Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or...
Reexamination Certificate
1999-04-14
2002-07-16
Hafiz, Tariq R. (Department: 3744)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
C705S014270
Reexamination Certificate
active
06421648
ABSTRACT:
BACKGROUND OF THE INVENTION
1. Field of the Invention
This invention relates generally to the field of data processing systems for the management of compensation plans used by merchants who use Network Marketing or Multi-Level Marketing (MLM) as a marketing approach. In this document, Network Marketing or MLM is defined as “an approach that remunerates participants for the purchases made by the people that they directly and indirectly introduced to particular products and/or services.” Note that, in order to take into account the latest trends brought by the intensive use of computer technology, this definition of MLM covers both models where participants physically distribute products and where they do not (no matter the names or legal status that participants are given).
2. Description of Prior Art
Thirty years of marketing literature (product diffusion theory in particular) has abundantly documented the natural existence and the strategic importance of the consumers' word-of-mouth. Word-of-mouth is the most effective form of commercial communication because it is timely, culturally adapted and interactive. Every day, it presides over a great number of marketing successes and failures. In fact, positive word-of-mouth is actually what mass marketers are seeking to generate when they define specific product positioning that they communicate through mass communications, mass distribution and packaging.
As a marketing approach, MLM aims at the same goal as mass marketing: create and keep a customer base for a specific offer. To do this, mass marketing companies try to create the social conditions for people to want to communicate their offer for free while MLM companies offer the people the possibility to be remunerated to communicate and distribute the offer to other people who will, in turn, do the same.
In order to be translated into a commercial success, word-of-mouth (natural or remunerated) requires the participation of a growing number of individuals. As opposed to what is expected of a traditional salesperson, one expects that an MLM participant does more than introduce the offer to end-consumers. In fact, one expects that a participant find other participants who, in addition to buying the offer, diffuse both the offer and the opportunity to other people around them. The very fact that more and more people accept to diffuse the offer and the opportunity ensures that, in the end, the offer reaches a large portion of the potential customers. In addition to necessitate a growing number of participants, MLM must deal with one normal economic constraint: the price at which a particular offer can be competitively sold sets a maximum margin that a company can give to those who contributed directly or indirectly to the end-sale. Combining this economic constraint with the nature of word-of-mouth, one realises the challenge that MLM must address in order to be effective: “it must divide up a fixed margin among a growing number of participants while motivating them to introduce more people to the offer over time”.
In order to remunerate people, MLM companies must trace the diffusion of the opportunity (which participant has introduced which participants) and the purchases of every participants. Such data is collected, stored and exploited thanks to computerized data processing systems. The precise exploitation of the data is defined by the compensation plan that determines exactly how the word-of-mouth is remunerated. To date, a plethora of MLM compensation plans have been developed. In the following paragraphs, we will introduce the idea that they come from two families of plans and we will explain why they fail to address the above MLM challenge.
A first family of plans can be seen as “Non-Differential”. This family of plans includes compensation plans commonly known as Unilevels, Matrix and Binaries (30% of MLM compensation plans in existence today). All Non-Differential plans remunerate participants by offering predetermined margins on the business volume of a predetermined number of levels of downline (i.e. a number of generations directly and indirectly introduced to the offer by a particular participant). In Example 1 below, we illustrate the principle common to Non-Differential compensation plans.
EXAMPLE 1
Illustration of the Principle of Non-Differential Compensation Plans
In Example 1, the total margin to be redistributed is 20% (5%+5%+5%+5%) and the number of levels on which it is applied is 4. Note that the margin to be applied can vary from one level to the other (e.g. 2%+1%+7%+10%) and that the number of levels can theoretically be as high as infinity.
According to Example 1, if a participant has 4 participants on his level 1, 6 on his level 2, 8 on his level 3 and 11 on his level 4, and if each participant purchase $10 during a particular period, the compensation for that period is calculated as follows: (4×$10×5%)+(6×$10×5%)+(8×$10×5%)+(11×$10×5%)=14.50.
For a given number of downline participants who purchase a given quantity of product/services, Non-Differential systems pay out as much money to a participant who personally introduced only one person (small individual effort) as it does to a participant who personally introduced tens of people (big individual efforts). As illustrated below, let's assume that our participant in Example 1 had the same number of participants in 4 downline levels (same business volume) but that his individual effort is four times less. For example, let's assume he personally sponsored 1 participant, who sponsored 9 participants who collectively sponsored 8 participants who sponsored 11 participants.
Under this scenario where he does not perform individually, the compensation of our participant for that period is ($10×5%)+(9×$10×5%)+(8×10×5%)+(11×$10×5%)=$14.50 which is exactly the same as when he personally introduced 4 people.
Example 1A
Two Possible Sponsoring Scenarios According to Example 1
Obviously, such plans do not effectively address MLM's challenge to divide Lup this 20% fixed margin among a growing number of participants while motivating them to introduce more people. As rational economic agents, people tend to optimize their ratio “Potential Gains/Effort”. Since the “Effort” rows faster than the “Potential Gain” when one introduces people who are not in one's intimate social circle, the natural tendency'is to introduce the offer to a few and hope that they themselves build a large group of participants. All other things being, equal, the money given to participants who do not make significant individual efforts is not available to be given to those who make significant individual efforts. Doing so, Non-Differential plans fail to effectively motivate participants to make more efforts.
Approximately 70% of MLM compensation plans in existence today belong to a second family of plan that can be considered as Semi-Differential. Those plans are commonly known as Stair-Step/Break Aways (“SSBAs”). They are considered Semi-Differential because they use a two-pronged method to calculate the compensation of participants. First, they use a “Stair-Step” Differential method and then they switch to a Non-Differential method (similar to the one described above) commonly called “Break Away”.
The Stair-Step Differential component of SSBAs consists of providing participants with a discount table that associates a limited number of discount levels (margin) to different brackets of business volume purchased by a participant's entire downline or group (no limit in the number of levels at this stage). A participant's net discount (margin) is the result of a subtraction between that participant's discount and the discounts applicable to those that s/he personally introduced (first downlines). In Example 2 below, we illustrate the kind of discount table common to Stair-Step Differential components in SSBA plans.
EXAMPLE 2
Illustration of a
Gagnon Louis
Valay Yann
Brouillette Robert
Hafiz Tariq R.
Kosie Ronald S.
Norman Marc
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