Starter Kit Strategy 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.
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!
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.
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
MLM Compensation Plan design will be a key to starting and running the successful MLM company. Growth comes from rewarding the right behaviors, and momentum results when consistent rewards and recognition are delivered. Budgeted MLM incentive dollars must target behaviors that produce expected outcomes. When the MLM compensation plan is designed to reward the most important and productive behaviors, it supports the company’s recognition and incentive system to form the magic of growth.
Here we cover the following MLM compensation planning elements:
- MLM Compensation Plan Design
- Plan Payout Analysis
MLM Compensation Plan Design
Any MLM compensation plan that does not motivate distributors will stall the best of companies. The compensation plan is considered by many to be the primary factor in motivation. Many ask , “what’s the best MLM compensation plan out there?” The answer: the best MLM compensation plan is the one that powerfully reinforces the behaviors you must elicit from your field sales reps in order to be successful.
MLM Compensation plan design team leader Dan Jensen has proven that “The Five Golden Behaviors” drive every successful compensation system. The Five Golden Behaviors are Selling, Recruiting, Building Managers, Building Leaders and Retention. Striking the correct balance of incentives that drive these behaviors should drive your compensation plan design efforts.
Below is a useful checklist for guiding you through the five golden behaviors, MLM compensation plan design strategies, awards and incentives, and general party plan elements.
MLM Compensation Plan Design Checklist & Key Considerations
- Do we understand the MLM compensation plan fundamentals and The Five Golden Behaviors?
- Will we design our own plan or work with a compensation plan design team?
- Will we analyze product margins, compensation margins and projected sales?
- Are we exploring target markets (leaders, builders / managers, consumers)?
- Have we developed the MLM compensation plan concept based on target market intelligence?
- Do we know how much we can afford to pay in percentage payouts?
- Have we determined our budget for promotions?
- Who will draft the MLM compensation plan and programming specifications?
- Are we strong on the marketing elements?
- Do our programming specifications and details provide enough for the MLM software team?
- Have we obtained a legal review and approval of our MLM compensation plan?
- Are we comfortable with the final edits and copy writing to describe the plan?
- If we are creating a Party Plan selling and compensation system, have we done the following:
- Define the in-home experience
- Design the hostess rewards program
- Develop the consultant home party compensation & incentives
- Do we have the following in place for our Awards, Recognition and Incentives (ARI)
- ARI strategies
- Key field behaviors and productivity outputs
- Awards calendar for all recognition
- Pre-launch recruiting awards and special incentives
- Promotions and contests
- First-year promotions and contests calendar
- Budgets for all ARI, promotions and contests
MLM compensation plan design is an art and science combined, and the most successful companies exercise patience and restraint with attention to the fundamentals of human behavior. Success begins with knowing and rewarding the right behaviors that lead to long-term growth and stability.
Growth and momentum are driven by the right behaviors done consistently by motivated builders. Incentive dollars should always be targeted to the behaviors that produce the desired results. When a compensation plan is designed to reward the most valuable and productive behaviors while leveraging relationships, it combines with a company’s recognition and incentive system to form the momentum and magic of growth.
A compensation plan that fails to motivate distributors can quickly stall the best company. Many factors contribute to the success or failure of direct selling companies, and the compensation plan is one of the biggest. Many ask us, “what’s the best compensation plan out there?” The answer: the best compensation plan out there is the one that exactly reinforces the behaviors you must elicit from your field sales reps in order to be successful.
Compensation plan design expert Dan Jensen has proven that “The Five Golden Behaviors” drive every successful compensation system for any new MLM as well as for an existing empire. These behaviors are Retailing, Recruiting, Building Managers, Building Leaders and Retention. Striking the proper balance for the incentives that drive these behaviors should drive your compensation plan design efforts.
There are some that think that the compensation plan is the end-all reason behind another company’s success. In reality, the compensation strategy plays a major part in the success of a company, but not the only part. What other elements of the business model contribute greatly to the success of a company?
