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Published: Jun 03, 2014
By: Mark Rawlins
Chapter One: How is network marketing different from other methods of distribution
When I use the word "distributor," I mean anyone who has signed an application and, in most cases, purchased a sales kit. Most of the companies I have worked with are what I call "open-enrollment" network marketing companies. The numbers I deal with in this chapter are from open-enrollment companies. In this type of company, most people who become regular consumers of product sign up as "distributors." The other type of direct sales company is "barriers-to-signup." In this type of company, only those people who are serious about selling product become distributors. I discuss the differences between open-enrollment and barriers-to-signup in Chapter Eight.
If you have a network marketing company and you've signed up 100,000 typical distributors, the demographics are something like this: Between sixty and seventy percent will not sponsor anyone--not one! Of the remaining thirty percent who do sponsor someone, two-thirds sponsor five or fewer new distributors. Only the remaining third sponsor more than five new distributors.
I often hear a statistic batted around that the "average" distributor sponsors three people. This is incorrect. An average distributor sponsors one. (You derive the average by dividing the number of people who could sponsor someone by the number of people who are actually sponsored. In the above example, both numbers are 100,000 and the result is one - 100,000/100,000=1.)
Upon hearing this figure, people often inquire as to the best sponsoring rate I've ever seen. My answer? Slightly under forty percent-which means that even in the most productive companies in terms of sponsoring, more than sixty percent of their distributors are not sponsoring anyone.
Of those distributors who do sponsor someone, the average is between two and three. But that number will also mislead a company if they use it in their decision-making process. Why? Because, as the old story says, "If you have one leg in the stove and one leg in the icebox, on average you should be about the right temperature." If a company deals with average numbers in recruiting, it isn't addressing the fact that it's dealing with very different kinds of people. If the company wants to be successful, each group of people needs to have their specific needs dealt with. That makes much more sense that talking about the average needs of the organization. Instead, it's far better to talk about the five types of distributors when working through commission plan issues.
The five types of distributors
2. Product evangelists
4. Sales leaders
This category includes most of the people who sign up, but don't recruit anyone else. Why did they sign up? For various reasons. Maybe they love the product and want a convenient way to purchase it at wholesale price. Or at the time, they really thought they might build the business, but later suffered rejection and changed their minds. Or perhaps the only reason they signed up in the first place was to get their brother-in-law out of the house so they could go back to watching the game!
Despite the fact that they signed an application, they're actually consumers. There is a good chance they want to purchase the product because they believe it helps them. It gives them more energy, or smoothes out their wrinkles, or whatever.
So what does a company do with these folks? If it treats them like salespeople, they'll almost certainly leave the organization. But if it treats them like consumers, maybe they'll stick around!
Consumers are vital to a company's success. If they weren't out there buying product from the distributors, there would be no company. The company must consider their interests in every decision it makes, including decisions relating to the commission plan. Consumer retention may be the biggest problem that most successful companies face.
II. Product evangelists:
These people may or may not sponsor anyone. But in either case, recruiting other distributors is not the reason they're in the company. They love the product, they love to tell people about it, they want their friends and acquaintances to benefit from it, and they would recommend it even if they were not signed up. They simply don't want to invest a lot of time building a business or don't feel comfortable closing the sale.
Product evangelists can be a company's greatest asset if it can turn their contacts into distributors. The challenge in working with product evangelists is to keep them motivated and enthusiastic, and to work with them to turn their leads into new distributors.
We all know that the best kind of marketing is word-of-mouth-product evangelists prove it. They help a company's business. They are the "network" in "network marketing."
Salespeople usually earn between one thousand and several thousand dollars per month. These people are important because they sell product, they take care of consumers, they keep product evangelists happy, and they're the only ones who can do it. They do well in sales-oriented organizations. The product evangelist knows how to talk about the product and get others interested in it, but the salespeople know how to actually sell it, close, and follow up. They may or may not be strong in recruiting, but they know how to move product.
