Category Archives:Compensation Plan

Starter Kit Strategy Part 1

Starter Kit StrateDan Jensen Consultinggy by Andi Sherwood, Dan Jensen

Consulting Starter Kits. Business Kits. Enrollment Kits. All of these names refer to the same thing: a packet of materials and/or products that is purchased at the time an individual enrolls with your company to become an Independent Business Owner (IBO). More importantly, this represents a strategy.

There are many types of companies in our industry.

– Internal/Self Consumption companies center their pricing strategy on the IBO/Wholesale (discounted) price, which results in most customers enrolling as an IBO in order to purchase at that price. – Customer/Retail Biased companies center their pricing strategy on the Retail Price and their IBOs focus on selling their products to customers who will purchase at the Retail Price and use the products without enrolling as IBOs. – Affiliate Programs are kind of a hybrid of the two. I say “kind of” because it is not really as simple as that sounds. There are some unique nuances and very few companies fall into this category. For that reason, the Affiliate type is not addressed within this article.

While this explanation of business types has been simplified, it isn’t necessarily a choice of one or the other, it’s a spectrum with Internal Consumption on one end and Customer Biased on the other end and most companies fall somewhere in between. There are companies that have succeeded and failed throughout the spectrum so there is no right or wrong choice. Alignment to business type, including the Starter Kit, is critical to success.

The Starter Kit strategies differ based on where your company is on the spectrum and it is vital that you understand how this impacts your desired business type. For purposes of this discussion, we will refer to strategies of the Internal Consumption and Customer Biased companies, even though many companies have a bit of both.

In this three part series, we will address the following Starter Kit related strategies: 1) Pricing 2) Products/Materials 3) Presentations

Strategy #1: Pricing The Starter Kit is not merely materials and products, it is a strategy that creates a healthy “barrier to entry” that can (when desired) separate customers from business builders. It creates a monetary gateway that an individual passes through, whether low or high, when enrolling as an IBO. While you may question the logic of creating barriers for a potential IBO, it is important to understand how this decision will impact your business type.

When the price of the starter kit is low, your barrier to entry is low. Many of the people that join your company are likely to be customers who want to buy your products for the best possible price – like a buying club. This is the nature of the Internal Consumption business type and is reflected in common starter kit pricing ranging from $10-$30.

In this low price scenario, very minimal commitment is made at enrollment so while the customers become IBOs, they do not act like IBOs. These companies will have some business builder IBOs that develop very successful teams made up of a few business builders and lots of customer-IBOs. While the average per IBO sales volume may not be high, the number of IBOs makes up for that.

Higher priced Starter Kits create a stronger barrier to entry. This often results in fewer IBO enrollments but higher commitment to building a business and thus higher per IBO sales volume. In Customer Biased companies, the IBOs count on the retail profit that they make when they sell to customers (who purchase at Retail) as a major source of income. In order to protect this vital aspect of the business, companies of this model should price their kit high enough to discourage customers joining solely for the discount and ensure that the starter kits have the proper mix of materials and products (this will be addressed in strategy #2).

Unfortunately, failure to price the Starter Kit appropriately has destroyed many companies in our industry. A Customer Biased company that fails to protect the retail profit will find that their IBOs do not make enough money for it to be worth their time selling and building a business. When earnings are not sufficient, an IBO will stop working their business and become a customer purchasing at discount. The company will find themselves unintentionally moving more towards an Internal Consumption model.

For example, an IBO who sells $1,000 in products to customers might earn a 25% retail profit of $250. If those same customers enrolled as IBO’s, they would get a 25% discount – in other words the retail profit to the seller becomes a discount to the buyer. The sponsor (seller) who would have earned $250 had they stayed as customers might now earn 10% on the IBO wholesale price ($750) = $75 total (instead of the 25% profit on the retail price). If the sponsoring/selling IBO had spent 10 hours finding those customers and taking their orders, then they would have earned $25 per hour for their time when those individuals were customers. When the customer became IBOs, that dollar-per-hour dropped to $7.50. When an IBO joins your company to make money, the $25 per hour is critical to achieving their goal as quickly as possible, thereby making the barrier to entry vital to protecting the retail profit.

