She Loves Me - She Loves Me Not: The Bottom Line About What MLM Really Means
Having stepped out of the MLM industry for over three years, I am now able to share with you the real answer about what MLM really means!
While these programs may have their benefits, there are also a lot of cons to consider. They're not all peaches and cream - in fact, be aware that many people get into them with an expectation for a "get rich quick" situation. If you hope to make serious money, it's going to take time and effort on your part... and if you're in it just for the product discounts or comfort items than this may not be right for you.
Find out more by reading my blog post on SheLovesMeNotBlog.com
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What is MLM?
MLM stands for Multi Level Marketing and it can be defined as a business selling a product or service to customers who are members of the business and recruited by other members.
In most MLM's, when a member recruits someone else, the person reaps commissions on that new person's sales. This type of marketing is not based on one-to-one direct selling, but rather on building teams of distributors who sell to the public. The concept has been proven to be more effective than an individual sale in building a business because it spreads out the risks among many people in order to reach many more customers (See diagram below). This allows the company to sell more of its products, thus generating more income.
Many people are attracted to MLM opportunity because of the lucrative compensation plan for salespeople and other bonuses that can be offered. Also the program could offer a way to market and promote a product or service that is new or unique to the market. This is why millions of people join an MLM company each month, just as they would change their normal workplace routine and join an existing company or look for a new job.
The typical pay plan in most MLM companies is as follows:
One-time bonuses:
A downline distributor earns one-time commissions when they recruit other distributors. They are often calculated based on the total number of new distributors that join the network each month.
MLM companies usually use an unilevel commission structure, which means that they pay commissions to their distributors based on their rank and number of levels they have recruited.
If a distributor makes more than one sale to a customer, they will earn a commission on both sales, but not two commissions equal to the sale price. Instead, they earn one commission per sale at one level higher than the original sale price in order to encourage more sales. For example:
An individual distributor makes $500 total in personal sales for the month and recruits two other distributors at $200 each. He makes $1000 total in personal sales for the month and earns two commissions of $500. In this case, he would earn $1500 ($500 on his first sale and $500 on his additional sales). This is called a double commission structure.
MLM Companies use a different pay plan for their distributors; usually these are based on how much product they sell or how long they have been active. In some cases they use an accounting method called the percentage of gross (or POG) plan to pay commissions. This means that the distributors sell a certain amount of product or where they are in relation to other distributors, who may be higher up or lower down the distribution chain and not just based solely on personal sales.
This type of commission plan encourages distributors to buy at least a certain amount of product each month to qualify for commissions. These requirements are usually referred to as the minimum consumption amount (MCU) or a similar term. Some people choose this option because of the potential for making more money, while others do so out of necessity when they have a limited budget. MLM companies usually make up any shortfall in sales using MCU's in order to stay profitable or break even.
The pay plan used by most distributors in the MLM industry will usually be outlined in the compensation plan or business opportunity description.
Another type of commissions available may be based on how long that individual distributor has been in the program and/or whether they have built up a certain level of personal volume.
Leadership Bonuses:
A leadership bonus can be paid to a person who manages an upline team from low to high levels of membership. These bonuses are often referred to as recruiting bonuses. This is different from a one-time bonus, which is paid only once when someone joins a network. The bonus structure is also different and is sometimes a percentage of the total volume of sales made by the entire team.
MLM companies that offer bonuses are usually those that are large or have been in business for many years, with a great track record. Leadership bonuses have been around for over 30 years and have helped MLM businesses retain their leaders much longer than would have been possible if they did not offer some type of extra incentive to their top distributors.
The reason this method works so well is because it allows newer leaders to earn enough extra commission to pay expenses as they build their business to qualify for bonuses at higher levels. If a new distributor joins an MLM company that has no leadership bonuses, they will start out with lower income and may not be able to recruit enough people to grow their business. Therefore they would either have to quit or give up on the business opportunity.
If they were able to be qualified for a leadership bonus of 5% of their team's personal sales, they could make enough extra money as they build their teams to qualify for the next level of bonuses based on their own personal volume. This type of plan is structured in such a way that it makes it more likely for someone to succeed as an independent distributor by giving them something other than just product discounts or intangible benefits.
A rewards plan is an incentive that distributors are offered when they do an upline's job. These can include bonuses to compensate them for giving out discounts, especially if the upline gives out a lot of product.
Sales Volume:
The main reason that MLM companies pay commissions is because they want as many sales (product) as possible. Distributors usually meet this quota by selling a certain amount or volume of products and give this money to the company to continue marketing and selling its products at their locations and through its other business opportunities. In some cases, the distributors will have a quotas on the number of people that they need to recruit in order for them to make commissions. Personal volume is usually the ability to sell personal quantities of products in order to make commissions.
In most MLM companies a 10% commission on the personal sales that distributors make each month are paid regardless of how many people they recruit. For example:
An individual distributor sells $2000 worth of product in their personal sales. They recruit two people at $200 each and they sell $4000 total in their personal sales and earn a 10% commission on those products. This is equivalent to earning $120 gross ($2000 x 0.10 = $120) per month and pays back double (10%) the money he or she has already spent on his or her inventory (products).
Conclusion:
If an MLM company does not pay commissions on its distributors' sales, then it will usually send them an incentive check or a bigger discount coupon to encourage them to buy more of the product.
In addition, some companies give distributors exclusive opportunities to make money by offering them a discount on products or special discounts just for the distributors. They do this in order to reward people who have proven themselves as leaders and have helped their teams grow and build the business opportunity. Because of this, many people will join an MLM company because they are offered incentives that are not available with other businesses.