IV. Sales leaders:
The sales leaders, along with the salespeople, provide the backbone of a company's business. They hold the meetings, close the leads the product evangelists create, and keep the consumers happy and supplied with product. A good indicator of the health of a company is the stability of the income of the sales leaders. It's the sales leaders, in fact, who create stability for a company. If there's constant turnover, or if, after a reasonable amount of time working their business, they don't make enough money to justify the time and energy they put in, there is a problem.
One of the first recommendations I make to new clients is that they identify their salespeople and sales leaders and study the retention rate of these people. If it's high, a company's success is ensured. If it's low, the company has a problem it must solve quickly.
These distributors typically provide the leadership, passion, enthusiasm, and excitement for a company's mission. There are very few dream-builders in a company. They hold the big meetings; they "paint the dream" in the minds of everyone.
A company needs these people. They're the ones who understand, and can explain, the value proposition of the company in a way that people can understand it. I've never seen a company grow and prosper without at least one dream-builder, and most companies need several. Dream-builders can convince people, and best of all, they take the risks, open new markets, and communicate the company's mission.
I've listened to dozens of dream-builders speak. They have grand ideas. Dream-builders are the reason why a commission plan needs to provide a way to pay big earnings. Many people with this kind of personality, once they make enough money to support themselves, also need money to support their own businesses. Dream-builders spend a lot of money on their businesses. They fly around the country, sometimes the world. They hold meetings. Often, they have a staff. They print newsletters. Dream-builders are the ones who take a company into new markets. When a company opens a new country, the dream-builders are the ones who fly to that country to recruit distributors. They're the ones who decide to reach out to different niche markets. All of these expenses are paid out of the pockets of the dream-builders.
Sometimes, if a company no longer wants the dream-builders to participate in what the company is doing, the company loses the boundless creative energy that dream-builders direct toward the company's success. They use that energy elsewhere. Often, when the dream-builders achieve the top level in a company, they slow down in building their organizations. Dream-builders are so goal-oriented that, when they no longer have goals to achieve, they lose their drive. The momentum of a company is generated by its dream-builders.
It's important to remember that just because a person is one of these types now, he or she isn't necessarily constrained from becoming another type. Several years ago, we did a study for a company about recruiting. Going into the study, we assumed that most distributors who had built good organizations had begun working hard immediately upon being sponsored. This was not the case. About sixty percent of the people who built organizations did get started within ninety days of the date they were sponsored, but forty percent didn't get started until later. Almost ten percent didn't start until more than a year after they were sponsored!
So which is most important-the consumer, the product evangelist, the salesperson, the sales leader, or the dream-builder? Every successful company knows it needs all of these people. Once the product evangelists and salespeople have brought people into the company, the dream-builders can reach down the tree, contact those new recruits who show promise, and raise up everyone who wants what the dream-builders have.
Everyone benefits from this kind of dynamic behavior within an organization. The recruiter benefits because his recruits make more, and so his income goes up accordingly. The recruit benefits because she finds a way to work toward her goals. The dream-builder benefits because he can pull together a unit of like-minded people to create the magic and achieve success. A company must maintain a balance among all three. It needs to allow all of these people to achieve their goals.
One of the big mistakes that companies make is to treat consumers and product evangelists like salespeople because they fail to do the research to sort them out. It's important for companies to make this differentiation because if a company treats consumers like salespeople, it won't be able to retain them. It requires researching and understanding each group, and it requires doing the traditional market research that virtually every other industry now performs. In the long term, if a company does not learn to break out, identify, and market to the specific needs of each of these types of distributors and market segments, then the company will ultimately suffer.
In addition to paying commissions, an example of a marketing strategy for each of these segments is:
1. Merchandise to consumers
2. Thank product evangelists
3. Support salespeople
4. Grow sales leaders
5. Recognize dream-builders
A well-designed commission plan helps that to happen.
