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How to Scrutinize an MLM Pay Plan

PART VI: The Binary MLM Comp Plan

By Daren C. Falter

The Binary

The binary was developed in the 1980s as an exciting alternative to traditional network marketing pay plans. The binary plan is based on a structure of two legs, a right leg and a left leg. One-leg downlines are considered illegal by many government regulators since they all seem to give too much advantage to the first distributors who gets into the company. Therefore, two legs are the industry minimum. Distributors can only sponsor two on their first level, and everyone else spills down below those two distributors, similar to a 2x matrix, except the binary counts volume, not levels. Maximum commissions are earned by balancing the left and right side of the binary. Over 18 percent of the programs I studied were binary plans. The number of companies using

the binary plan is slowly increasing every year.

Binary: The good

In a binary, all you need are two strong legs and you are on your way to a full-time income; most plans require many more. Add a third solid leg to most binary plans and you are on your way to a six-figure income. Sure, you may have to sponsor more than just two or three distributors to achieve financial independence. When you sponsor your third distributor, that person must go down under one of your initial two distributors, creating excitement and synergy. By placing more distributors into a binary plan, leaders can create pockets of synergy. The matrix is the only other plan that gives the upline incentive to place people under other distributors in their downline.

Most binaries pay weekly. In addition, new distributors can earn their first check during their first week and receive that check in the mail within ten days. This helps with distributor motivation and retention. In most compensation plans, the reward is so far removed from the work that the distributors get discouraged and quit. Also, the binary plan is designed without levels; it has only volume counts. Levels can restrict distributors from earning commissions on their entire downline. There are no group volume requirements or group quotas in most binary plans. With a modest personal product volume requirement each month, you remain active to receive commissions on unlimited levels.

Payout Percentage

Traditional plans pay around 5 percent on breakaway or unilevel volume. The binary plan averages 5–15 percent payout on unlimited depth. You must be balanced to earn maximum commissions. This balancing act is designed to create “breakage” to the company or commissions that flow up to the company based on some distributors not qualifying for them. When distributors don’t balance their legs, they don’t earn the full payout that is possible in a given week. The balance rolls up to the company. All pay plans have some form of breakage strategy employed in the plan.

Those who like games of strategy generally enjoy this type of plan. Where you place new distributors in your downline can affect your payout. Also, most binaries reward top distributors with re-entry certificates that allow distributor to reenter their own downline and place another distributorship position in a place where it is needed the most. Placement of these new business centers requires careful placement strategy.

Attitude Check

Now there are two types of distributors in network marketing: those with good attitudes and those with bad attitudes. The binary plan is the ultimate attitude check. The binary structure is the only pay plan besides the matrix that actually gives the upline incentive to place people into the downlines of distributors below them. The distributor with the good attitude is going to be appreciative of any sponsoring of new distributors in his/her downline, even if the new recruits are placed on the stronger side. The distributor with the bad attitude may object to these downline placements since these new distributors may not necessarily be placed on the side that they want them on. With the binary, you can find out right away if your distributor has a “glass half empty” or a “glass half full” attitude. Negative people will not survive the binary, while positive people feel the plan tends to be more synergistic than other pay plans.

Strength of Most Binaries

Most binary plans, especially the most recent plans developed over the last five years, are quite fair and can generate fairly substantial checks. In most cases, binaries favor the middle of the compensation plan. A distributor who is generating between $2,000 and about $40,000 in monthly sales volume can earn an excellent percentage in payout if this volume is distributed evenly according to the plan’s balancing standards. Once gross sales volumes exceed $40-50,000 per month, the unilevels and breakaways tend to kick into high gear. However, you will generally earn a better percentage with a binary in the midrange volumes.

Binary: The Bad

The binary plan is a very exciting and synergistic plan, but it can also care some baggage. No pay plan is perfect and the binary has its own set of issues. Some deal with the way the binary plan can be manipulated by leaders, other issues deal with the basic structure. Here are some things to be aware of when evaluating a binary plan.

Overemphasis on Pay Plan/Recruiting

Trust me when I say that I’m just as much a recruiting machine as the next full- time network marketer, so in no way am I discouraging this activity. However, many of the binary plans put far too much emphasis on their compensation plan, leaving little room for anything else, including product promotion. It’s tempting to do this when you have a compensation plan that is so much fun to demonstrate on paper. But distributors who learn how to balance their presentation between product, company, and compensation plan will ultimately build a more stable, long-term business. Governmental regulators are constantly dropping into distributor opportunity meetings to make sure the product is still emphasized over the compensation plan.

