A binary compensation plan, as its name suggests is based on the number 2. A distributor in a company that operates a binary compensation plan can only build a downline consisting of two legs. A left leg and a right leg.

That’s correct, a binary compensation plan only allows you to have a maximum of two frontline distributors. Any more that you personally sponsor would have to placed underneath one of your two personally sponsored frontline distributors. This is another case of spillover.

The width restriction, however, is not as bad as it sounds as the average network marketer will only sponsor between 2 to 3 people in their entire career. The only way to build a binary is to go deep. Depth cultivates leadership and a team spirit.

The spillover and volume driven nature of the binary compensation plan fosters teamwork. This is advantageous to newer, lesser experienced distributors who can expect to get good support from their upline leaders. Another advantage is distributors are paid weekly in most companies that operate binary plans.

Unlike the matrix or unilevel plans, your commissions are not dependent on the volumes generated by each individual level in your downline, but on the overall volume generated by each of your two legs. This means you’re paid on the efforts of every single distributor in your downline.

However, there’s a limit to how much volume you can generate in a leg. Once you reach this limit, you must “re-enter”, as a distributor in your own downline. While on first impressions, a binary plan appears simple in concept, it is infact, a very controversial pay plan.

This is in large part due to its beginnings in the early 1990s in gold coin scams, and other shady products such as high-ticket one-time travel certificates and overpriced prepaid phone cards. This is also in large part because companies that operate binary plans make it very difficult for their distributors to generate commissions.

Binary plans are very “gimmicky”. Companies that operate binary plans require you to “balance” your two legs in order to maximise your payout. If your legs are not balanced, that is generating the same amount of volume, then you are only paid on based on the volume of the weaker leg.

For instance, say that you have a left leg that’s generating 700 points and a right leg that’s generating 500 points. In this case, you’ll only be paid the commission based on the lowest common denominator, which is 500 points. Can you say breakage? Hmmm…

Some companies will carry over the remainder 200 points over to the next pay period, but this only makes balancing both legs more difficult because you have the extra carry over points to account for.

Another unusual aspect of a binary plan is many companies allow you to start with three “business centers”. This essentially means you start with yourself at the top, and then you sponsor yourself on your left leg and your right leg. This effectively allows you to have three downlines, a left downline, a right downline and an overall downline and it allows you to get paid on each of these three downlines.

What will ultimately limit the binary plan’s acceptance is they are notorious for unrewarding commissions. In a very well known company that uses a binary, you must generate a personal volume of $125 and have both legs producing at least $310 – that’s a total of $745 of volume that you’re responsible for bringing in to the company – to earn a commission of $40, a commission rate of just over 5%.

When looking for a job, you’d look carefully at the job description to understand exactly what was expected of you, wouldn’t you? You would make sure that you have the capabilities to do the job and that you’d be comfortable doing it, am I correct?

After you’ve determined that you’re the right person for the job, you’d probably want to know how much you’d be paid to do what you do best. This gives you options. You can compare several similar roles with different companies and weigh up which one is the best deal before making an informed choice.

So why wouldn’t you use the same approach in choosing a compensation plan and company that would give you the best chance of success?

If you do not understand your pay plan, if you have not crunched the numbers to see how many active distributors you need in your downline to achieve your income goals, then shame, shame, shame, shame, SHAME on you!

It’s important that you understand the basics of MLM compensation plans and the behaviours they drive. Only when you understand then you are able to assess whether you’ll ever be successful participating in a certain plan or whether you’re destined for failure. Each plan drives behaviours which may or may not be suitable for you or the people in your team.

There are five basic compensation plans in the in MLM industry. Each company will have their own variations of them, they may have a combination of two or more of these plans, but here are the five fundamental compensation plans and the behaviours they drive.