One question I often hear when discussing the five types of distributors is, "How do you design a commission plan around the needs of all of those people?" The answer is that you don't. It's important to remember that there's a difference between marketing strategy and commission plan design. Yes, a company needs to build a marketing strategy around the five types of distributors, but, as a practical matter, commission plans are built around the dual considerations of sales commissions and sales management commissions. This is true because there are typically two major activities that companies want to encourage enough to pay distributors commissions for doing them. They are:
1. Selling product to consumers and servicing their needs.
2. Finding and managing salespeople to help them continue to sell product and grow.
Remember that it's illegal to pay commissions on recruiting in the United States. You can pay only on the sale of product. So a company doesn't pay commission for finding a salesperson; it pays commission only on the product that the salesperson sells.
Throughout this book, we'll judge the commission plans we examine in terms of how they pay sales commissions and how they pay sales management commissions. So let's talk about these two components of a commission plan.
Sales commissions pay consumers, product evangelists, and salespeople. Most companies don't pay any sort of commissions to their consumers, but if the company or distributor decides to give a consumer a rebate on the product, that rebate comes out of the money reserved for sales commissions. In an open-enrollment company, sales commissions are difficult to design correctly because there is often a consumer in the following sponsorship situation:
When this happens, the commission plan needs to split the sales commission money between the product evangelist and the salesperson. In barriers-to-signup companies, the sales commission is easier to pay because the distributor gets the retail profit on any product he or she sells, thus earning that sales commission money directly. Because consumers and product evangelists don't usually sign up as working distributors, the challenge, in these types of companies, is figuring out how to pay the product evangelist for his or her role in the sale. (See Chapter Eight for more discussion of open enrollment versus barriers-to-signup companies.)
So a company must decide how much of its commission money to spend on sales commissions. Next, it must decide whether to use some of that money to give consumer rebates, and finally, create a strategy to ensure that if a product evangelist is involved in acquiring a consumer, that the product evangelist is properly compensated and the rest of the money flows up to the salesperson.
Sales management commissions
These commissions are much easier to design than sales commissions. This is because the needs of the sales leaders and dream-builders are similar. Therefore, unlike sales commissions where a lot of time is spent worrying about how to pay the right person, with sales management commissions the biggest worry is creating consistency in the payout.
Consistency is the number-one rule of the game in sales management commissions. If a sales leader has $200,000 of downline volume three months in a row, but the checks that leader receives for each of the three months are $20,000, $5,000, and $14,000, the company has a problem. It does happen, and it's not a pretty sight. Sales leader commissions need to be predictable.
The other important item is that the qualifications to achieve higher ranks need to build on each other and remain consistent. For example, commission qualifications should not reward building deep for the first few ranks and then switch to reward building wide.
The effect of commission plans on distributor behavior
There is a wide range of multi-level commission plans. Some of these plans are designed to pay relatively high commissions to the person actually selling the product, and less money in "downline commissions." In other companies, the commissions focus is more on downline commissions and less on commissions to the person selling the product. I'm going to discuss the differences between the two, and the pros and cons of each.
In a sales-oriented network marketing company, it's possible for distributors to make good money simply by selling product. Suppose, for example, that at one company selling cosmetics, distributors earn fifteen to twenty percent on product they sell. By offering a reasonably high percentage, that particular company encourages its distributors to build a good retail sales business. However, in a true direct sales company, the commission would more likely be in the forty percent range. So why have so many companies of the last twenty years chosen network marketing instead of direct sales as their method of product distribution?
There are two reasons. One is that sales alone, with no recruiting, leads to a lack of growth. Companies have found that taking on the responsibility of recruiting enough distributors nationwide to keep the company growing has become too difficult and expensive to handle internally. It's easier and more effective to assign that responsibility to the distributors. For example in 2001, Avon, one of the oldest and most successful direct sales companies, converted to a multi-level commission plan.
The other reason is that the prospect of earning downline commissions in addition to sales commissions is very powerful. Even for successful salespeople who are not sure they can build a large downline, there are two benefits. One is the fact that a multi-level commission plan can create a group of paid referral agents to refer business to the distributor. The second benefit is the possibility of one of these referral agents building a big business is very attractive.
