Herbalife Review: Pyramid scheme or not?
Herbalife operate in the health and wellness niche of the MLM industry and is based out of the US state of California, however is incorporated in the Cayman Islands (a known tax-haven).
Herbalife was founded way back in 1980 by Mark Hughes, who purportedly sold Herbalife products “from the trunk of his car”.
Hughes often stated that the genesis of his product and program stemmed from the weight loss concerns of his mother Joanne, whose premature death he attributed to an eating disorder and an unhealthy approach to weight loss.
His goal was to change the nutritional habits of the world.
Despite achieving success with Herbalife however, Hughes died in 2000 from an ‘accidental overdose of alcohol and doxepin, an anti-depressant‘.
What the exact story there is I’m not sure but Herbalife continued to plough along and today is headed up by Chairman and CEO Michael Johnson (photo right).
For a broader history of Herbalife be sure to check out their Wikipedia entry, whereas here I’m going to focus on three recent events involving the company.
In November 2011, after seven years of litigation, the Commercial Court in Belgium ruled that Herbalife was a pyramid scheme.
The case was brought forward by the non-profit organisation “Test Aankoop” and claims that Herbalife breached the WPMC (market practices act) by running a pyramid scheme.
In response, Herbalife filed a defamation counterclaim (surprise surprise) against Test Aankoop.
As is often the case here on BehindMLM, analysis by the court focused on the revenue makeup of Herbalife and what its distributors were primarily compensated for doing.
In comparing retail and downline (internal consumption commissions), the court noted
the provided incomes out of the distribution network are therefore significantly higher as the provided incomes from the same amount of clients (retail customers).
there is a chance of a compensation which is derived primarily from delivering (recruiting) new distributors into the system then out of the sale or the usage of the products.
Furthermore the most purchases were performed against a discount percentage of 25% and 35%, which shows that Herbalife is getting the biggest part of her profit out of the distributors.
Following the foregoing shows that it is a lot more profitable for a supervisor to sell to a distributor, rather than selling directly to a consumer.
Herbalife tried to argue that their distributors purchasing product counted as retail sales (with the distributors purportedly eventually selling the product purchased to retail customers), but ultimately failed.
Curiously, in making such a claim Herbalife attempted to place the burden of proof in proving that their distributors went on to sell internally purchased products to retail customers on Test Aankoop, rather than themselves.
Herbalife of course couldn’t provide any proof as they don’t track what their distributors do with purchased product (despite have a 70% rule in their distributor agreement), with the court rejecting the notion that Test Aankoop prove Herbalife’s claim.
Ultimately the Commercial Court found Herbalife
in breach of Articles 91, 4 and 99 of the Act regarding market practises and consumer protection because it has established,managed or promoted a pyramid scheme.
The defamation counterclaim against Test Aankoop was dismissed. The entire order from the Commercial Court can be viewed here.
Fast forward to December 2012 and it is this time in the US that pyramid scheme allegations arise. On the 20th of December 2012, hedge fund manager Bill Ackman (photo right) gave a three-hour long presentation detailing why he believed Herbalife was a “modern day Ponzi scheme”.
Accompanying the presentation was a 300 page long slideshow, which after the presentation Ackman said would be “handed over to the regulators”.
Ackman’s claims were instantly dismissed by Herbalife CEO Michael Johnson, who claimed that Ackman’s presentation was ‘a ridiculous assertion by people who are trying to manipulate our stock‘.
Johnson, who was America’s best paid chief executive in 2011, said his lawyers “would go crazy” if he went into too much detail about why Ackman’s analysis was “bogus”.
He added that he would ask the US Securities and Exchange Commission to investigate the hedge fund tycoon’s motives.
And it appears investigate they will.
On January 9th 2012, it was uncovered that the SEC (New York) had launched an “inquiry” not into Ackman, but into Herbalife itself:
The Securities and Exchange Commission has opened an inquiry into Herbalife Ltd. amid an intensifying public battle between the seller of nutritional supplements and a hedge fund that argues it is a pyramid scheme, a person close to the probe said Wednesday.
The inquiry is being led by enforcement officials in the SEC’s New York office, the person said.