As a rule of thumb, the higher your Starter Kit price is, the more Customer Biased you are and likewise, the lower the price, the more Internal Consumption focused you are. If I were to place a price on the Starter Kit for a company right in the middle of the spectrum, in today’s economy, it would be somewhere in the range of $50-60.

Please note that there are some legal requirements regarding the Starter Kit pricing in the USA. The are a number of states which specify a maximum amount that you may charge for the kit and there are rules that govern the cost of goods for the kit versus the selling price. Please check with your industry attorney for specific information on the legal aspects of the Starter Kit. In summary, the pricing of your Starter Kit is a very important strategy that should be considered in your business in order to create alignment between your kit and the business type that you intend to be.

Shave Years Off Your Learning Curve At The Direct Selling Symposium

Launching a new Direct Selling Company (home party or MLM) and getting it off the ground can be a very complex and difficult process. Especially if you’re doing it on your own. Unlike many things, the world of Direct Sales is not something that you can just YouTube and find easy-to-follow tutorials on how to effectively build and grow a Direct Selling Company. There are many areas that must be considered, such as building your compensation plan (and keeping it legal), training your field, compliance, legal, your sales pitch, how to motivate your sales force, recruiting, retention, logistics, what software are you going to use, how do you keep a balanced budget, communication with your field, customer service, social marketing, and the list goes on and on. The best practices for each of these disciplines is truly unique for the world of direct selling.  Much of what drives the peculiarities is the fact that your products will be demonstrated and sold by an army of independent field sales reps – who will make a decision each day whether or not to work their business and stay with your company.

Because of these complexities, only 20% of all direct selling startups are in business after one year.  The other 80% have failed in their attempt to launch.  However, what we have found is that if the entrepreneurs will take the time early to learn and follow proven best practices and processes for starting and running a direct selling company – that success rate is as high as 80% still in business and growing after one year.

We want more successes and less failures!  We’re sure you do to!  Failures are bad for the industry and leave thousands of independent sales reps’ dreams laying in the wake.  Successes breed confidence and good will in the direct selling industry and help independent sales reps reach their dreams and aspirations.  To increase success rates – YOUR success, we have brought together in one place, at one event, the industry’s leading experts in these different fields to educate you on Best Practices of Starting, Building, and Growing your Direct Selling Business.

The Direct Selling Symposium is a place of education, learning, and mentoring – and includes front-of-the-room instruction as well as individual coaching sessions.  It is NOT a time when services are sold – in fact it is prohibited.  Whether you’re an entrepreneur starting from scratch or leveraging your existing business by diversifying into the direct selling space – attending the Direct Selling Symposium will shave years off your learning curve, and dramatically increase the likelihood of success.  We look forward to seeing you there!100_6124.JPG

Dave Taylor

 

How Your Enrollment Kit Affects Your Compensation Plan

A successful compensation plan drives the behaviors that make your sales force successful and helps to create sustainable growth for your business. While there are many factors that determine your business success, everybody knows that your compensation plan is one of the big ones. But there are many factors that can help or hinder your compensation plan. One of the big ones is your enrollment kit – the “business in a box” that all of your new recruits purchase when they sign up.

Guiding Principle: Align your business kit strategy with your compensation plan strategy so they work together in harmony.

Best Practice #1: If your people lead with product and follow with the opportunity, you are probably a customer driven business model. Your sales force hunts for customers to sell products to and they earn a commission or profit making it worth their time. We call this a “retail biased” business model. Your products will have a market acceptable retail price that customers are willing to spend for your products once they hear your unique selling proposition (USP). In this approach it is vital to avoid customers signing up as distributors only to get the distributor price discount. Doing so robs your distributors of their commission or profit they would otherwise earn. Instead of a 25% to 50% retail commission / profit, your distributors earn a much smaller commission on the purchases of their new enrollee who is actually their customer. The dollar-per-hour proposition for the sponsor drops like a rock from $25 or higher down to less than minimum wage. Next month they’ll find other things to do with their time. Bad for them. Bad for you. Last one out turn off the lights! When you charge a high enough price for your enrollment kit it will act as a filter so customers stay customers and people who want to earn money buy the kit to start a business. Usually this means a business kit price of $79 to $199. The higher the kit price the fewer the customers that enroll for a discount.