But some network marketing companies have also become unbalanced in the other direction. There have been companies with tens of thousands of distributors who are consistently recruiting new distributors, but who never get around to selling any product. These companies create a big problem for themselves, and there have been several over the last few years. Companies with a high percentage of downline commissions, but little, if any, sales commissions, have sometimes grown quickly, but then had difficulty sustaining their momentum. This is because all of these distributors have little incentive to sell much product because they only may make a small percentage on product sales and it isn't worth the time. If you have an entire company doing this, all you have is a huge downline.
The important thing is to create a commission plan that encourages and compensates the activities a company wants its distributors to perform. For most companies, this means that distributors should be encouraged to spend a significant amount of time in both recruiting and selling, but a company must design its commission plan to elicit the balance it believes is best.
Obviously, the type of commission plan a company designs has a strong influence on how distributors work to build their business. As you read this book, keep in mind what kind of balance between sales commissions and sales management commissions you think is appropriate.
In a traditional sales organization, as I pointed out earlier, the role of a salesperson is to sell product, period. It isn't the responsibility of the salesperson to bring in new people to perform this task. In a network marketing organization, however, a distributor has the dual responsibility of both selling and recruiting. When a company chooses a commission plan, it must be sure the plan rewards the balance of distributor activities it believes is correct.
One last thought. Recruiting exists to build the capacity for sales-to create the infrastructure. With that in place, a company must promote sales, because that's what brings in the money. The more a company promotes recruiting, the faster its sales force grows. But that growing sales force is only a potential means to increase sales; no one earns any money if the distributors aren't selling. You may have heard the old expression about someone who is "too busy sawing to sharpen the saw." Or in this case, sometimes companies are "too busy recruiting to stop and sell the product."
Why people join network marketing companies
What are people looking for when they join network marketing companies? Why do they choose this route to help achieve their goals rather than looking for another traditional job with a company that offers a regular salary and a certain amount of stability and predictability?
I've found three main reasons why people make such a choice.
The first has to do with community needs. Our society no longer offers many of the forums in our communities that once gave people a sense of belonging, a sense of purpose. To a large degree, our society has lost its interpersonal connections. Town meetings and other community events no longer occur to create a sense of community. The workplace is volatile, the population is mobile, the culture places less emphasis on the family, and many have lost contact with the religious structures that used to give people that all-important feeling of being part of something valuable. If you don't belong to a church where you can feel at home, if your employer seems ready to downsize you out the door at any moment, if you've moved hundreds of miles away from your home community, if you don't have a feeling of being connected-well, you see what I mean. It's possible to live in a huge city, with millions of inhabitants, and still feel isolated. In today's mobile society, we're actually a tribal people without tribes.
What does all this have to do with network marketing companies? A great deal, actually. If you're a member of a network marketing organization, you belong. You have a place. You connect with your consumers, with your downline, with your mentors in the business. You're helping people to purchase a product or a service that will improve their lives. You attend conventions and motivational seminars that help you to improve as a person. You're on the team. In a society such as ours, in which people often find themselves alone and lonely in the midst of the crowd, belonging to a group can give meaning and purpose to an otherwise unfocused life.
The second reason for becoming involved in a network marketing enterprise has to do with income needs. In today's volatile workplace, people simply don't have the job security that workers once enjoyed. Today's employees tend to change employers every few years. Even if you do have fairly stable employment, the chances are that your income is far less than you feel you need or deserve.
Also, people view the money they earn from a network marketing company as different from the pay they receive from a regular employer. Why? If you're an employee of Acme Widgets, the only way for you to receive a promotion may be for someone to die or quit. It doesn't matter how good you are or how hard you work. But in network marketing, you have a great deal of control over what you make. You're motivated not only by what you're making now, but by your potential earnings. And no one can stop you.