The probe won’t necessarily result in any enforcement action, but it adds pressure on Herbalife a day before a meeting with investors at which the direct seller has promised a full rebuttal of the allegations lodged by hedge-fund manager William Ackman.
The inquiry by the SEC’s enforcement division follows scrutiny of Herbalife’s financial disclosures by the regulator’s corporation finance division last year.
A spokeswoman for the SEC declined to comment. Herbalife had no immediate comment.
I myself haven’t read Ackman’s presentation or written anything up till now on this issue, and that’s solely because to date I haven’t reviewed Herbalife on BehindMLM.
Typically I place established MLM companies towards the bottom of my review list because there’s usually more than enough information out there on them. Newer companies tend to have less information out there on them and as such I tend to favour researching and analysing them first.
With the recent developments surrounding Herbalife however and potential SEC action looming later in the year, it occurred to me that if I want to comment and write on the subject with any real confidence, then I’ll first have to do a formal review Herbalife and its business model. So here it is.
Read on for a full review of the Herbalife MLM business opportunity.
The Herbalife Product Line
As mentioned at the start of this review, Herbalife operate within the health and wellness MLM niche.
Translating this into a product line, Herbalife market a range of health and wellness products including
- weight management – shakes, meal bars, protein powder, “enhancers”, soup, nuts and protein bars
- “targeted” nutrition – heart health products, male, female and childrens tailored nutrition supplements, “healthy aging”, digestive health, the immune system and stress management
- personal care – aloe based cream, wash, gel, shampoo and conditioner, multivitamin skin treatments, skin revitalizers, anti-aging and fragrances
- energy and fitness – sports formula, guarana tablets and tea, fitness drink and a “Herbalife 24” performance nutrition range
The Herbalife Compensation Plan
The Herbalife compensation plan is poorly presented with the official documentation lacking any real structure or flow. As such I’ve tried my best to represent it here with some sort of logical grouping.
Apologies if it’s confusing but the source material I had to work with was quite poor to begin with.
Retail Profit in Herbalife is defined as
the difference between the discounted product price paid by distributors and the retail price paid by their customers.
Herbalife state that this retail profit equates to 25 to 50% of the retail price of the product.
Wholesale Profit in Herbalife is defined as
the difference between the discounted price distributors pay for
products and the discounted price paid by their personally recruited distributors.
Herbalife state that if a distributor sells products directly to their recruited distributors (downline), they ‘can earn up to 25% wholesale profit‘.
If recruited distributors purchase product directly from Herbalife, then the company pays out the wholesale profit as an override, to the first qualified “Supervisor” in the purchasing distributor’s upline.
Much of the Herbalife compensation plan revolves around “points”, which are allocated upon the sale of Herbalife products by a distributor to either customers or recruited distributors in their downline.
Distributors themselves can also generate volume via the direct purchasing of Herbalife products from either the company or their upline.
“Personal Volume” is defined as all volume generated by a distributor and their recruited downline, up until the first qualified “Supervisor” is found in the downline (this is done via a unilevel I believe and is sorted by levels).
“Group Volume” is generated by newly qualified Supervisors who place orders in their first month of qualifying. Group Volume can only be earnt by distributors who are ranked as qualifying Supervisors or above.
Finally for the purposes of rank qualification volume points can be deemed “encumbered” or “unencumbered”.
Encumbered points are volume points used by another distributor in your downline for qualification purposes (they can be used by both of you, it’s just classified as encumbered). The points that qualify as encumbered are those generated by distributors between a distributor who qualifies as a Supervisor and a Supervisor who is generating 2500 volume points a month.
Unencumbered points are volume points generated by any distributor, counted down to the first qualified supervisor in any unilevel lineage leg (generating less than 2500 points a month total each), as well as a distributor’s own personally generated volume.
Senior Consultant Sliding Scale
When a distributor joins Herbalife and starts earning retail and wholesale profit, they do so purchasing product themselves at the wholesale discount rate of 30% (effectively resulting in a 30% commission upon reselling of the products to either recruited distributors or customers).