- Training which builds competence in the field
- A strong and unified management team
- A focus on mission, vision, and values that attracts the passion of others
- A visionary person with whom the field can connect and relate
- Great products offered at competitive prices
- Excellent service provided to the sales force and customers
- Excellent and consistent communications with the field
- Effective tools such as kits, forms, instructional materials, etc.
- Simple systems that your sales force use to do their business such as web tools, a web order entry system, reports, etc.
- Retention best practices studied and implemented from the start
Dan Jensen teaches a key discipline for evaluating your plan to determine the behaviors that it will support. Mastery of this discipline empowers you to consider all the “what if” scenarios of plan design, both when launching your MLM company or Party Plan company as well as throughout the life of the company when analyzing all of the opportunities and chances for growth and evolution of the compensation plan.
This key discipline is to analyze your new MLM plan for the behaviors it supports. Take each type of commission at the lowest granular level of detail and ask yourself, “if this was the only type of commission the plan paid, what would it make me do?” For example, if your plan pays out 6% for four levels of sponsors, isolate the level one commission in your mind (a commission on those who are personally recruited). Look at it as if it was the only commission paid in the plan. What would a level one commission make you do if it was the only type of commission paid? A level one commission engenders two behaviors: recruiting and teaching to sell. It would seem to promote recruiting new people and teaching them to sell so the sponsor could get paid on their sales. It would not create managers or leaders. It does not make the sponsor sell more product (retail profits from personal sales do that). A level one commission simply generates recruiting and ‘teaching to sell’ behavior (which is what a manager must learn to do).
What if the plan only paid 6% on level two (no level one, three, or four commission is paid)? What would that make you do? It would encourage a person to sponsor a couple of people on the first level and then teach them to recruit others. It would make the sponsor also teach them how to get others to sell so the sponsor could make a commission when they did. Go through this mental exercise of isolating each type of commission in your plan and note for each commission type which of the Five Golden Behaviors it creates and which behaviors it fails to create. There is a powerful downloadable tool at www.jenetek.com called the new MLM Plan Behavior Analysis Worksheet that has a template for this type of analytical exercise. When you have looked at each type of commission, also look at the big picture to see how well your plan addresses all of the Five Golden Behaviors. Is it well balanced? Does it spend most of its money on recruiting and very little on building managers and leaders (out of balance)?
Party Plan Compensation and Hostess Reward Programs
According to Dan Jensen (firstname.lastname@example.org), the real key to success in the Party Plan Compensation design is to understand what he calls the “Dollar-per-Hour Proposition.” It’s the secret to unlocking the door to sustainable growth. This is not only true of the Party Plan Company, but it also holds up in the MLM company analysis.
What would your business look like in one year if every one of your party plan sales consultants were to spend 30 minutes more each week on the business? What if they spent an hour more each week? This opportunity can be found in this simple principle… you must provide a compelling reason for each consultant, both new and experienced, to spend a little more of their time in the business each day and each week. You are competing for their time. Your greatest competitor is not another direct selling company. It’s time. Their time. Why should they spend their time on their business rather than on other things they love to do? If you don’t give them a compelling reason, they won’t. It’s that simple.
New recruits especially fall victim to this in a new MLM. The attrition rate for new distributors during their first year is very high. Both the DSA and an independent research group called the Wirthlin group have posted research establishing that an average of 80% of new recruits fall away within their first twelve months. The majority leave during their first ninety days. Yet, a few companies enjoy attrition rates less than 20%. How do they do it? How does a company keep 80% of their recruits during the first twelve months?
To answer this mystery, we must first recognize another uncomfortable truth: The vast majority of new recruits in their first ninety days do not sponsor even one person. Perhaps they are afraid. Perhaps they don’t feel they know enough yet to bring a new recruit into the business. Whatever their reason, for the most part, it doesn’t happen. That presents a big challenge. How can you give them a compelling reason to spend time on the business during their first “make-or-break” ninety days? Most don’t even have a downline from whom they can earn even a small commission? If they do sponsor one or two people, what will their first few commission checks be? Imagine the excitement when after weeks of working her business, Suzy opens her first commission check for $8.75! Not so much. Companies that rely solely on downline commissions to persuade their new recruits to spend time on the business inevitably see their attrition rate rocket to dizzying heights. So what’s the answer?