Best Practice #2: If your business is a “self-consumption” model where everybody who uses the product should sign up as a distributor, then your business enrollment kit should be low, often $29 or less. In this model your recruits don’t earn a retail profit or commission. They only earn on the purchases of their personal recruits and downline so the barrier to entry must be very low. To be competitive, however, you must design your compensation plan to provide a sufficient dollar-per-hour proposition to your people so it makes it worth it for them to enroll new customers as distributors. In the USA and similar markets this requires a minimum of $25 per hour for their time. Some companies pay a very high commission on the first order of a new recruit to make this happen.

Best Practice #3: Optional product kits are sometimes offered to new enrollees to give them sufficient product to sell to customers or personally use for a while. Legally you can pay a reasonable commission on these optional kits (never on a required kit to avoid violating pyramid laws). The commissions earned by the sponsor on selling a kit to a new customer or recruit can be sufficient to make it worth their time (dollar-per-hour of $25 or more). Warning: if your business depends heavily on a monthly Autoship model, selling a product kit to a new customer or recruit can greatly reduce the repeat sales for the following month and/or greatly undermine your Autoship retention rate when they don’t need any product for a while. Nobody stays on Autoship with a closet full of product.

Best Practice #4: If you sell to customers do not include huge amounts of discounted product in your enrollment kit. This defeats the entire purpose of a higher cost enrollment kit. A jewelry company, for example, should not offer $300 worth of jewelry in a $100 enrollment kit for new recruits (the kit would also contain business materials which is why the cost of the kit can be $100). Customers would buy the enrollment kit solely for the discounted value and learn that your products really aren’t worth the retail asking price anyway. The seller now becomes the sponsor and earns little or nothing on the sale instead of a full personal commission or profit. Bad news. High and/or regular discounts will destroy the perceived value of your products.

Conclusion

1) Determine what type of direct selling business model you want to be – customer biased or self-consumption.

2) Determine the price of your enrollment kit based on your business model. A higher price is necessary to keep customers from enrolling as distributors just to get the discount.

3) Be careful when offering discounted product kits that it doesn’t load up the garage to a point where they won’t buy any more product for a long time – especially if you have an Autoship business model.

4) Don’t harm the perceived value of your products by including a high value of products for a greatly reduced price in your enrollment kit.

By Dan Jensen, October, 2014

dan@danjensen-consulting.com

www.danjensen-consulting.com

10 Steps Towards Launch! Part 3 - Compensation Plan

The following is part 3 in our 10-part series entitled “10 Steps Towards Launch!” by Terrel Transtrum, President/Founder of ServiceQuest. If you are thinking about starting a new direct selling company, contact us today!

The third of ten business segments to help new MLM companies get started is COMPENSATION PLAN.  This crucial segment for a new MLM company centers on creating a reward system for the important behaviors that drive sales, recruiting, and growth.

 

  • Creating a Great Compensation Plan that Rewards the Right Behaviors
  • Knowing the Right Behaviors to Incentivize
  • Determining the Distributor’s Dollar-per-hour Earning Opportunity
  • Using the Right MLM Definitions
  • Creating a Successful MLM Founder’s Organization
  • Computing the Commission Payout Percentage
  • Fine-tuning Your Selling Approach & System
  • Determining the Type of Company that is Best for You and Your MLM Distributors
  • Writing the Programming Specifications for Accurate MLM Commission Programming
  • Obtaining Legal Review of Your MLM Compensation Plan

 

Here are examples of descriptions that you might write for your MLM Launch Best Practice:

 

  1. Dollar-per-hour – We have determined the “dollar-per-hour” proposition for our recruiting and sales plan, and the results are documented for reference and tracking. Our plan will generate sufficient earnings at each rank to make it worth their time and keep them working.
  2. Commission Payout Percentage – We know exactly how much we can afford to pay in commissions as a percent of revenue to maximize field performance and support sufficient profit to expand our business.  We have analyzed the margins and our results are documented for reference.

 

A thoughtful pass through these best practices will help you to create your MLM planning checklist for this vital business segment of your new MLM business.  For more information, contact Terrel Transtrum terrel@launchsmart.com.

