Hi this is Robert Proctor. Do you ever wonder how commission volume (CV) is determined in a multi-level marketing compensation plan? Stay tunes, I’m going to show you how. You know every week I consult with multi-level marketing clients and potential multi-level marketing clients. One of the questions I’m asked most is How do we determine the commission value of a product for a compensation plan? Well, the mathematic formula is pretty simple. I’m going to take a few minutes here and actually show you how to determine CV or what we call commission value based upon a product that you want to sell through multi-level marketing. The first and most important thing to determine is what is your cost of goods?
For the example here, I determine my cost of goods for my widget is $10. Typically in network marketing most multi-level marketing companies mark up their price by 6-8 times their cost of goods. For this example I’ve marked it up 8 times. I’ve taken a $10 cost of goods and marked it up in a retail sales price of $80. That retail sales price is normally what your retail customers are going to pay for the product. Not preferred customer’s, that’s something that we’ll save for another time. Your retail customer that doesn’t participate in the business opportunity is going to pay $80 for that.
What do distributors pay? Well, most distributors join your network marketing company so that they can by the product at wholesale. We actually talk about if you promote the product they’ll stay for the opportunity. If you’re promote the opportunity, there just leaving for the next opportunity. Most distributors are focused on joining a multi-level marketing company so that they can enjoy the discount offered to distributors. Typically, you’re going to offer a 20-30% discount to your distributors when they participate in the network marketing opportunity.
Here we offered a 20% discount or a 25% discount. Our product retails for $80. We’re going to give a distributor a 25% discount. That also means that when the distributor sells this product to a retail customer they’re going to earn the difference normally between the 60 and $80. That’s what’s called a retail sales profit. The distributor price here is $60. Now the most important question at all that I’m asked is, “How much is the company going to keep?” And when I ask a client this I always tend to joke, “You can’t answer all of it.” In this scenario we’ve decided the company is going to keep $15.
In the typical retail sales industry, there’s a terminology known as keystone and that’s usually where a company takes their product cost to goods for $10 and they double it. They retail it for $20. Well we know in network marketing there’s much more value provided by distributors, provided by the company so we can usually tend to mark products up a little bit higher. We decide here that the company is going to keep $15 profit. That’s after they cover their cost of goods. What’s our commission value? Our commission value is $35. $35 is the amount that we can afford to pay through the compensation plan.
We’re not going to design comp plans today, that’s for another episode. How do we determine the 35? Well bottom line, the $60 price paid by distributors, less the $10 cost of goods, less the $15 that’s kept for the company. We have a commission value available of $35. There’s 2 schools of thought on how we’re going to pay that $35 out through the compensation plan. My recommendation, just set your commission value, your (CV) at $35 and then the compensation plan should be designed to payout 75-80% of that. Again, in a future episode I’ll go into why we don’t pay out 100% of that, there actually specific, unique reasons for that.
Set the CV at 35. It’s pretty easy to calculate from there. The other option asset your CV your commission value at 80 which is your retail sales price and then pay out about 43%. How did we get 43%? Well, simply our available commission is $35. 35 is 43% of 80. Again, 2 schools of thought on how you can pay it, pay out the compensation plan pay out the commissions. This is Robert Proctor, I hope you got some value from this information. If you did make sure to like it, share it, send some people to watch the video and have a great day. We’ll see you on the next episode. Thank you.
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