RULES FOR COMPENSATION PLANS IN MULTI-LEVEL MARKETING PROGRAMS TO PREVENT THE WORST ABUSES
By Jon M. Taylor, Ph.D., Consumer Awareness Institute, and Advisor, Pyramid Scheme Alert
Over a period of several years, I developed the “Five Red Flags” model for recognizing the most harmful product-based pyramid schemes (“network marketing,” “multi-level marketing,” or “MLM”), which can be found at – http://www.mlm-thetruth.com/5RedFlags2column40pages2Color3-6.pdf
On the basis of this model...
I have analyzed the compensation plans of over 250 MLM programs, nearly all of which have serious problems that lead to extremely high loss rates and high turnover. In the process of responding to requests for my opinion of various programs, the question is often asked, “If there were a legitimate MLM program, what would it look like?”
Virtually all multi-level or pyramid selling schemes are inherently flawed in ignoring the realities of market saturation and the fact that rewards to a few come as a result of the failed investments of the vast majority of participants. However, I believe a fair and honest MLM program is conceivable, provided certain rules are required to protect against the worst abuses. The following rules, applied as a group, could prevent most of the problems we see in typical MLM programs:
1. There should be no entry fee to sign up as a participant in an MLM program - and no minimum purchases to qualify for commissions.
WHY this rule?
The practice of requiring high signup fees or of committing to initial or ongoing minimum purchases to qualify for commissions is what accounts for losses for 99% of participants on typical MLM programs, since few earn enough in commissions to recover their investments. With no “pay to play” requirements, any participant could actually profit from selling products.
Why this would rule not be sufficient by itself.
Some MLM’s have already done this, but de facto “pay to play” replaces more blatant requirements for minimum purchases to qualify for commissions, discounts, or advancement. All the MLM’s have to do is set up accelerating bonuses or discounts based on volume – which is common to many businesses. The compensation plan designers merely set it up so that it becomes apparent that there is not sufficient reward for selling direct or buying in small quantities. And it is always easier to buy than to sell to get into the more rewarding volume levels. So they set up “dummy distributors” to fill quotas and buy in their names – and give the products away, use them, store them, or flush them down the toilet, it doesn’t matter. They deceive themselves that they are getting ahead, when in fact they are falling further and further behind financially.
2. Commissions could only be paid for sales to legitimate customers not participating in the plan, but not for sales to immediate family members of such participants. In other words, no commissions could be paid on sales to recruits or anyone in one’s downline.
WHY this rule?
This would assure that the MLM program would be focused on sales to legitimate retail end users. It would assure that the program does not pay rewards primarily for sales to a chain of participants, 99% of whom lose money. Also, commissions should not be paid on sales to immediate family members of participants because a participant could merely purchase products in the name of a family member.
Why this would rule not likely be sufficient by itself.
Actually, this is one rule that might be able to stand by itself. But again, it is conceivable that MLM participants would set up “dummy distributors” and buy in their names – as has been done in highly leveraged programs that require minimum numbers of distributors to achieve certain levels in the pay plan.
3. (in lieu of #2, though #2 is preferable) More than half (51% or more) of company payout for commissions and bonuses to participants would have to be paid to the persons actually doing the selling – not to his/her upline.
WHY this rule?
This would assure that rewards were paid primarily for legitimate direct selling to non-participating customers, rather than for sponsorship of a downline. It would also prevent escalating rewards for persons higher in the hierarchy of participants; i.e., for leveraging (top-weighting) the plan so that the emphasis would be on recruiting a downline to get to the top of the pyramid.
Why this would rule not be sufficient by itself.
Law enforcement would find it difficult to monitor compliance with this rule, and the MLM company could find a way to skirt the requirement. MLM communicators often claim that products can be sold at substantial retail margins – though they are not generally price competitive even at wholesale.
4. MLM programs would have to use a simple uni-level compensation plan with no more than four levels of participants.
WHY this rule?
Complex pay plans, such as breakaway, binary, or matrix plans make it difficult to unravel any deceptions built into the more exploitive plans. It also makes comparisons between plans difficult. Why four levels? Major corporations can cover a country with four levels of sales management - branch manager, district manager, regional manager, and sales manager. More than four levels in an MLM are more than are functionally justified; i.e., they only serve to enrich the upline exponentially as it gets closer and closer to the top of the pyramid – at the expense of downline victims of the scheme.
Why this would rule not be sufficient by itself.
All MLM sponsors would have to do is offer escalating commissions to those at the second or third level to make it unprofitable to sell directly. The money is in the recruiting. This is a similar principle to that used in the “Australian 2-up systems.”
All four of these working together should prevent the more typical MLM abuses.
As indicated, any one by itself may not be sufficient protection, as MLM program designers are adept at circumventing such rules. But it would be very difficult to skirt all of them taken together.