What often makes people worried and depressed is not hard work or responsibility, but lack of control over their own lives. Because so many workers from all levels-blue-collar, pink-collar, middle management, executive-are feeling manipulated and shuffled around at work, they eventually decide to take charge of their own destinies and control their own incomes.
The way to achieve this goal is often by joining a network marketing organization, which offers people the chance to achieve whatever they're willing to work for. In network marketing, an individual may reach a level of income he or she could not achieve in the traditional workplace while lacking the degrees or the years of experience required. A conscientious distributor can see a genuine relationship between the effort put forth and the financial reward received.
The third reason people join network marketing organizations is for self-improvement. A traditional company usually trains employees only in what they must know to be able to provide the services the company needs from them. But many people have a need for personal growth far beyond cursory job training. Network marketing organizations, with their motivational rallies, training tapes and seminars, and mentoring structures, fill that need. A Mary Kay beauty consultant, for instance, may not become rich beyond her wildest dreams. But at sales meetings she receives, for free, the same kind of training normally only available to corporate managers; she gains experience in working with people; and she grows in confidence and skill level. She also gains control over her work environment. The same is true of the experience many distributors have with the top network marketing companies, whose executives understand how vital this need is among those who sign up.
Network marketing companies not only sell the product; they also give their people the motivation to change and improve. A distributor might find himself or herself learning and growing for the first time since leaving school. A network marketing organization might say to its people, "Our mission is to make you more than you are. Our commitment to you extends beyond the products we sell."
If you've spent much time browsing the shelves in bookstores, you know that a large percentage of the non-fiction books for sale are in the area of self-improvement. Millions of people in today's world have an overwhelming need to make themselves more than they are now-not just in terms of income, but in terms of confidence, ability, spirituality, physical condition, you name it. An organization that makes it a priority to help its members achieve these goals has a powerful appeal.
Rules of network marketing commission plans
Now that we've discussed the three reasons people join network marketing companies, let's talk about the rules that cause network marketing commission plans to succeed. Over the years, I've developed three rules that I believe apply to successful commission plans. These three rules are:
1. The stability of a company is a function of the number of $500 commissions it pays out each month.*
2. The excitement about a company is based on the ability to earn a $50,000 commission.*
3. Commission plans are self-fulfilling prophecies.
Rule #1 - Stability:
The stability of a company is a function of the number of $500 commissions it pays out each month. This rule refers to salespeople. This is important because distributor retention is much higher when distributors are earning $500 a month than when distributors are earning less than $100 a month. There is not an exact number, and the number is different for each company. However, there always seems to be a point in the few hundred dollar range (I say $500 because it's a good round number) where retention takes a dramatic turn upward. I was struck by a speech made in a convention many years ago. The statement was to the effect that "The difference between the life a person is leading and the life he wants to lead is usually a few hundred dollars a month."
The income a person makes as a distributor for a network marketing company is often a second income, on top of a full-time job. Suppose that your "day job" isn't necessarily something you want to give up, but you're not satisfied with the level of income it produces, or with the challenge it presents, or with the level of growth it offers. How much additional income will it take to keep you involved in a second income-producing effort? It will have to be worth the free time you'll have to sacrifice. You might, for example, wind up going to a sales meeting or delivering products rather than watching the playoff game for (insert sport of your choice here) or browsing the Internet or reading a good book. For most people, the answer to "How much will it take?" currently seems to be around $500 a month.
Why that amount? Because our society demands that whatever a person earns on the job should go to the family-car payments, mortgage, the children's education-but often the money earned through a side business is that person's own money. (Some people call it "mad money".) That extra few hundred a month means that now people can achieve what they want. They may not be able to believe they could earn ten times what they're making now, but they may be able to visualize a life of making ten to fifteen percent more. The extra money can let them have the extras they want without having to fight the family budget for it. That ability makes a huge difference to network marketing because it motivates people to work as distributors and to stick with the company.