 

Direct Selling Compensation Plan Payout Analysis

This article will introduce you to the steps necessary for estimating payouts from your network marketing / MLM compensation plan or party plan compensation system. Whether you are analyzing an entire MLM compensation plan or running a what-if analysis of changes or enhancements, the LaunchSmart™ Payout Estimator can be a helpful tool.

Because every MLM compensation plan is different, you must rely on fundamental payout assumptions and variables. We have found that the best approach begins with organizing the plan into three basic commission groupings: Retail Profit Commissions, Front-End & Team Bonuses, and Back-End Generation & Leadership.

Because network marketing / MLM compensation payout analysis is such a vital step in the creative process, we recommend that you become familiar with the following absolutes of a proper analysis:

  • You must understand your nework marketing / MLM compensation plan in its entirety
  • Consider all the ways a person might exploit the plan in order to achieve its maximum payout
  • Consider behaviors in light of known production principles, such as the Perato principle and breakage
  • Accept that the MLM compensation plan will evolve as the company grows and its culture unfolds
  • Make sure that everything makes sense to you. (Magic is in marketing, not in the numbers.)

This section will give you the checklist for analyzing the payout of your party plan compensation plan, and network marketing / MLM compensation plan, whether it is a new plan or whether you are considering upgrades, enhancements or changes:

MLM Compensation Plan Payout Checklist & Key Considerations

  • Have we identified the behaviors rewarded by various elements of the plan?
  • Have we allocated the payout to various compensation plan elements based on informed estimates?
  • Have we estimated the percentages of plan participants who will perform at the various behavioral levels?
  • Have we organized our plan into the three basic commission groupings for analysis:
    • Retail profit commissions
    • Front-End & Team Bonuses
    • Back-End Generation & Leadership
  • Have we determined whether our products / services require the use of points or commission volume
  • Have we had a fresh set of eyes examine the plan to see where the plan can be unexpectedly exploited?
  • Have we worked with our compensation design team to thoroughly analyze payout exposures?
  • Have we reconciled “face value” of the plan with anticipated payout?

Network Marketing and Party Plan / MLM Compensation Plan Payout Estimator

Because each plan has its own unique fingerprint, you need a dependable tool to guide you through the payout analysis of the plan as a whole, or changes that you are considering. COMPAY™ is a consultant’s tool, now available to you with additional features, for estimating behavior under the plan and projecting payouts at the various levels of your compensation and incentive system. This powerful tool integrates with JACKRABBIT™ to provide users with fast and reliable results. At each step in the launch process, LaunchSmart™ tools dramatically increase your percentages for success.

The content of this article is extracted from ServiceQuest® RetentionSmarts™ Modules. For more information on RetentionSmarts™ training and mentoring systems, contact a member of the LaunchSmart team.

Retailing Is the Root of Direct Selling Success -- Or Failure

Direct Selling Compensation Plan Expert Dan JensenGuest post from Direct Selling Symposium partner, compensation plan expert Dan Jensen. Dan is one of the most sought-after compensation plan specialists in the direct selling industry.  Having worked with hundreds of successful MLM, Party Plan and direct selling companies over the last 30 years, his breadth of experience provides immense value to direct sales companies needing a better compensation plan strategy.

Retailing Is the Root of Direct Selling Success — Or Failure

Retailing is the root of direct selling success – distributors should be compensated based on its health!

Too many compensation plans are designed around rewarding the top distributors, leaving retailers to shoulder the load, unrewarded. Companies have an opportunity to improve their retail volume, if they can read the signs hidden within their ordering data.

Here are 5 signs that you may be leaving retail customers on the table:

  1. Order Size: If average order size remains small, it is a sign distributors are buying inefficiently order-by order for retail customers, or consuming the product themselves (internal consumption).
  2. Order Frequency: A regular monthly order, that doesn’t vary in size, is another sign of internal consumption.
  3. Recruit turnover: If a recruit were not making money from their main source of income, retailing, why would they stay?
  4. Lack of new recruits sponsoring: Sponsoring is much easier when the recruit is already experiencing success in retailing.
  5. Leader only sponsoring: Similar to the last point, if leaders are the only ones adding new recruits, it is a sign that a decline is imminent as their downlines get stalled by high turnover rates.

