The compensation plan allows for 5 or more levels, which is more than are needed to manage the sales function.
Additional levels only further enriches those at or near the top of the pyramid of distributors. Excessive levels in a downline is another sign participants are expected to sell primarily to their downline, rather than to the general public.This makes it an exploitive money transfer scheme, or product-based pyramid scheme.
In conventional sales settings, sales for the entire country can be managed in four levels: (1) branch sales managers, (2) division sales managers, (3) regional sales managers, and (4) national sales manager. Each of these levels individually manage sales people directly.
- Not certain if the MLM does this? Ask yourself these questions:
- Does the company pay overrides (commissions and bonuses) to distributors in a hierarchy of more than four levels?
- Is the compensation plan so complex — with such a complex set of bonuses and other enticements — that you would find it difficult to explain it to a friend?
Important Background for Red Flag #5
Other qualifying questions that could be asked include: Is it possible to have dozens, or even hundreds, of people in your downline from whom you could collect commissions? – or – Have you been told, or has it been implied (in a variety of ways) by the promoters of the scheme, that the real money is in building a downline? – or – Does the company use a binary, trinary, matrix, breakaway, “Australian 2-up,” or hybrid of any or all of these compensation plans with more than four levels of payout by the company to the upline?
When an MLM company pays commissions and bonuses on 5 or more levels of participants, the program can be said to be highly leveraged; i.e., a few at the top of a pyramid are enriched at the expense of a multitude of downline participants, the vast majority of whom lose money. (Occasional exception: Where there are less than five levels, accelerating commissions at higher levels may be used by the MLM to achieve a top-weighted pay plan that disproportionately rewards those at the top.)
Again, for even the largest of conventional distributor arrangements, the entire U.S. can be covered by four supervisory levels in the distributor hierarchy; e.g., national manager, regional managers, district managers, and branch (or local) sales manager – and sometimes an international manager if one is needed for foreign markets. A pay structure with more levels than that is superfluous and bloated, driving up product prices and making sales at a competitive retail markup unprofitable and unrealistic.
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When combined with the other factors herein, only those “distributors” at the top of the pyramid realize any significant income, and the extra levels only enrich those at or near the top of the pyramid at the expense of those beneath them. In some states, this could be considered “unjust enrichment.”
So – with an upline of 5 or more levels, the top-level participants may be profiting to an extreme degree from the losses of those beneath them. Such exorbitant incomes result from the reaping of huge overrides from the combined product investments of as many as thousands of downline participants, which increase exponentially with each added level.
Compared to recruiting, selling products at full retail price becomes a waste of time in systems with so many levels in the pay plan. The incentive to recruit to move up a level becomes very great. Again, one can see that the legal criterion of “primary emphasis” on income from recruiting fees (in the form of downline purchases) is satisfied.
MLM promoters refer to such residuals as “leverage” – large company payouts, disproportionate to effort expended, to top-level participants. The effects of leverage can be illustrated in a downline of six levels of participants. For example, assume that a “distributor” recruits five “active distributors,” each of whom recruits five more, and so on through six levels of distributors. The pyramid grows exponentially as shown below:
- Level 1: 5 distributors x $5 in commissions & bonuses = $25/month
- Level 2: (5×5=) 25 + 5 = 30 total distributors x $5 in commissions & bonuses = $150/month
- Level 3: (25×5=) 125 + 30 = 155 total distributors x $5 in commissions & bonuses= $775/month
- Level 4: (125×5=) 625 + 155 = 780 total distributors x$5 in commissions & bonuses = $3,900/month
- Level 5: (625×5=) 3,125 + 780 = 3,905 total distributors x $5 in commissions & bonuses = $19,525/month
- Level 6: (3,905×5=) 15,625 + 3,905 = 19,530 total distributors x 5 in commissions & bonuses = $97,650/month!
If each “distributor” were to buy enough products each month to yield an override of $5 in commissions and bonuses to the original upline distributor, then with a five-level downline, the upline distributor gets $19,525 per month, while with a six-level downline the same distributor can get $97,650 per month – five times as much as for five levels. The incentive to recruit to get to the sixth level becomes enormous. Of course, it seldom works out that way, but these are the type of figures that are often presented to prospective new recruits at MLM opportunity meetings.
This illustrates why recruiting is emphasized, as opposed to selling products to persons outside the pyramid. An income of $97,650 is much more appealing to a Level 1 participant than $100 that might be earned by selling the products at the full retail price (assuming $20 markup on products sold to each of five customers).
A few MLMs pay on only three or four levels. However, they compensate for it by paying a much larger percentage of the commissions to the top levels. So the end result is the same – the bulk of the commissions go to the upline and not to the person making the sale.