Today, I want to start a series of posts to help people new to network marketing understand the different MLM commission structures they're likely to be faced with.  That way, people who read this blog will have a clearer idea of their choices.

Please note:  What I'm about to say applies only to people who join a network marketing company intending to earn an income.  If you join purely to buy the products wholesale, it's not relevant to you.

But for those looking for a little extra income, or complete financial and time freedom, or anything in between, the marketing plan is a really crucial area. As an old mentor of mine used to say — even if we were selling gold bars, unless people got paid adequately for their efforts, nobody would take it on.

A networking company's "marketing plan" is simply the way that it compensates its distributors for the work they do in marketing the company's products.  In fact, it's frequently called the "compensation plan" — the terms are interchangeable.

Now you might think that there would be a relatively simple commission schedule, which anybody could read and understand.  Unfortunately not.  Although you can broadly describe how a plan works in words, the actual computer algorithms and payout schedules are very complex, due to the multi-level payment structure. 

The good news is, you don't need to understand the math to earn very large sums of money!  But you do need to be aware of what size of business, and how it needs to be structured, to produce the income you're looking for.

Here's where you need to forget hypothetical whiteboard or PowerPoint examples.  What it really comes down to is how the plan works in practice.  How much it puts into your pocket compared to the amount of work you do.  Or more accurately, compared to the amount of turnover that your work generates for the company via your personal usage and sales, and through your downline team.  Is the reward comparable to the effort?  (Beware of recruiters who say “I don’t know how much I earned in my first year — I’m still receiving it.”  You’re entitled to straight answers.  Hit them with something like, “Okay, how much did you pay tax on?”)

Remember that each of your downline must receive their fair share of the commission, too.  (The ones who do the work, that is.  The truth is, most distributors generate very little turnover, and so can't expect to be paid very much.  In fact, as many as 85 to 90 percent of

your downline may be wholesale buyers and customers only, which leaves just 10 to 15 percent to share in the commissions.  In practice, this is a good balance.)

I've been around this industry for a while, and I have a fair amount of experience on how different sorts of marketing plans work in practice.  That's what I want to share with you now, without baffling anyone with industry jargon. (And again, remember that I’m addressing ONLY those who join to develop an income stream.)

First point.  Be very careful of plans which have what's called a "front-end" and "back-end" structure.  They are fairly common, but are used mostly by the older companies. 

These plans probably worked well in the early days, when network marketing was mostly moms and pops selling to their neighbors, family and friends, and making a few extra dollars.  But in today's global marketplace, where thousands of people are looking for a replacement income, or a way out of a job they hate or a business that's killing them, and where MLM company turnovers are reaching into the hundreds of millions — even billions — of dollars annually, these plans don't work nearly so well.

At least, they tend to work for only a very small percentage of top people who garner obscene amounts of money, leaving the great bulk of mid- and lower-level distributors fighting over crumbs.

If you want to take your chances of making it into the top group, that's fine.  Just be aware that 99 percent of working distributors usually end up with little to show for their labors under this style of plan.

How do you identify plans of this type?  Just watch out for a structure like this:  everyone starts off at the bottom rung of the "front end" on a minimal commission level.  Then, as you enroll customers and enlist new distributors, your weekly/monthly group volume grows, and so does your commission rate, step by step.

Here's how this works:  you might start out (like everyone else) on 4 percent commission.  Once your wholesale group volume reaches say $1,000 per period, you might graduate to 8 percent.  But suppose someone you've sponsored accounts for most of this $1,000.  Your 8 percent is net of their base rate of 4 percent, and you end up with just 4 percent on most of your volume!

So what you're really getting paid in the front end of the plan is the rate applicable to your total group turnover (let's say it's 20 percent on $10,000 of group volume) LESS 4, 8, 12, or 16 percent payable to those underneath you.  What this boils down to is that, in practice, nobody earns a substantial amount on the front end of these plans.  As the great majority

of people never progress beyond the front end, this in turn renders these plans not terribly effective at providing substantial incomes to — guess who?  The great majority of people!

I'll talk about the "back end" of this plan in my next post.