Once you recognize the signs of retail distress, there are proven ways to fix most the problems quickly:

  1. Well defined pricing levels and commitments: Recognize the difference between retail and wholesale customers. If retail customers are easily allowed wholesale status without any real commitment, it diminishes the ability of the distributor to make a profit.
  2. Auto-ship program: Long-term commitment can be rewarded with a discount off retail price, but still above wholesale price.
  3. Realistic pricing: If the majority of retail customers are paying the “wholesale” price, while the published retail price adds another 40%, there will be a lack of interest for people to ever buy at the retail price level, again diminishing distributor profit.
  4. Product marketing and sales tools: Hi-impact brochures and videos help to ensure a consistently excellent message allowing for increased sales.
  5. Distributor sales training: Along with the marketing and sales tools, the distributor also needs to be trained on how to sell the product, and how to sell in general.
  6. Internet retailing: Creating a win-win-win situation for the customer, distributor and company. Order process becomes more efficient for the customer, the distributor receives their retail profit while reducing their time input, and the company gets more orders.

Companies can compensate their sales leaders in many ways, but they need to focus on making sure the retail roots are solid and healthy before focusing on that fabulous trip to Hawaii.

What Turns a Compensation Plan into a GREAT Compensation Plan?

Direct Selling Compensation Plan Expert Dan JensenGuest post from Direct Selling Symposium partner, compensation plan expert Dan Jensen. Dan is one of the most sought-after compensation plan specialists in the direct selling industry.  Having worked with hundreds of successful MLM, Party Plan and direct selling companies over the last 30 years, his breadth of experience provides immense value to direct sales companies needing a better compensation plan strategy.

What Turns a Compensation Plan into a Great Compensation Plan?

A great compensation plan will be attractive to both the distributor and the direct selling company (DSC) who implements it. From the DSC standpoint, it will promote preferred internal company behavior, such as retailing, recruitment, retention, training and sponsorship. From the distributor standpoint, it will be reasonable, simple to follow and stable.

The ability of the distributors to sell product to retail end user customers is directly related to the health of the DSC. Pricing policies need to promote a healthy retail channel by having a substantial difference between wholesale and retail pricing, usually about a 33% markup, allowing the distributor to profit, and maintain their excitement in the business. This also requires the retail price of the product to be reasonable to the end customer, before any sort of discounting. Confusing the wholesale and retail prices will add to distributor frustration over time, and hinder the healthy growth of the DSC.

Incentives are based on group volume, not individual performance can enhance recruiting. Recognition and rewards should be given equal weight for new recruits. They need to be achievable, and frequent in order to keep interest while their profits are ramping up. This will also have a direct effect on retention, since most recruits are lost within the first 60 days. Promote milestone type contests, which allow everyone to get to that goal rather than only a select few from a top-seller type contest.

The next step in a great compensation plan needs to promote the infrastructure of the DSC. Once distributors begin to teach others how to succeed within the DSC structure, they need to be recognized and rewarded for this increase in efficiency. Incentivizing this manager behavior with volume and recruiting rewards based on the entire group, rather than individual goals.

Similar to promoting manager behavior, a DSC needs to encourage the growth of sales leaders. These are the people who will train, motivate and reward the managers. Becoming a sales leader should not be easy or available to people that cannot train other managers to succeed. Again, compensation should be focused on how effective they are at training great managers, recruiting, and retailing.

The distributor on the other hand has a different view of the compensation plan. They need to see that they are compensated reasonably to keep their interest. Most plans pay out between 30% and 50% to distributors through margin on product. Any less, and they will look elsewhere for a better opportunity.

Another key component needs to be simplicity. Keeping the plan simple will allow faster mental “buy in” to the idea of selling that particular product or service, and better retention of recruits once they have decided to join.

The final component should be the stability of the plan. Distributors will lose interest if the compensation plan changes each month as sales increase beyond expectations. Maintain a reasonable plan from the start, and only change compensation if the cost of the product or service increases. Having a reasonable and stable plan will likely not attract heavy hitter types, but then again, short-term gains are not what most DSC’s are looking for. Invariably, these heavy hitters never stay at any one company very long. Leave that turmoil to someone else.

Compensation Plan
DSC Needs Distributor Needs
  • Recruiting
  • Retailing
  • Retention
  • Build Sales Leaders
  • Build Managers
  • Reasonable
  • Simple to Understand
  • Stable