If you are competing for their time, the answer may be different for each individual. Experience suggests that those companies whose consultants earn about $25 per hour or more keep a much higher percentage of their sales people and realize consistent growth. Knowing that each consultant will be exposed to frequent rejection and negative comments from spouses and friends (honey, why don’t you get a real job?), we must offer more than other part-time options available.
The nature of direct selling is that it has no schedule, no structure, and usually no real supervision to help a person succeed. Most people feel very uncomfortable when put into an environment where there are no clear expectations, no scheduled working hours, and no boss to correct you when you make a mistake. Direct selling is a tough job, no matter how you slice it. If you don’t provide a compelling offer for their time, you will continue to see recruits leaving for other part-time options. A waitress at a restaurant, with tips, can earn $15 to $20 per hour. Your “compelling” offer must be better. Much better.
While sales consultants usually don’t calculate what their dollar-per-hour rate is, they feel it, they sense it, and they always know when they aren’t getting enough for their time. With such a high percentage of women, their husbands ask the same question, too… is it worth my time and hers to have her doing the business. How many women have left the business because their husbands wouldn’t give them the support they needed? How different the story would have been in many cases had she been earning $25 to $35 per hour? Many husbands become “believers” when their wives are consistently making $25 per hour or more. In some cases, in fact, they are pushing them out the door to do more!
Consider also how much passion a sales consultant will have to recruit their friends and neighbors if they are only making $10 per hour! “Sallie, come join under me and you, too, can earn $10 per hour like me!” Not very inspiring, is it? Imagine, however, if the sales representative is earning $35 per hour. “Sallie, I’m making loads of money in my business and it’s easy to learn how. Come and join my team!” What a difference it makes to know that your recruit will earn enough to make it worth their time and thank you for teaching her the business.
Calculating the Dollar-per-Hour Proposition
There are three major factors that affect your Dollar-per-Hour Proposition:
- Average time per presentation (one-on-one or party)
- Average sales volume per presentation
- Average costs to the consultant for each presentation
In a party-plan business, the following list illustrates how much time a sales consultant spends on a typical party. For example:
|Minutes per Party|
|Travel to and from the party||60|
|Tear down / Clean up||15|
|Actual presentation / demonstration||60|
|Socializing at the party||30|
|Taking guest orders||20|
|Enter the party order into computer||45|
|Order receiving and separation||*|
|Delivery to hostess||*|
|Customer Service / Problem Resolution||15|
* Companies where the consultant receives the party order, separates it into individual guest orders, drives it to the hostess for delivery, and then drives home, can expect to add at least another two hours to the time each party takes for the consultant. Be careful what you expect your consultants to do after the party!
How Much Can You Pay Out in MLM Commissions or Party Plan Compensation?
Using a model created by Dan Jensen, the renowned compensation plan designer, you can get close to determining what your commission plan can pay out. Through the use of an informed model like the one found at http://www.jenetek.com/LearningCenter.htm or included in the LaunchSmart™ System, you can determine the relationship between markup from product cost to retail / wholesale, the amount of pre-tax profit to the company, and the amount that can be devoted to compensation and incentives for your new MLM.
The key is to understand the true long-term cost of the MLM compensation plan or Party Play hostess and consultant rewards plan before making a full commitment to the plan. Any estimate of the percent of sales should be projected to when the company is mature, usually 4 to 8 years from launch. The compensation plan for a direct selling company is mature when:
- Volume is extended far enough out from the company (at the top of the pay structure) so that it pays commissions to all the distributors and consultants without any pay “dead-ending” into the company.
- Top distributors achieve the highest titles or ranks to qualify for maximum payout.
