easy that it generates a lot of extra commissions, distributors seem to remember the negative feeling generated by the loss all of those commissions long after they’ve forgotten the positive feeling of getting the money originally.
Incentive Programs. Money isn’t the only thing that motivates people. This was what Napoleon was talking about when he said, “Give me enough ribbon and I will conquer all of Europe.” Companies can create recognition, cash contests, and trips. A company can have these incentives computed, tracked, and reported on the monthly commission statements.
As a company works to create a loyal distributor force, it’s important to remember that for distributors who are earning a few hundred dollars a month, a free trip to a convention can be the trip of a lifetime. As companies design contests, it’s important to remember the five types of distributors. Contests can be much more targeted to specific distributor types than commissions can.
Other ideas, such as buy one get one free, free shipping, new product promos, and product credit are also very successful.
In the late 1990s, when many traditional network marketing companies were having flat sales, many party plan companies were doing very well. The areas of contests and incentives are areas where party plans companies traditionally excel. This has caused many of their network marketing cousins to take a look at what the party plan companies are doing so they can improve. The area of incentives is certainly one of those areas.
As you can see from the commissions discussed in this chapter, there are some great ways to create additional value for the distributor. It’s important, however, that a company remember that these commissions are added after the commission strategy is defined, and typically after the majority of the commission plan is designed.