If you haven’t read Part I yet, “Breakage” is basically money that is kept by an MLM company that could have been paid to its hard working distributors. In network marketing, there’s front end breakage and there’s back end breakage (or compensation plan breakage).
Front end breakage (as discussed in Part I) is designed to take more money from distributors as they are purchasing the product from the company, before they are compensated for a particular business period, whether that be a week, or a month.
Back end breakage is often taken out of the compensation plan. Many MLM companies promote that they payout 50%, 60%, 70% of the price of the product to distributors. But in reality, they only pay out 30% to 40%. So what happened to the rest of money? It, of course, went to the company.
One way to NOT payout the full amount promised is to have a “leadership bonus” that almost nobody can qualify for. Here’s good example…
Let’s say that an MLM company has a leadership bonus of three percent (3%) on all of your volume. To qualify for this leadership bonus, you have to have six legs (6) all turning over $10,000 of volume per leg, each month. So that’s at least $60,000 in monthly turn over to qualify for this leadership bonus.
Now let’s say that you do have six legs. Not all of them are doing the required $10,000, but three of them are doing $30,000 each in volume every month. So that’s at least $90,000 of revenue that your team is responsible for bringing in to this company.
BUT, the policy clearly says to qualify for the leadership bonus, you must have six legs that are all doing $10,000. So that’s 3% in volume commissions that has not been paid to you. Where did that money go? To the company.
That 3% leadership bonus was figured into the pay plan at the very beginning, when the company launched. Rarely will they pay out that leadership bonus. Very few people will qualify for it, which means the company is keeping a lot of money that could have been paid to lower ranked but hard working distributors.
That’s just one example of compensation plan breakage. Breakage is inherent in some types of compensation plans.
For instance, some binary compensation plans are notorious for it. A binary compensation plan only allows distributors to have two legs. A left leg and a right leg. Many binary plan companies only pay bonuses on the weak leg, or the leg that’s generating the least volume and nothing on the strong leg. They do that to encourage distributors to have a balanced volume between the two legs. But, at the end of the day, any commissions not paid on volume generated by distributors, is breakage.
Another compensation plan where there is inherently high breakage is the unilevel plan. Most unilevel compensation plans only pay down to a certain level, say 6, 7 or 8 levels deep. That means the volume generated by distributors below this level, which could be a significant part of your business, is not paid to you. Where does it go? To the company of course.
Some experts will argue that compensation plans with breakage will reward the producers more generously than a plans without breakage, allowing the company to give more to the distributors who are doing the greatest amount of work. There is an element of truth in that, no doubt about it.
But there are many companies out there that just want to make an extra buck out of their distributors. They scheme to get as much breakage as they can with unrealistic qualifications and unreasonable volume qualifications. These schemes actually rob the part time distributors who make up the vast majority of the distributor force and sustain these companies.
There are however, a minority of good MLM companies who look for ways to minimise breakage with plans that not only reward those at the top but also ensure the part timers in the field also get a check.
So please do your due diligence and understand MLM company compensation plans and business models before you commit for the long term.
To your MLM success,
Wayne Wu
P.S. I would love your input! If you have an opinion that would contribute to this discussion, please leave me a comment below.
P.P.S. Share the love. If you enjoyed reading this article and think others will get value from it, please share it on Twitter or Facebook by clicking on the "Tweet" or "Share" buttons at the top of this post. Thank you.
Related posts:
- What is “Breakage”? Every Network Marketer Needs to Know (Part I)
- Binary Compensation Plans and Their Complex Balancing Acts
- Understanding the Unilevel Compensation Plan – The Good and The Bad
- How the Stairstep Breakaway MLM Compensation Plan Works
- Does Your MLM Company Have a Fair Compensation Plan?
- Which Compensation Plan for Which Colour?
- Which MLM Compensation Plan Is The Right One For You?
{ 3 trackbacks }