- The payout is stable for six months, with only a half percent variation after considering seasonal trends. New MLM With experience and a good analytical approach to projecting compensation payout, you can feel assured that your plan will withstand the rigors of growth.
Plan Payout Analysis
To determine the steps necessary for estimating payouts from your new MLM compensation plan, read on. Whether you are analyzing an entire compensation plan or running a “what if” analysis of changes or enhancements, this information can help.
Because every 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 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 compensation plan in its entirety
- Consider all the ways a person might exploit the plan in order to achieve its maximum payout whether it’s a new MLM or established
- Consider behaviors in light of known production principles, such as the Perato principle and breakage
- Accept that the 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.)
Plan Payout Checklist & Key Considerations
- Have we identified the behaviors rewarded by various elements of the plan? For a new MLM? For an established company?
- Have we allocated the payout to various plan elements based on informed estimates?
- Have we estimated the percentages of plan participants who will perform at the various behavioral levels?
- Do we understand the dollar-per-hour proposition for our plan as it relates to party plan companies?
- 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
- What is the dollar-per-hour proposition for the MLM model?
- 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?
A network marketing compensation plan can be compared to a symphony orchestra with several instrumental groups. The woodwinds, brass, percussion, and strings each play a role in creating beautiful music, but only if they are in perfect harmony together. Imagine the awful sound if the brass began to play Beethoven’s 5th while the woodwinds played a piece from Chopin. To make beautiful music, all the instrumental groups must play a well composed music score in perfect harmony.
The well designed compensation plan is like a beautiful music score with all of its components working together in perfect harmony creating the maximum opportunity for success for every consultant who wishes to build a long-term business. Whether the consultant seeks a fun way to earn a few hundred dollars each month in only a few hours each week, or has career aspirations to earn a six-figure full-time income, the compensation plan must be crafted to help them achieve their dreams.
Ten principles are at the foundation of a great plan. Be sure that your plan design does everything possible to make each one a reality. Here are the principles, with some of the training from the LaunchSmart™ Tools added to help create a perspective for understanding the principles:
Principle #1 – Growth comes mostly from retention
The cost of losing one active consultant can be measured in hundreds, if not thousands, of dollars over time. Not only do we lose the sales they would have generated, but also the sales from the recruits they would have recruited, and the recruits they would have recruited, etc.
In early 2004, our firm received a call from a company that said they had recruited 34,000 distributors in the prior calendar year. Upon examining their year-end performance, they realized that they had a net growth of only 900 distributors as a result of the year’s efforts. 900! They contacted our firm for assistance in changing the attrition trend at their company.
With very little thought, it will occur to you that they would have been far better off to have recruited 3,400 (instead of 34,000) and kept 50% of them, which would give them 1,700 net growth, nearly double what they had from 34,000 new distributors! In the end, it matters little how many we recruit. What really matters is how many we keep. What benefit does recruiting bring if we lose them as quickly as they join?
Principle #2 – Each new recruit is precious and deserves all the help their upline sponsors can give them
Principle #3 – We are in the people-building business.
Principle #4 – Time is our top competitor
Principle #5 – What one person receives without working, another person works for without receiving
Principle #6 – The dream is real
Principle #7 – People will go to where the money and rewards flow, no matter what we train them to do
Principle #8 – Rather than do the work of 10 people, I’d rather get 10 people to do the work
Principle #9 – To develop successful leaders, first develop successful managers
Principle #10 – Leaders must be rewarded for leading by example
MLM Compensation Plan Design Checklist & Key Considerations for Party Plan
- Do we understand the compensation plan fundamentals and 5 Key Behaviors?
- Will we design our own plan or work with a design team?
- Analyze product margins, compensation margins and projected sales
- Analyze target market (leaders, builders / managers, consumers)
- Determine the dollar-per-hour proposition for a party plan company
- Develop compensation plan concept based on target market
- What is the dollar-per-hour proposition for MLM model?
