Methods Of Direct Selling – Differences In Compensation Plans
The question “What is the difference between direct sales and MLM?” is one which I get often.
Or similarly the question is often phrased as “Which is better MLM or direct sales?”
Actually, both are odd and difficult questions to answer because MLM is direct sales!
Definition Of Direct Sales
The official definition of direct sales or selling is: the marketing of products or services directly to the consumer, bypassing the retail location. The original peddler or door-to-door salesmen were the old-fashioned version of direct sales.
Modern direct selling includes many variations of 1:1 selling such as party plan and a wide variety of relationship-based systems of connecting as well as internet sales.
Using the true definition of direct sales then, all of the following types of home businesses would be considered direct sales:
- party plan
- network marketing
- door to door
- affiliate marketing
- and any variation of relationship marketing 1:1
Direct selling companies often use a variety of methods to reach their consumer and each company has a unique pay structure or commission plan.
Methods Of Direct Selling Commission Structures
What really separates the different methods of direct selling businesses are the commission structures.
It is actually a pretty complicated subject and adding to the complication of the plans is the fact that many companies pick pieces from different types of programs to implement for their field consultants. Below is the layman’s definition of the different methods of direct selling.
If you would like a full white paper on any or all of these methods of direct selling, just send Deb an email for a more complex description of each.
Simple Definition Of Direct Sales Commission Structures
There really is no simple definition of any direct sales commission structure. Due to the complexity of the topic it is difficult to cover all the variables. Most companies’ compensation structures fall into one of the following and/or may take parts of several plans.
Unilevel Payment Plan
The unilevel plan is the one that most party plan companies use.
It is very easy to understand which is definitely a benefit in itself. Unilevel plans only enable you to personally bring in one line of distributors, therefore everyone you personally sponsor is on your 1st line. (As opposed to other plans where you can bring people in and place them under someone else.)
There are no limits to how wide your front line can be in this plan, meaning that you can bring in and sponsor an unlimited number of people. They are all placed under you, the recruiter in the first line. The commissions are normally paid out on a limited depth between 3-5 levels deep in various percentages reducing as they go deeper.
The goal of the unilateral plan is to recruit a large number of front line distributors and then encourage them to do the same.
The Breakaway Plan
The stair step breakaway means exactly what the name implies. You climb the ladder to success and when you reach a certain level you break away from your upline distributors. The group that breaks away then runs their organization separately.
The break away distributor earns a higher commission percentage.
There is no limit to the width or number of front line distributors you can sponsor. This program really does not encourage teamwork as income is reduced when a break occurs.
As distributors break away, the original sponsor is still entitled to earn a small percentage (override) from each break away distributor’s efforts although this is generally much smaller compared to what they were earning before the break away.
In the “stairstep breakaway” plan, the best income is earned by recruiting as many front line consultants as you can who are great product users or sellers.
The break away system works really well for long term direct sellers who are able to make up in loss of immediate income by accumulating many teams who have broken away and the residual income makes up for the immediate loss of sales.
What Is The (Forced) Matrix Compensation Plan
The matrix plan, also known as a forced matrix plan, is based around a compensation structure that has a set width and depth for which a consultant is paid.
The width and depth of the plan indicates how you get paid.
For example a 3 x 5 plan suggests you can only sponsor a maximum of 3 front line distributors and you earn commissions up to 5 levels deep.
This system encourages teamwork because your front line is limited. Any new recruits that are sponsored after your front line is full must be positioned under one of your existing downline distributors.
Understanding The Binary Compensation Plan
The binary plan is all about 2. There are only 2 first line consultants in a team. Each one is called a “leg”.
All distributors after the first 2 are then placed under one of your first 2 front line members or under another distributor in the downline. This creates a supportive environment for new members because the best way for you to achieve success is by helping new members to build their organizations.
In the binary compensation plan the goal is to have balance in the amount of volume flowing through either side of your business.
For example if you had 900 sales dollars (or points) in the left leg of your business but only 600 points flowing through the right, you are paid out on the highest leg which is the 600 side.
Because the goal is to balance both of your organizational legs this encourages your consultants to help their weaker members to build their organization and promotes teamwork. Everyone is focused on achieving volume balance and a more consistent , higher commission check.
Like the unilateral plan, the binary plan works better in creating faster and quicker income for the average consultant because 2 front line distributors begin to provide income immediately for the recruiter.
Which Is Better MLM Or Direct Sales?
So, as you see…. this is a pretty complicated subject! When you ask “Which is better MLM or direct sales?” What exactly do you mean by that?
Print or download the descriptions of the explanations offered above.
I think that most people who ask that question are really asking “Which is better party plan or MLM?”
Party plan sales is really relationship marketing at its finest because the party plan environment taps into the emotional connection of the home party. Since it is predominately unilateral commission the opportunity for massive income is lower and yet the average consultant can make income quickly,
Usually party plan commission structures do not provide residual income meaning that you must continue to do home parties on all levels to continue to receive income.
MLM, which means of course multi-level marketing, usually uses one of the deeper multi-level structures. Therefore, it offers a greater chance for wealth creation and residual income when you stick with it long term. It is more difficult to understand and often is not as quick of a start up when looking for quick income.
The important thing to remember about all of these forms of direct selling payment plans is to realize that they are NOT a pyramid selling situation. We have another page that you may want to look at to determine what is a pyramid scheme.
Direct Sales Business Success
If you are here because you are considering starting a business and are trying to figure out which one is best for you then another article on how to start a party plan business may be more relevant because it is not the commission method that determines your success.
Most companies are a combination of different parts of the above-mentioned pay structures. A specific commission plan is not what determines success in direct sales.
Direct sales is an awesome opportunity and a viable business model to supplement any home’s income yet many who start never achieve their goal because they do not stick with it.
When seeking a direct sales company you only need to understand the simplest form of the compensation structure and make sure that it matches your long term goals.