So for these distributors, whose primary motivation is additional income, this "extra" $500 a month will keep them working for a company. The commission plan should enable the distributors to reach this level as quickly as possible. If they work and struggle for many months without earning more than a few $50 or $100 commissions, they often quit. That small additional income isn't worth the time and effort required to earn it. To retain distributors, the company needs a commission plan that brings those distributors who are committed to this critical mass of approximately $500 as soon as possible. How does a company design a plan to get them to $500 as quickly as possible? By making sure that after they've proven they're serious by moving past the product evangelist role to the salesperson role, the percentage they earn on their downline increases.
For example, if the plan pays out five percent on downline sales, a distributor needs $10,000 in sales to earn $500. But if the commission plan lets distributors make twenty percent instead of only five percent on downline sales, they can start bringing in $500 a month with only $2,500 in sales. Obviously, many more people can achieve this level of sales than can reach $10,000. That means that more people will be motivated to continue because they've reached a level of additional income that's meaningful to them.
Rule #2 - Excitement:
The excitement about a company is based on the ability to earn $50,000 commissions. Allowing people to make $500 a month isn't all a company has to think about. Many people become involved with network marketing companies because they have a big dream. Some people can see themselves making a whole lot of money, and that's what they want to do when they sign up as a distributor. A commission plan needs to allow for the dream-builders as well as for the people who only want a few hundred extra dollars each month.
If dream-builders believe that others are achieving a large income through a company-if they believe that working as a distributor for Company X will give them financial independence-they'll be excited about becoming distributors, and they'll work hard. What the company must avoid is misleading them. We all know that only a small percentage of distributors in this industry ever become rich, but it isn't fair to use a bait-and-switch commission plan. If a company wants to attract the dream-builders-and successful companies have at least a few of them-it must be possible for a distributor to achieve the dream if he or she works the business. Once the dream-builders discover that it isn't possible to get where the company told them they could go by means of a commission plan, they're gone.
So what is a "whole lot of money"? I use $50,000 a month, but is that the amount it takes to guarantee success? I know of very successful companies that send out monthly commission checks in the hundreds of thousands of dollars. I also know of very successful companies that could never send out a single commission check that would even come close to my number of $50,000. But like I said, they're successful, so which is right?
To some extent, this is one of the great unanswerable questions. However, we can answer some portions of it. If a company shows Ferraris, million-dollar mansions, stretch limousines, and private jets in their literature, but the maximum that top distributors can earn is $10,000 a month, the company has a problem. Companies need to set expectations in line with their earnings potential. The second issue is that disclosure is important. Distributors need to know what a commission plan can possibly pay. And last of all, it's important for companies to remember what work they expect distributors to do for the commissions they earn, and make sure that these commissions are in line with the work expected.
Rule #3 - Self-Fulfilling Prophecy:
Commission plans are self-fulfilling prophecies. I say this because people can't work a plan they don't believe in. The company and its sales leaders have to believe in the commission plan it implements. (A mediocre plan that creates excitement, and therefore sales, is better than a great plan that creates neither.) Because the fact of the matter is, if a company is paying out forty percent in commissions and, because the distributors believe in the plan, they sell $1,000,000 in product, $400,000 will get paid out. The company is better off than if they had a "better" plan that that the distributors didn't like and only generated $100,000 in sales, and hence paid only $40,000 in commissions. I learned this lesson years ago - never recommend a plan the sales leaders hate. You will look bad because there will be no sales and your plan will be blamed. I did, I was, and it was. It was not a pleasant experience!
Do all network marketing companies need the same balance between sales and sales management? No. That's one reason there is no one perfect commission plan. In Chapter Three, I am going to talk about the steps to designing a commission plan. Then in Section Two, in order to understand the other significant aspects of a commission plan, we'll look at the major components of the commission plan itself: commissions, rules, and structures. I'll be referring to these concepts throughout this book, so you need to read this next section carefully if you don't already have a thorough understanding of these components.
*Obviously these numbers are approximations, but they give you the idea.
2003, Mark Rawlins. Reprinted with permission from Mark Rawlins. No part may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without permission in writing from the author.