Does binary mean two or four?

Even though the name binary implies two, meaning it is a two-legged plan, some binary plans allow and even encourage distributors to sign up with three business centers (more on this later). This allows distributors to launch their business with four legs. In order to optimize the pay plan and make maximum commission percentages from your work, you not only have to find leaders to populate all four legs, but you must balance these legs. If it’s difficult to create balance in two legs, think about how much more difficult it is in four legs. In almost every traditional binary pay plan I’ve researched, serious networkers are building four legs from the beginning of their business, not two legs as most pay plan demonstrations describe. However, there is generally no requirement to build four legs.

Look for binary plans that focus in on building two legs. This kind of teamwork and synergy will help you maintain momentum in your legs while you strive to achieve your income goals.

Balance is the key

Balance is the key to maximizing payout in the binary plan. If you have only one leg take off, you cannot benefit from the volume on the larger leg until you have balanced the same amount of product sales volume on the opposite leg. In other words, if you sign up a distributor who takes off and signs up ten distributors in one month on your right side, obviously you will have more product volume being purchased on that right side. Before you earn commissions on the product volume on the strong leg, you must start working on the left side to balance the same amount of volume on the weak leg. If you do not balance, you get paid on the amount you can balance and the rest sits in that strong leg like a bank account, waiting for you week after week. Some plans have tried to deal with this issue by offering a 1/3–2/3 balance rule that allows distributors to get full payout if they are not quite balanced. The 1/3–2/3 allows distributors to cash out on all of their product volume during a given week if their volume in their weaker leg is at least one-third of the volume represented in the strong leg. So if distributors had 5,000 volume in the left leg and 30,000 in the right leg, they would be paid on 5,000 volume on the left, and 10,000 on the right for a total of 15,000 in volume for the week. The remaining 20,000 volume that is not paid on the right leg generally carries over in most plans so you can have a chance to balance out the next week to earn the rest of this commission. Even with the 1/3–2/3 incentive, most distributors develop one huge leg and the other legs are much smaller. A 1/3–2/3 option can help a little but it will not correct this problem.

Since the binary allows and even encourages spillover, many people may have distributors signing up underneath them that they did not personally prospect and recruit. However, almost always, these bonus distributors are placed on only one side of that distributor’s organization. In order for the distributor to take advantage of the new volume in their group, they must place an equal number of distributors or customers (product volume) on the weaker side. Unlike the matrix plan, distributors have to earn the right to receive commissions from spillover. In other words, there is no free lunch. Distributors must prove themselves worthy of receiving commissions from upline volume placed under them. Add the dynamics of building four legs instead of two, and you can see how complicated the balancing act can become.

Some non-binary distributors will criticize the binary because it seems to give the wrong incentives. Instead of encouraging you to work hard with your workers, it actually penalizes you for working with your best legs and rewards you for bailing out the less dedicated distributors. Binary proponents believe that the binary is unselfish because it forces you to lift the weaker person and try to strengthen them. It’s really all in the way you look at it.

Runaway legs

Odds say that one of your legs will take off before the other in the binary plan. When one leg takes off like a rocket, this is called a runaway leg. These runaway legs are the best and the worst thing that can happen to a distributor. Before this leg takes off, you are carefully balancing each new distributor on the left and right. Essentially, your efforts are divided between building two legs. As soon as one of those legs takes off on its own, you can then begin focusing most of your attention on your weak leg. When distributors focus on building one leg only, the chances of it becoming another runaway leg are twice as high as before. It’s just a matter of time before this leg becomes a strong leg, and soon both legs will be maximizing weekly.

Generally speaking, when two legs are maximizing in a binary plan, distributors will produce an above-average full-time income. Three maxed legs will produce a six-figure income. (These payout figures are hypothetical examples of the typical binary structure. Commission payout can vary from plan to plan.)

Sometimes distributors can become frustrated at how long it takes to balance out a strong leg. This can be a problem for some distributors. However, keep in mind that you may never have a leg take off in any other plan like you do with the binary. That’s why you may only hear the term runaway leg in reference to the binary plan.

Runaway legs can be discouraging. Distributors who do not have a strong, long-term commitment to building their binary downline may become discouraged when they see the money they are leaving on the table. Some distributors even quit and curse the binary plan forever. This is ridiculous, of course, since building a runaway leg is one of the greatest things that can happen to you in any pay plan. In the binary, pray for a runaway leg. Then, once you have one, pray for another one.

