Network marketing systems establish a hierarchy where managers are compensated for their own sales and those of their recruited distributors. MLMs have been criticized for their tactics, but provide income opportunities. Different compensation plans include single-tier, stairstep breakaway, matrix, and binary structures.
Network marketing systems, also called multi-level marketing (MLM), pyramid marketing, or direct selling, establish a hierarchy in which managers are not only compensated for their own sales, but also for the sales of other distributors they can recruit. . . Most network marketing systems rely on word of mouth and referrals to sell directly to customers. Managers and their distributor downline are therefore able to expand the company’s presence.
MLMs and network marketing systems have been criticized in the United States (US) by the Federal Trade Commission (FTC) and others over the years for some of their tactics and compensation schemes. Most network marketing systems, however, go overboard and provide income opportunities for their distributors. Network marketing systems have various compensation plans, depending on the company and the system. One of the most common and simplest is the single-tier structure, where sponsors can hire their frontline distributors and receive a replacement for their sales. There is no limit to the depth or number of people a sponsor can have on board; distributors are encouraged to do the same, and the sponsor can earn commissions from distributors five to seven deep.
Stairstep breakaway plans have representatives responsible for individual and group sales targets. When the numbers are reached, the rep moves up a level in the commission structure. Group leaders are considered to be anyone with one or more descendant recruits. Furthermore, the groups that achieve their highest sales volume break away from the upline. Distributors above the ladder, however, will usually still receive commission and replacements from the breakaway group.
Matrix plans are similar to the lower-level structure, with the exception of a limit on the number of representatives at the first level. Beyond that number, new recruits are automatically placed in lower-level descendant positions. When the maximum number of distributors is reached, a new matrix structure is started. On unilevel and matrix plans, there are usually limited volume levels and minimum sales quotas.
In a binary structure, the distributor need only have two representatives; more than two are automatically set in descending line positions. With only two reps needed, it gives the distributor a chance to start seeing commissions quickly. The main disadvantage of the binary structure is the problem of balancing the two parts of the binary – most plans stipulate that each part of the binary can only represent a set percentage of sales. It is up to the distributor to keep representatives motivated to reach their numbers.
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