- Determine how much you can afford to pay in commissions
- Does the plan reward leadership and is it supported by training for MLM distributors and party plan consultants who aspire to top leadership positions and pay?
- Determine percentage payouts
- Determine promotions budget
- Draft compensation plan
- Marketing elements
- Programming specifications and details
- Legal review and approval of compensation plan
- Final edits and copy writing
- If Party Plan
- Define in-home experience
- Design hostess rewards program
- Develop consultant compensation & incentives
- Awards, Incentives and Recognition and Incentives (AIR)
- Develop AIR strategies
- Identify key field behaviors and productivity outputs
- Define awards calendar for all recognition
- Determine pre-launch recruiting awards and special incentives
- Define promotions and contests
- Create first-year promotions and contests calendar
- Determine budgets for all AIR, promotions and contests
How do I decide the type of compensation plan that is right for my MLM or Party Plan company? How hard is it to design a good compensation plan?
For this question, we consulted with the leading compensation plan designer who has worked with more than 600 compensation plans over the course of more than 25 years.
Designing an effective compensation plan is often quite complex. It must sustain growth over many years, work well in both times of high growth and times of flat sales (the real test), and motivate people to do the right things to build successful field businesses. A plan that builds the right levels of competence at the right times of a career from new recruit to top-dog leader takes great care and attention to detail. A plan that rewards the right behaviors in the right balance takes a thorough understanding of the timeless principles that have been proven by other successful compensation plans, a grasp of the techniques that are most effective, and experience to know what does not work well.
A plan that is worthy of the passion and excitement of each sales representative is very difficult to design. Unfortunately, most companies eventually find major flaws in their original plan designs as their sales force develops into leaders and some start earning significant incomes. Not one company has yet been found who would say that they would not change anything in their compensation plan. Instead, most companies would change many things in their plan but are so entrenched in their current approach that the thought of changing something makes them run for cover and break out in cold sweat!
The money a company spends to compensate its sales force will most likely be its largest expense category month after month, year after year. It is common to pay out 50% or more of each retail dollar to one or more of the sales force. Spending the time and money early to get the plan “right” the first time will help business grow and assure that the money spent on compensation will provide a rich reward for top performance from the sales force, year after year. It will, indeed, be the best investment a company can make as it prepares for launch. In reality, it truly is a make-or-break proposition.
How does one go about designing a compensation plan?
The purpose of this website and the LaunchSmart™ system and tools is to help clients to grasp some of the fundamental principles involved. It is a principle based approach. There are far more principles and concepts involved than those that can be included without additional training and development. However, we remain committed to giving as much information as possible in this venue.
Compensation plans often follow trends and fads. These have always been short lived. When one company is doing well others are often quick to follow their lead and copy their compensation plan. For many who take this approach it has proven fatal. The proven approach to compensation plan design is not to follow fashion or trend, but instead, to base the plan on proven principles that do not change.
In the following paragraphs, Dan Jensen explains some of these principles and includes a few techniques based on articles he has published over the years. If you are not confident enough to attempt to do it yourself, you will come to understand the thought processes that this team goes through go through when designing a plan and the principles on which the plan designs are based.
MLM Compensation Plan and Party Plan Compensation Plan Design Principles
The compensation plans that create the best results follow similar principles of success in direct selling. This is true whether they are MLM Compensation Plans or Party Plan Compensation Plans. A few of these timeless principles include:
- Balance the key sales force behaviors using your compensation plan
- Have a strong emphasis on selling to customers (retailing)
- Build strong managers
- Build strong leaders
- Build a “retention culture”
If a company gets these principles right, despite a few mistakes in other areas they will still move upward. These are the proven principles and natural laws at work.