Volume caps: the momentum killer

Instead of limiting levels, the binary plan limits volume. In other words, once you reach the maximum level of downline sales volume in a particular leg during one week, you must then reenter into your own downline and start a new leg in order to increase income. As distributors persist in building any network marketing downline, eventually they should experience a phenomenon known as momentum growth. This is a very exciting period in most pay plans, and this momentum growth could continue for years. However, in the binary plan, since volume can be capped, and no more commissions can be generated after this cap without reentering the downline and starting over with a new position, momentum growth can be squelched. When distributors have existing legs that are maxing out in volume every week, they have no more incentive to place new distributors downline in these strong legs, and they lose incentive to work with distributors in stronger legs. They turn their attention to starting new momentum growth in their new legs. It’s almost like starting over again from scratch. This cap on volume can also be discouraging to some distributors.

Powerleg hype

The worst part about being associated with the binary plan is the powerleg hype that you hear about in almost every company that uses the binary. Since only two legs are required to start making good income, many aggressive MLMers will stack all of their new distributors, one after the other, into two large powerlegs so everyone can receive the advantage of spillover.

These powerlegs are very helpful and encouraging for active, productive distributors who happen to fall in the powerleg. But many unfortunate souls miss out on the powerleg because they come in under someone who is in a powerleg and needs to build the weak side of their group. Their sponsors place them at the top of the weak leg, and now instead of hundreds of people building this massive powerleg on one side for them, they have to build both legs themselves and generate their own momentum. This can be extremely dispiriting for the non-powerleg distributors who are aware of the powerleg concept and hear of all the success stories but were not invited to the party. Anytime there is a lack of fairness in a pay plan, it can breed contempt.

The best way to avoid this problem is to avoid distributor organizations and companies that stress the powerleg or powerline concept. It shouldn’t be something that is openly and publicly promoted. Yes, it can be a benefit to those who are involved, but it can be a bone of contention for everyone else. Also, keep in mind that even though the powerleg may or may not help every distributor, other plans like the breakaway and the unilevel don’t have any powerleg stacking incentives, and it can be a disadvantage to do a substantial amount of stacking in these plans.

Binary Variations

The binary plan does have significant variations from plan to plan. As mentioned earlier, some binary plans are split with a balancing requirement of 50/50, meaning that volume needs to balance on each side to receive commissions that week. The 50/50 plan is the safest and the most traditional binary. We also previously mentioned the 1/3–2/3 split binary, meaning you can have up to 66 percent of your volume on the strong side and still match with 33 percent on the weak leg. In theory, this plan can help distributors more easily balance their legs, but distributors I’ve interviewed who have worked both plans are convinced that is really doesn’t make that much of a difference.

Be aware of binary plans that allow the purchase of more than three business centers at start-up. Business centers are like separated distributorship positions stacked on top of each other. Each center must be activated with approximately $100-$200 in product purchase. Some binaries allow a seven-pack or even a fifteen-pack. This generally can increase the cost of start-up to $700-$3,000. These plans usually do not last long, and in many states they’re illegal. Many states now have a law that prohibits companies from offering business start-up expenses that exceed $500. Purchasing 7-15 business centers is the binary’s equivalent to the front-end load in the breakaway.

Can binary plans pay out too much? The answer is a resounding… YES! Some companies using variations on the binary plan have actually gone out of business because they paid out too much. One such binary variation is called a cycling binary. The cycling binary plans accumulate volume just like other compensation plans. But instead of paying distributors once each week, the pay plan cashes out and distributors receive their check immediately when a certain volume is reached in the weak leg. This cycling process can occur several times per month, several times per week, or even several times per day in extremely fast-growing organizations. Since the cycling binary cashes out so often, very little breakage is left for the company to pay for operating expenses and employees. This breakage is absolutely necessary for a company’s survival. Some cycling binaries have even been known to pay over 100 percent! As a result, many companies using cycling binaries have gone out of business. Even with a poor track record, you can expect to see this plan again. There’s always some hotshot out there who thinks he is going to revolutionize the industry with a new plan, but hasn’t done his homework. It’s a good thing you’ve done yours.

To prevent cycling binaries, and other binary plans with limited breakage, from bankrupting the company, some plans have developed rules that act as a safety net to catch runaway plans. If the commission payout percentage becomes too high, the plan will start limiting the commission payout to each distributor so the plan doesn’t pay out too much. These limitations are called “income caps” and they’re absolutely essential to prevent serious problems with over paying distributors in any binary. This can discourage some distributors, but most intelligent networkers understand that this practice is absolutely necessary for the survival of a company.

