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Most direct selling companies in the world use the stairstep breakaway. It is the oldest plan in use today. Companies such as Avon and Rainbow pioneered this compensation plan and are using it to great effect.
The main advantage of this compensation plan is that you can develop and maintain a very strong sales management structure. The Rainbow organization is a perfect example of this. They have a National Distributor who is responsible for the country. This person typically pays for the rights to the country, finances the stock, and manages the warehouse and distribution. They are also responsible for recruiting and training regional managers (Regional General Distributors) who look after various predefined geographic regions within the country. The RGDs then recruit and train Distributors who are responsible for sales in a town or section of a city. The Distributors appoint the Dealers who sell the products.
One big advantage of this plan is that the Dealers are working for a Distributor directly. They will attend sales meetings, receive training and report to that distributor. The Distributor earns money from every sale generated by their Dealers and is therefore highly invested in their Dealer’s success. No Distributor may sell outside of their region, ensuring that the Distributor remains focused on their specific region.
From the company’s point of view, the Distributor is accountable for achieving sales targets within their region and if these targets are not achieved, the company can assign the distributorship to someone else. The company therefore has full control of who is running their teams and is normally able to predict turnover very accurately.
The challenge that this plan presents is finding a way to identify and promote leaders without destroying the Distributor's business. Many different mechanisms have been implemented to overcome this issue with a varying degree of success. The most widely adopted mechanism is the breakaway commission.
A Dealer, Joan, shows herself to be effective by achieving high sales volumes. She then applies to become a Distributor. If the company and their upline Distributor agree, Joan is promoted to the position of Candidate Distributor and can build and manage a team. Now, here is where it gets messy - let’s say Mary is a Distributor and qualifies for 45% commission, while Joan qualifies for 25% commission. Mary would earn 20% commission on every sale made by Joan. When Joan gets promoted to Candidate Distributor (CD), she moves to 35% commission which reduces Mary’s commission to 10%. Not only is Joan now eating into Mary’s commission, but she is also exploiting Mary’s region. This is a huge disincentive to Mary and almost guarantees that she will never put anyone forward for promotion.
To overcome this, companies have tried every trick in the book (and a few that are not). They usually place the CD on a sliding commission structure. As the team sales increase, the CD's commission incrementally moves from 25% to 35%, thereby limiting the upline commission loss. Then, if the CD is promoted to Distributor, they are required to leave their newly created team behind and start a distributorship in a new area. If there are no areas available, the CD would be required to relocate or wait until an area becomes available.
Once a CD is promoted to Distributor, they are deemed to have broken away. Their commission is increased to 45% and their upline no longer earns a differential commission on their sales. This is where the breakaway bonus comes in. If Joan becomes a Distributor, Mary would earn a small breakaway commission on Joan’s total sales volume.
The big advantage of the Stairstep Breakaway plan is stability. Every Distributor jealously guards their sales volumes and area. They look after their team and can normally be relied on to achieve meaningful sales volumes in their area. If they are not achieving the required volumes, there will always be several CDs waiting to take their place. Avon has built a massive global business with an annual turnover in excess of $12B using this model. Even though it is old and has several drawbacks, it should not be discounted out of hand and could be the perfect compensation plan for your business.
I normally recommend this plan for the sale of products that require complex demonstrations or where an extensive amount of training is necessary.
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