MLM Compensation
Plan Design

As per Direct Selling Guidelines 2016

You have to prepare a Compensation Plan which incentivise your direct sellers based on sales of products or services only, you must not provide any incentive / income whatsoever based on the recruitment of distributors

Important Aspects

MLM Plan Design Considerations

A lot of MLM Companies copy compensation plan from others which is not recommended, instead they should follow the principles layed out here to design their MLM Business Plan

MLM Plan Design

Compliance Aspects

The Guidelines clarify the difference between a legitimate (rugulated) Direct Selling commission plan and various other illegal compensation mechanisms such as :

  • Money Circulation
  • Prize Chits
  • Pyramid Schemes

You have to design a commission plan which is strictly according to the Guidelines and which do not fall under these illegal compensation mechanisms because if your commission plan is falling under the definition of the banned / illegal compensation mechanism then

  • Your company won't comply with the Direct Selling Guidelines
  • You may face civil & criminal litigations according to respective laws

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MLM Plan Design

Attractive Aspect

  • Your Commission Plan is such an important element that it contributes to a significant portion in success and failure of your whole MLM business
  • If you are able to design a commission plan which attracts and incentivize direct sellers then it can make your Direct Selling startup a success and if you are not able to do it can also make your fail, in order to achieve an attractive and sustainable plan you have to think about allocation of incomes across various scenarios, distributors at various levels
  • You’ll also have to understand how the product categories & market you operate can affect how commission plan, your plan have to be in accordance with your product line and demographic factors because if it is not then your direct sellers will not able to perform maximally and you may end up losing your sales momentum
MLM Plan Design

Sustainability Aspect

  • The Guidelines does not impose or prohibit any specific type of Compensation Plan but it is in your best interest that the Compensation Plan should be Attractive enough for the Direct Sellers at the same time it should be profitable for your MLM Company in the long-term
  • A lot of people do huge mistakes with this part, most people copy some other company’s compensation plan or design the plan themselves without a thorough analysis and mathematical modeling and end up making huge losses due to unsustainable commissions being paid
  • Most people make a lot of mistakes in understanding unit economics, income distributions, cash flow, margins, profits and reserves and as a result they start their company without a thorough analysis and calculations which leads to huge losses for the company in the long run which becomes unsustainable and eventually the company has to shutdown
Creating your Commission Plan

DOs for MLM Plan

Things you Should Do while designing your MLM Compensation Plan

Properly Understand your Product’s unit economics
Allocate your revenue properly among incomes
Thoroughly Calculate commissions to be paid out on sale
Clearly understand risks and take measures to reduce it

DON'Ts for MLM Plan

Things you Should NOT Do while designing your MLM Compensation Plan

Copy some other Company’s commission Plan
Create Commission plan with paper calculations
Base your commission plan on assumptions & hope
Design plan only based on leader’s suggestions
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