1. The Stairstep Breakaway Plan – is the oldest and most common pay plan. Since there is no width limit to this compensation plan, it’s great for people who can confidently sponsor new frontline reps. It’s very suitable for those with a forceful direct personality, who can “close” the deal. If you’re the mentoring type, you like to nurture people and develope them into leaders, then you’ll probably be bummed out as to why your check disappears after your new downline leader breaks away from you. This is a pay plan that gives the greatest rewards the very few who get to the top.
2. The Unilevel Plan – Again, because there is no limit to how wide you can go, it’s a great plan for those who can “hard sell” and sponsor multitudes of frontline reps. There is very little incentive to develop leaders and mentors here because the plan is limited by depth. You may have a downline organisation that goes 20 levels deep, but you’re only being paid on the first 6, so why would you help anybody below that? The only way increase your income is to sponsor more people, so it’s limited in terms of leverage.
3. The Matrix Plan – is a plan that actually fosters some team work because it’s limited by both width and depth. Experienced uplines can help new distributors in building their organisations with “spillover”. Unfortunately, because of “spillover” this plan attracts those with a welfare mentality – the do nothing, get rich types. Even more unbelievable are promotions on the internet shouting “Huge spillover”…”We’ll build your downline for you!” Hmm… Good luck in building long term residual income with deadbeats in your downline. Remember, each frontline position is GOLDEN.
4. The Binary Plan – is a plan only that allows you to have two sponsored on your frontline, which is actually not a bad thing as the average network marketer will only sponsor between 2 and 3 people in their entire MLM career. It’s a depth driven and volume driven plan so it does foster leadership and teamwork, which in my opinion is key to long term success in MLM. But again, spillover can attract the welfare minded. And with “gimmicks” such as balancing leg volumes, multiple business centers and “re-entry”, unfortunately it can become a bit of a “money game”.
5. The Aussie 2 Up – Oh… my… gosh! Don’t even go there. Newbies are almost 100% certain to fail with this plan. I mean, if a newbie is required to pass up his first two recruits to his upline, how encouraging is that? Is your upline ever going to return your calls again after he’s got your first two pass ups? If you’re the hard selling, churn and burn, do anything to get the sale type, you might have a chance of success with this but 99% will fall flat on their face.

Look, to be successful in network marketing, you have to work with the numbers. The numbers are: 96% of people will be part timers with dreams of becoming financially independent, the average person will only sponsor 2 to 3 people, 90% of people hate to be sold, “closed” or convinced into doing something.

And if it doesn’t work for these people, who will make up the vast majority of your downline organisation, it’s not going to work for you in the long term.

An Australian two up, or Aussie 2-up is any programme where you pass up your first two sales and personally sponsored distributors to your upline. Hence the “two up” – I’m not sure where the “Australian” part comes in.

That means your first two personally sponsored distributors are now personally sponsored by your upline, putting them in direct competition with you, and giving your upline the leverage. You derive no benefit, it’s only after you have made your first two sales, you can begin to benefit from your own hard work.

Aussie 2-up programs are always information products or expensive travel packages that cost $1000, $5000, $10,000 even $25,000. They are always one-time sale items. There is no residual income because they are not consumable products. There is no monthly autoship, no repeat custom.

You will never sell to the same customer again, so you’ll always be chasing new customers. So people in this type of pay plan are actually competing with each other for product sales.

Wait a minute, $5,000 – $10,000 for an information product package and you give up your first two sales? Hmmm… Can you say SCAM? There may be a few legitimate companies out there that use the Aussie 2-up compensation plan, but unfortunately they are amongst a sea of scams.

Here’s how the 2-up scams work…

Typically the scams operate at arms length from their distributors. The company does not deal directly with distributors or customers. The existing distributors do all of the book keeping. Typically, a sponsoring distributor would require a new recruit to pay cash for a $2500 package, yes cash (a BIG red flag), to him and then he would personally keep $2000 and send $500 to the company.

This is so when the time comes for the scam to be shutdown by federal agencies, the scam operators can skip town and say they didn’t have anything to do with any customer. This directly puts the responsibility on every distributor, who would take the full brunt of the law for promoting the scam. Very, very slick.

The scams will package up information that you can find at your local library or on the internet for free, or package up some dubious offshore seminar, or travel vouchers that you can find for free.

The Aussie 2-up is only suitable for the “sponsor monster” types and those that can sell. Only people who have no problem closing somebody on an information package that costs $2500 can succeed. Unless you’re a professional sales person and you have no issues in hard selling, doing just about anything to get a sale, you can’t be successful in an Aussie 2-up. It’s 100% against the nature of most people.

Statistically, the average network marketer will only sponsor between 2 to 3 people in their entire network marketing career. So if the first two sales are going straight to the upline, it’s obvious that most people who participate in these schemes are destined for failure.

