“Breakage” is money that’s kept by the MLM company that otherwise could have been given out to distributors in the field. Why should companies look after distributors and give out as much money as possible? Because MLM companies are nothing without their distributors. Bare that in mind as you read this.
In the world of network marketing, there’s front end breakage and there’s back end breakage or what’s commonly referred to as compensation plan breakage. For this article, let’s take a look at front end breakage. Front end breakage is actually built into the business model and here’s how it works…
There are thousands of MLM companies in all kinds of industries. The majority of them are in the health and wellness industry and they sell consumable products such as shampoos and creams, vitamins, weight loss formulas and super jungle juices etc., etc.
Most of these companies say they produce their own products. But that’s only a half-truth. The whole truth is there are nine or ten manufacturing companies that make all of the products for the thousands of network marketing companies in the health and wellness arena. Some companies do manufacture their own products, but that is very rare. The companies do however, specify their own special formula for each of the products manufactured.
Now let’s say an MLM company contracts one of these manufacturing companies to produce a juice for them. And let’s say the cost to the company for purchasing the product from the manufacturer is two dollars ($2).
Normally, the company would sell that product to its distributors for say, fifteen dollars ($15). All the of distributors are compensated fairly according to the pay plan and everybody is happy.
But let’s say this company and their king pin hot shot distributors are a little bit greedy and they want to take a little bit more money from the distributors who work hard to build their business in the field.
So what they do is setup an marketing company or marketing division that purchases the juice from the manufacturer at the same wholesale price of two dollars ($2). They then sell the juice to the actual MLM company for four dollars ($4).
They have just created one hundred percent (100%) profit, which is two dollars ($2), even before the product gets into the hands of the distributors. And now the company and the king pin hot shot distributor can now split the profit 50-50 and they can laugh all the way to the bank.
The MLM company still sells the juice to its distributors for $15, so now there is two dollars ($2) less margin. That means, the company pays out less in compensation to the field because that commission has been stolen by breakage that is built into the business model.
So that’s how front end breakage works and there are MLM companies that do this.
Just how much money can a company make with this form of breakage? Well, if a company moves about 250,000 bottles of juice per month, that means the king pin hot shot distributor and the company owners that put this breakage in place are making an extra $500,000 profit every month! That’s $500,000 that has not been paid to the hard working distributors in the field.
wholesale business model
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