Balance the key sales force behaviors
The money spent on sales force compensation represents the company’s single largest expense. The return on investment for this large expenditure must be measured in terms of behaviors. What behaviors do you get back for the money you spend on commissions? What are the behaviors that you need to build the business? Dan Jensen teaches these as the Five Golden Behaviors:
- Building Managers
- Building Leaders
Building a Strong Retailing Ethic
Of all of the Five Golden Behaviors, this may have the greatest impact on your success for several reasons:
- Retention of new recruits: Industry wide, most attrition occurs during the first sixty to ninety days of a new recruit. Why? Most find that their participation in the business opportunity simply is not worth their time. They don’t earn enough in their first few weeks to justify their time involved. In addition, we find that that about 70% of new recruits do not sponsor even one person in their first ninety days! Very few sponsor two or more. What this means is this… Your compensation strategy must provide a way for your new recruits to make at least $25 to $35 per hour in their first ninety days without a downline. If you don’t, you’ll struggle to keep the majority of your new recruits. What would you do if you put 40 hours into your new business as a new recruit and received only a $16.83 downline commission check in your first month?
- DSA statistics suggest that 54% of all new recruits were customers before they decided to become distributors. If you develop a strong retailing ethic, you not only build sales but you also create a huge pool of great recruiting prospects with your customers.
- Companies that build a strong retailing ethic find they can enroll many new customers for every new distributor.
To build a strong retailing ethic, consider these suggestions for MLM and Party Plan environments:
- Build a culture that respects the difference between a retail customer and a distributor. Retail customers generate retail commissions; this is essential to retaining new recruits and helping them achieve the magic $25 to $35 per hour target.
- Don’t make it too easy to join as a distributor or you will cut off the profits your distributors make from retail sales. If you were a distributor selling to a new customer and they learned that they could buy the product at wholesale if they only sign a form and pay $10, what would they do? They’d gladly pay the $10 to save even more on their price. Who loses? The distributor loses their retail profits and never achieves the $25 per hour target. Eventually your company loses as you see your new recruits leaving through a revolving door. Companies that build successful retailing cultures quickly learn that they must have a small ‘barrier to entry’ to differentiate between a customer who just wants to buy product and a distributor who wants to build a business. They learn that they must aggressively protect the distributor retail profit.
- If you are a party plan company, be careful not to encourage consultants to aggressively recruit their hostesses unless the hostess really wants to build a business. Some hostesses can do more for building sales as a repeat hostess than they would as a consultant.
- Have an acceptable retail pricing model. Don’t price your products so high that customers get sticker shock. Make it easy for your reps to sell at retail.
- Party plan companies should focus on strong booking success in every party. Indeed, the success of a party should be measured more on the bookings than on the sales volume. A party with low sales volume but with lots of bookings is a great success. Parties without bookings mean that the seller is out of business.
Companies that fail to build a strong retail culture become wholesale buying clubs. This is called the ‘internal consumption model’ of direct selling. There have been a few successes of this model over the years, but even fewer that have endured the test of time. If you want strong growth over the long term, build a strong retailing ethic.
Build Strong Managers
A manager usually has a group of six to twenty active sales reps whom they train and motivate. Managers are experts at selling and recruiting and the company depends on them to teach others to do the same. The ultimate goal of a manager is to help others in their group or team to become strong Managers.
Without managers, each recruit is left to figure out by themselves how to succeed in the business and, as a result, most fail. Managers make it happen. They lead by example.
Without this mentoring behavior by good managers, we often see a culture develop recruiting bodies as fast as they can and moving on to the next new recruiting opportunity. This puts the company on a dangerous path of very high attrition with business builders often finding that no matter how many they recruit, eventually they can’t keep up with those leaving the opportunity. In time, such a culture develops an accelerating revolving door losing as many recruits as those who are joining. Successful managers believe that every new recruit in their group is precious and deserves the help they need to succeed in the business. Good managers are your future leaders.
To build managers, your compensation plan must have the right incentives for distributors so they will want to be managers. Their income must be well worth the challenge and time commitment. The plan must compensate well for managing.
Building Strong Leaders
Your success will be no greater than your success in building a group of strong leaders in the field. Leaders provide the strength that sustains and builds the business over time. If you want to make it in the long term, and make it big, there’s no other way. But how do you develop a large force of strong sales leaders?