On your first two sales, you may get great support from your upline. He’s right here for you showing the tricks of the trade and guiding you step by step. But after you make your first to sales? Woosh, he’s gone. You’ve broken away and he knows he’s made all the money of you that he can. He no longer has any vested interest in helping you.

Don’t risk it with the Aussie 2-up. It’s been proven time and time again that team work, coaching and a product that has long term residual value has always lead to long term MLM success.

A matrix plan is any pay plan that has a fixed width and a fixed depth. If you’re in a matrix plan you are limited by how many frontline distributors you can personally sponsor. While there’s no limit to how deep you can go, you are only paid down to a certain level.

Let’s take a look at a 3 x 5 forced matrix plan, that is a maximum of three frontline distributors, paying down five levels deep. On the zeroth level is you. On your frontline (you first level) you can have up to 3 distributors, the second level can have up to 9 distributors, on the third level 27, on the forth 81, and finally 243 on the fifth level. The end of your payline is level 5.

Hence the total number of distributors you can get paid on is 1+3+9+27+81+243 which equals 364. This is the maximum number of distributors you can EVER get paid on. Can you see what’s wrong here? There’s no limit to how many people you can have in your downline. Yet, you’re being paid on a limited number of distributors.

So if you’re in a matrix, every single one of these positions are golden. You’ve got to have as many superstars in your team as you can in order to maximise this pay plan.

But the irony of the matrix plan is that it does not attract superstars. Quite the opposite, in fact. In a 3 x 5 matrix, you can only sponsor a maximum of three people onto your frontline. If you ever sponsor a fourth distributor, there is no more room on the first level. Therefore, you must place the fourth person on the frontline of one of your frontline distributors, that is, on your second level.

This is called “spillover”. The problem with spillover is that it attracts lazy, welfare minded people, who want a downline to be built for them. And because of this phenomenon of spillover, distributors in matrix plans often put out over hyped advertising campaigns of “do nothing and get rich” to attract lazy opportunists. Companies actually promote this stuff, it’s unbelievable.

Spillover, does not fill the matrix. It just fills down underneath the first lazy welfare minded distributor. If you’re building a downline for a non producer, the positions get harder and harder to fill the deeper you go, because each level has an exponentially increasing number of spots.

The lazy non producer is sitting back, letting you do all the work, filling up all of those spots beneath him. It’s quite unbelievable, but there thousands of people in matrix and binary plans just waiting for spillover to make them rich. But you can only fill up so many spots beneath him, because you can only sponsor so many people.

On the other hand, spillover can encourage good teamwork as sponsors help their downline distributors with recruiting and growing their organisation. This only happens if you sponsor good, hard working people. Remember, in a matrix plan, every frontline position is GOLDEN.

Spillover is nice to have, but if any distributor in your downline is waiting for it to happen and not working with you, then you have a tough job ahead.

Although quite many companies use the matrix plan, they have not had a successful record in the network marketing industry for the reason that they foster nonproducers.

The unilevel compensation plan is a common in modern day network marketing. By and large, a unilevel compensation plan is a linear, whereby your income is directly proportional to the number of people in your organisation.

By contrast to the stairstep breakaway plan, the unilevel plan is a very easy compensation plan to understand and explain. In companies with more complex compensation plans, you would start as a distributor and move up to Silver, Gold, Platinum, Ruby, Emerald, Diamond etc, etc.

But in a company that employs the unilevel plan, you’re just a distributor. There may be bonuses such as a car bonus, but there are no “generation” override bonuses for leadership groups like there are in a stairstep breakaway, because there is no provision for these in the plan.

Every person you sponsor into a unilevel plan goes onto your frontline. You can go as wide as you want. However, unilevel plans only pay you a commission to a certain level. Most unilevel plans only pay you to the sixth, or seventh level. Any distributors in your downline below this level, you do not receive a commission from.

It’s very easy to crunch the numbers to find out how many distributors you need on a regular monthly volume to make a certain amount of money.

A unilevel compensation plan may pay you like this: You get a 5% commission on all of the volume of your first level, 5% on the volume of your second level, 6% on the third, 6% on the forth, 7% on the fifth, and 7% on the sixth.

But it’s important here to distinguish between a downline and a payline. You may have built a huge downline that goes down, say twenty levels (20), but you’re only paid to the sixth level, so therefore, you’re missing out on a significant portion of your total group volume.