Experience Can Break the Binary

In a few cases, experienced network marketing pros have joined a binary plan and have started recruiting at a massive rate. Having experience with compensation plans, these pro networkers know how to place all of their recruits into the plan to maximize profits for themselves. However, many company owners who implement the binary plan assume that enough distributors will not be able to balance their organizations perfectly, so enough breakage will flow upline to the company to pay for corporate operational expenses. A network marketer who launches a massive recruiting campaign and manipulates all of the volume to his or her advantage can sometimes “break the bank,” so to speak. These savvy network marketers perfectly balance their organization to exactly match the 50/50 or 2/3–1/3 requirements and maximize their commissions.

When companies create pay plans that pay too much, they’re still obligated to pay earned commissions, even if they have to pay more than they took in on the sales. Most companies now have income caps that restrict distributors from earning too much from their balancing act. Make sure the binary you’re investigating has income caps to protect your company from paying too much.

Controversy

The binary has been the target of some bad media and rumors in recent years. Some of these negative reports are based on the fact that many of the most visible or popular binaries have run into snags. In reviewing the case histories, it seems that in every case these programs were investigated, fined, or shut down based on criteria other than the compensation plan. Explosive growth, illegal income or product claims, unethical conduct, and unproven or ineffective products have had more influence on company shutdowns than the compensation plan. Some of the rumors about the disadvantages of binary plans have been started and perpetuated by distributors in other programs who consider the binary to be competition to their plan. The breakaway plan still has the record for number of shutdowns but it is also more widely used than any other plan as of this year.

Even though most of these shutdowns have little to do with the compensation plan, the perception is that binary plans will attract more heat from regulators, thus putting the company at more risk. This controversy can be difficult to deal with. If distributors do not believe in their compensation structure, they will have a hard time promoting it to others. If you have hang-ups with the binary or any other type of compensation plan, either get over it or get out of it. So many people hold psychological blocks because they think their compensation plan is repressive, when in fact it is their lack of productivity that is keeping them from making progress.

Binary: Overall Evaluation

Although the modern binary is constantly evolving, I found it to be a revolutionary plan and a top contender among today’s innovative plans. The binary is fair, lucrative, and has an element of synergy and teamwork not found in other plans. Avoid binary plans that market the compensation plan over the product line. If the main focus of every presentation in the dynamics of the compensation plan, the company will probably not make it. This can lead to trouble, even shutdown. Avoid companies that put a cap on their distributor’s volumes too early and force you to reenter your downline for additional streams of income. Do look for companies that cap distributor incomes for safety reasons so payout percentage does not go beyond what is reasonable and fair. This protects everyone in the plan. Try not to join companies that stress joining the powerline. Remember, many distributors will never have the advantage of being in a powerline and this can lead to major resentment and massive distributor attrition. Also, avoid binary plans that market non-consumable products or one-time-purchase product lines. History teaches us that these two elements don’t mix.

Mark Rawlins has been working with network marketing pay plans for over two decades. Mark commented on the binary plan, saying, “One thing is sure: the binary has been around long enough and has had enough success and has enough supporters that its place in the network marketing industry is assured. I think the controversy surrounding the binary will continue to subside. As the plan has become more mature, companies, distributors, and software vendors all know how to make the most of the strengths and deal with the weaknesses. There is no reason for the ‘surprises’ that plagued binaries in the early days to continue.”13

About the Author

Daren C. Falter is the author of the network marketing industry-wide best seller How to Select a Network Marketing Company. Daren has been a consultant to the network marketing industry for over 12 years and a student and participant for over 20 years. Daren has built downline organizations into the tens of thousands of distributors with several different companies. Daren is a popular convention speaker and trainer. You can visit Daren online at his blog at  www.networkmarketingreview.com. You can also order Daren’s best-selling MLM book at www.networkmarketingbook.com.

Daren recently launched a new network marketing company, Yoli, Inc., near Salt Lake City, Utah. Daren and his four partners are excited to introduced the worlds most nutritious beverage using patented BlastCap™ Technology. For more information about Blast Cap Technology, Blast Caps, or Yoli, visit Yoli at www.prelaunchinsider.com.

Copyright ©2009 DC Falter Marketing, Inc. ALL RIGHTS RESERVED

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