The ultimate aim of every venture is to make a profit. However, in most businesses, the process of profit calculation is straightforward. Let’s assume you work in sales for a company. In that case, whatever sales you make, you get the commission.
But MLM is different; here, profit calculation is not so simple. It’s because MLM businesses follow different compensation plans. Furthermore, compensation is also paid based on individual sales efforts as well as the contributions made by downline members.
Likewise, there are incentives, bonuses, rewards, etc., to incentivize the team members. With so many levels of compensation distribution, calculating the actual profit becomes an uphill task for MLM companies.
Calculating Retail Sales Profits
Retail sales are essential for MLM businesses to keep making profits. In this segment, we will explain how to calculate retail sales profit and the various aspects you must cover. But first, let’s understand the concept of retail markup.
Explaining the retail markup and potential retail earnings
Simply put, retail markup is the difference between the retail selling price and the actual product cost. In most cases, it’s represented as the percentage of the product cost. Let’s say you acquire a product for $100 and sell it for $110. In that case, your retail markup is $10 or 10% of the product’s cost.
Factoring in any wholesale costs or discounts for MLM members
The above example of retail markup is pretty straightforward. But in actual practice, MLM companies buy products in bulk at wholesale cost. This allows them to procure products at a lower cost, enabling MLM companies to offer more margin to their distributors or incentives and discounts. Therefore, while calculating the profits, you must factor in wholesale prices and any incentives or discounts you provide to the members.
Illustrating calculations with examples
Let’s clear up the concept of retail profits with an example.
Suppose you acquire one product at $120.
The retail price you have set – $170
You are also offering a discount of 5%, which is $6.
Therefore, your total product cost will be – Wholesale price + discount = 126.
So, Profit = retail price – product’s total cost
Retail Profit = $170 – $ 126
Retail Profit = $44
Let’s say you sold 15 units of that product.
Your total profit = 15 * $44
Total profit = $660
Estimating Team Commissions
MLM business is different from traditional models. It involves compensation plans and team networks. You have to factor in these aspects, too, to determine MLM profits;
Understanding the structure of downline commissions
MLM members are arranged in a chain-like structure often referred to as a downline. And distributors make money not only from their efforts but also from whatever business their downline does. Whatever members you recruit come under your downline. Similarly, members recruited by your downline also come under you, extending the downline further.
Different levels of the downline and their commission percentages
Firstly, downlines aren’t a single chain; instead, they comprise various levels known as generations. The amount of commission members can earn hinges on their level and the quantity of members in their downline. Moreover, the commission generally diminishes as you delve further into the downline.
Here’s a typical example;
Calculation based on the volume generated by your team
Now, transitioning to tracking sales and calculating actual profit, you need to assess the total sales volume generated by your team.
Here’s a simple workflow to do that;
Unpacking Bonuses and Incentives
Besides retail sales, MLM companies reward their members with incentives and bonuses for their extra efforts. These rewards serve as a motivation for team members and encourage them to give their best.
Here are some common types of bonuses in MLM;
In order to accurately calculate MLM profit, you have to factor in additional bonuses you offer to your downline.
Deducting Expenses and Costs
Besides product costs and commissions, there are other miscellaneous expenses that you must consider for profit calculation. These expenses might appear trivial but can quickly pile up and eat away all your profit. Being aware of them will help you keep them in check plus accurately calculate the final MLM profit.
Here’s how you can deduct these expenses and costs;
Considering Time and Effort
Profit isn’t only about sales and revenue. It also involves time investment and the ROI you generated in that time frame.
Here are some key considerations to look for;
Acknowledging the time and effort invested in building the MLM business
First, MLM, like any other business, requires time and effort to succeed. You have to acknowledge this fact and adopt ways that enable you to achieve more in less time. However, do remember that MLM is not an overnight venture. It takes time to build a customer base, nurture a downline, and develop a steady income stream.
Every business works for profit, and MLM is no different. But the process of MLM profit calculation is no easy task. It requires careful consideration of retail margin, compensation structure, commission percentage, etc. Unless you don’t understand how these factors impact the final revenue, you won’t be able to calculate profits accurately. Given the number of factors that influence MLM profit, it will be prudent to employ tools that could automate the entire MLM profit calculation process.