This is the main disadvantage of the unilevel plan. It lacks the flexibility for you to achieve your goals. No distributor gets a promotion, you always stay at the same level. The only way to increase your income is the sponsor more people. So there’s really no incentive to develop leaders in your organisation.

It discourages leading distributors to train any downline member below their payline, since there’s no incentive. They’re not getting any commissions from him, so why bother? It causes sponsors to be thin in support, which is not conducive to retention. Downline retention is so critical to long term success.

The other disadvantage of the unilevel compensation plan is every new person you sponsor goes on your front line, which means every distributor you sponsor is in competition with each other. It discourages people to work together as a team. And teamwork is where all the leverage is in network marketing.

People who can recruit like a machine will get the most from unilevel plans, because they can maximise the compensation plan by going as wide as possible. And it pays to have frontline members who can do the same – go wide, wide, wide.

However, in the network marketing industry, the average distributor will sponsor less than 3 people (2.7 in fact) in their entire MLM career. Hence for the average distributor who simply won’t sponsor multitudes of people into their business is better of in a plan that pays deep, where people can work together as a team.

Due to these limitations, it is common for network marketing companies who start out with a unilevel plan to adapt their compensation plans to act more like a stairstep breakaway.

The stairstep breakaway pay plan is the oldest MLM compensation plan. Having stood the test of time, it is the most commonly used compensation plan. The oldest and largest MLM companies, Amway, Herbalife, Mary Kay, Neways, Nu Skin still use this type of pay plan. It is also the most complex form of compensation plan and the most difficult to explain to new prospects.

Before the days of computerised databases and online ordering, distributors did not deal directly with their MLM company. They actually bought products at wholesale price from their sponsoring upline, who bought from his sponsoring upline and so forth until the first “direct” distributor who dealt directly with the company.

In fact, some companies still use “direct” to distinguish their top producing distributors from others, with designations such as Gold Direct, Platinum Direct, Emerald Direct, Diamond Direct etc.

Back in the old days, throughout the 1950s, ’60s, ’70s, ’80s and even ’90s, it was the direct distributor’s job to train and motivate their downline organisation. It was their job to calculate and pay commissions to their frontline distributors, who calculated and paid commissions to their frontline distributors and so forth.

Direct distributors would order huge amounts of product from their company and warehouse it in their garage, and this is where their local downline distributors would get their products from.

Thankfully, distributors no longer have to do any of their own book keeping, and this level of inventory loading is a thing of the past. Technology has made ordering products much, much easier. Today, all distributors in all legal network marketing companies deal directly with their companies. However, the stairstep breakaway plan still works the same way.

In a stairstep breakaway pay plan, a distributor moves up the volume rebate scale (bonus scale) in steps, or “stairsteps”. He may get a rebate of 3% for the first 100 points of volume he and his group produces, 6% if he produces 200 points, 9% for 300 points and so on and so forth.

When a distributor reaches the top of the volume rebate scale, his group volume would be signficant enough that he’d be better off dealing directly with the company, and therefore he qualified to become a direct distributor. He now had the responsibility of sourcing the products for his frontline distributors in return for higher commissions.

But the new direct distributor would “breakaway” from his upline direct and form something of a separate business entity. However, the breakaway direct’s volume would no longer count toward the volume for his sponsor and therefore, the sponsor lost a considerable portion of her volume and therefore, income. This is the primary pitfall of the stairstep breakaway compensation plan.

The sponsor would get an override commission on the total volume of the breakaway leg, but this is only a small percentage compared to the commissions she would have received prior to her new direct breaking away.

So under these circumstances, there would be no incentive for your sponsor to support you in building your organisation once you reach a certain level. When you reach the same rebate level as your sponsor, you break away and their income drops.

The stairstep breakaway plan rewards the few who can consistently sponsor new distributors and build multiple breakaway legs. But unfortunately, industry statistics show that the vast majority of distributors will not be able to sponsor enough people to get the most out of this pay plan.

Have you ever considered how many people do you need in your downline to make $10,000 per month?

Once you work this out, the answer to this question may surprise you. It may even anger you depending on how serious you are about becoming financially independent via network marketing. The real question is: how much does your MLM company reward you for bringing in revenue?

The best compensation plan is one that will pay you the most money for the least amount of effort. Why do some companies have “better” compensation plans than others?