- To develop strong leaders, you must develop strong managers. All good leaders were strong managers, first.
- Second, the compensation plan must reward leaders for leadership behavior. What is leadership behavior? The development of new managers and leaders below them and helping them, in turn, to develop other managers and leaders. For a leader to grow their business, they must develop strong managers and leaders and nurture the process continually. They must often work deeper in their downline often outside their own group and do this together with other downline managers and leaders. Great leaders hunt for their downline rising stars and mentor them into tomorrow’s great leaders. This is how leaders build successful downline organizations. There’s no other way. Long term growth that exceeds your rate of attrition comes from developing people into better managers and leaders.
How can a compensation plan reward leadership behavior? By rewarding the development of managers and leaders from deep within their downlines. If a leader sees little reward for developing tomorrow’s leader in their downline, they won’t bother. Instead, they will work shallow (a manager behavior). If there are strong rewards for developing managers and leaders from deep within their downline, your strong leaders will do so. They always follow the money. They always look to leverage themselves to get the most return on the time they spend with others. If your plan rewards this behavior, you will see a constant stream of new leaders rising to the surface and your business will enjoy long-term health and growth.
Build a Strong Retention Culture
No amount of recruiting will compensate for poor retention. No matter how many are recruited, you can lose just as many as you recruit. The key to growth is retention and it’s often the most elusive. Successful companies quickly learn that retention must become part of their “culture” of success.
New recruits need $25 to $35 per hour to make it worth their time and keep them in the business. Most attrition occurs very early in the life of a new recruit (60-90 days). But how do we keep recruits who have weathered the storms of their first ninety days? How do we keep leaders and managers (those building a business) from eventually jumping ship?
Here are some powerful, proven tips you’ll want your compensation plan to address to keep your people working hard month after month:
- Use “golden handcuffs” to keep them engaged in the business. Would you walk away from a $300 per month income stream? Your compensation plan needs to help people develop a recurring income stream as quickly as possible of at least $300 per month. This is done by rewarding the right behaviors as early in their career as possible. An example of what not to do would be to provide meager commission percentages to new people until they develop a large team. In short, get early money into the hands of your young sales reps as quickly as possible. You’ll keep them longer.
- Use both a stick and a carrot. When a person fails to meet their minimum requirements, don’t continue paying them as if they had. Use a “paid-as title” as well as recognition or “badge” title. In short, they have two titles. Pay them well as they perform, but match their earnings to the true level of their performance each month.
- Handsomely reward strong managers for their team building results. As they work with their team members, retention will increase.
- If you reward managers more for their personal sales than for their team building, you’ll see them sell more but fall down in their team building. This will cause an increased attrition rate. Your compensation plan needs to carefully balance incentives between personal sales commissions and team building commissions.
- Use recognition at every opportunity to affirm the right behaviors that build successful teams and downline organizations.
Apart from MLM compensation and incentives strategies, and party plan compensation and incentive strategies, companies that successfully retain their managers and leaders find ways to earn the trust of their people. A company that has a great compensation plan but proves to be untrustworthy to their field will find their people leaving out the back door. Mistrust trumps a good compensation plan. In the end, it all boils down to “trust.” You have to show them that you can be trusted with their precious customers and downline recruits.
Training – often the missing ingredient
Successful companies quickly learn that they need both motivation (compensation plan and incentives programs) as well as training programs to build lasting success. Motivation without ability doesn’t work. Be sure your compensation plan has a strong and effective training program that is in perfect alignment with its principles and techniques for building success. You could have the best compensation plan in the world but fail miserably because you don’t train your people how to use it to their advantage.
Follow these timeless principles:
- Balance the key sales force behaviors using your compensation plan
- Always have a strong retailing emphasis
- Build strong managers
- Build strong leaders
- Build a “retention culture”
- Train, train, train
Then, watch your bottom line grow.