Simple, some companies simply don’t run as efficiently as others. Some companies have large numbers of employees, large buildings, private jets, and other high overhead items that they can’t pay their distributors more generously.

The network marketing industry average for the earning $10,000 per month is about two thousand people, that’s $5 per person, per month. That’s not too bad when you consider that some MLM’s require you to have 10,000 people in your downline to earn $10,000 per month. There are of course, companies that only require you to have 300 to 400 people to achieve the same result. Obviously, you’d rather be in the latter rather than the former.

This is what’s really strange about network marketing…

When people go for a job they want to know exactly what sort of work, how much of it they’re going to be doing and exactly what they’re going to be paid. They can then pick and choose the company that will pay them the best for their efforts.

That rarely happens in network marketing because most people simply do not have the experience to understand how they’re going to be compensated.

It’s very unfortunate that people still get into opportunities because of some hyped up income claim made by one hot-shot heavy hitter at the top, assuming that they can get the same result, while in reality the majority of the distributors in the field are making pennies.

If you’re planning to build to an income level that will allow you to retire “happily ever after”, it pays to understand your compensation plan. That’s because your compensation plan will determine whether you’ll actually make any money in the first place, whether you can actually retire on a full time income, or whether you’ll have to keep buildling your downline for the rest of your life.

The biggest cost to you is acquiring new customers and distributors. How much does it cost you to bring in a new distributor? Even if a distributor stays with you for the rest of his life (most don’t), it could be a long time before you recoup the costs of just signing him up.

The bottom line is, the more people you require, the more it’s going to cost you in distributor acquisition and the harder it is going to be to build to your income goal. Plus, and it’ll be even harder to maintain it. The more people you require, the more downline attrition you will have because the people who are sustaining the business, the part-time networkers are not being rewarded for their efforts. Why should they stay?

If you’re serious about success in network marketing, it’s not just a side hobby, then it would be in your best interests to figure out your company’s pay plan and make an informed business decision on your company as an appropriate vehicle for financial independence.

It doesn’t matter if your product is super duper and has every vitamin and mineral under the sun. That doesn’t matter if the compensation plan stinks. People need to be rewarded fairly for their efforts and they will vote with their feet.

A few days ago, I had a conversation with a lady who reached a very significant pin level in one of the largest MLM companies. She is no longer with this company, but her story is one that’s not too uncommon within the MLM industry and should serve as a lesson to all of those who really want to live the MLM “Dream”.

From the outside she and her husband had what you could call “success”. They were always on stage, speaking and telling inspirational stories at company events. Every week they trained their downline on how to promote the business and its products.

What was missing?… The Money!

Over their years with this company, they had tirelessly built a downline numbering in the thousands. They should have been on an executive level income, but their monthly bonus check was less than two thousand dollars!

So what went wrong? Did their company rip them off? Well, sort of…

The problem was their business was plagued by downline attrition. New distributors would come and go very quickly. Their downline simply could not generate the volume that was required to achieve the level of income they were promised. They and their leading distributors did their best, but they could not motivate the people in their downline to build the business.

Downline attrition is a growing problem in the network marketing industry as the internet continues to distract people with endless get-rich-quick money making opportunities. Now, it’s more important than ever before to get the right people people into your business. Business opportunity seekers are the worst types of people you can have.

They worked very hard to build that business, doing endless belly-to-belly prospecting that quite frankly, most networkers do not want to do.

So did they sponsor the wrong people? Perhaps…

But on closer inspection of the company’s business model and its compensation plan, their lacklustre results were for the most part, inevitable. This company ran a compensation plan that only benefited the very few distributors who got to the top. The people in the field, who would work hard in their spare time to build their dream, who sustain the business, were rewarded virtually nothing for their efforts.

The large distributor organisation that they were apart of did not encourage retailing but rather endless recruiting, which of course, benefits the distributors at the top. The massive attrition was no surprise. Nobody wants to work hard for nothing.

The moral of this story is you can’t succeed unless you understand the business model of your MLM company. First and foremost, good business partners are essential. You can not afford to have business opportunity seekers who hop from company to company. But you must have a compensation plan that rewards people in the field for their efforts.

Network marketing is a hard game. There’s nothing more de-motivating than spending time and money showing the plan every day, sponsoring just a few and not see any tangible result for it.