Via the Senior Consultant Sliding Scale, this margin is able to be increased on a scale to up to 42%. Distributors must qualify for the Sliding Scale, and are able to do so in one of three ways:
- Personally purchase a single order worth 400 volume points or more of product or more that month
- Personally purchase a total of 800 volume points or more in a month, composed of orders consisting of less than 400 points each (product purchased after the qualifying 800 points is scaled)
- Accumulate 400 volume points or more over two consecutive months (failing to qualify under criteria 1 and 2 above), which result in sliding scale qualification for the following third month (it does not apply retrospectively to purchases made during the two qualifying months)
Once qualified for, the scale is tied into total volume (personal + group volume) generated as follows:
- 0-424 points – 30%
- 425 – 549 points – 35%
- 550 – 799 points – 38%
- 800 – 999 points – 40%
- 1000 – 1999 points – 41%
- 2000 – 4000 points – 42%
- 4000+ points – 50%
Herbalife Membership Ranks
There are three primary membership ranks within the Herbalife compensation plan. Along with their qualification requirements, they are as follows:
- Distributor – sign up to the company and pay a joining fee
- Senior Consultant – see qualification criteria for sliding scale in “Senior Consultant Sliding Scale” above
- Supervisor – generate 4000 volume in a month (1000 unencumbered) or generate 2500 volume for two consecutive months (1000 each month unencumbered)
Supervisor distributor status is an annual qualification, which must be met between February 1st and January 31st of the following year to maintain Supervisor status for another 12 months.
Also note that genealogy wise, a Supervisor who has a Distributor in their downline qualifying to become a Supervisor must be able to match the qualifying Supervisors volume production during their qualification month(s).
If the upline Supervisor is unable to do so, the qualifying Supervisor is shifted up to a qualified Supervisor above their upline who is able to match their volume generation (all future commissions are then paid out to this upline Supervisor).
Royalty Override Income
Royalty Overrides in Herbalife are paid out using a unilevel compensation structure. A unilevel compensation structure places a distributor at the top of the structure, with every personally recruited distributor placed directly under them (level 1).
If any of these level 1 distributors recruit new distributors of their own, they are placed on level 2. If any level 2 distributors recruit new distributors, they are placed on level 3 and so on and so forth.
Using this unilevel compensation structure, a qualified Supervisor Distributor is able to earn an override bonus on the volume generated by Supervisors down 3 levels.
The override is a percentage of the volume generated by Supervisors in these first three levels, with the percentage being determined by a distributor’s own total monthly volume generation:
- 0 – 499 points – 0%
- 500 – 999 points – 1%
- 1000 – 1499 points – 2%
- 1500 – 1999 points – 3%
- 2000 – 2499 points – 4%
- 2500+ points – 5%
Note that Supervisors who qualify for overrides must also have made sales to ten individual retail customers for that month (no minimum volume). This is an ongoing monthly requirement for override qualification.
Global Expansion Team
The Global Expansion Team (GET) is the first of three Herbalife membership levels that extend past Supervisor.
GET distributors earn a 2% Production Bonus on the volume of their downline if they generate 5000 volume points for that month. The volume counted uses the unilevel compensation structure outlined above and continues down until another GET or higher ranked members is found.
Additionally GET members also “qualify for vacation and training events”.
Qualification for GET distributor status is the generation of 1000 Royalty Override Points for three consecutive months.
Millionaire Team distributors are able to expand the Production Bonus to 4% if they generate 3000 volume points and 4000 Royalty Override points in any given month. Failure to qualify results in a 2% Product Bonus being paid out.
To qualify for the Millionaire Team, distributors must generate 4000 Royalty Override points for three consecutive months.
President’s Team distributors are able to expand the Production Bonus to 7%, depending on their generation of Royalty Override Points:
- President’s Team (6% Production Bonus) – generate 10,000 Royalty Override points over three consecutive months
- 20k President (6.5% Production Bonus) – generate 20,000 Royalty Override points over three consecutive months
- 30k President (6.75% Production Bonus) – generate 30,000 Royalty Override points over three consecutive months
- 50k President (7% Production Bonus) – generate 50,000 Royalty Override points over three consecutive months
Note that at the Presidential Level the Production Bonus extends beyond the first GET or Millionaire Team Distributor found in a downline. A further 4% Production Bonus is paid out on the downline of a GET Distributor and 2% on a Millionaire’s Team Distributor’s downline.
Also note that this is an ongoing monthly requirement and that should a distributor fail to reach their Royalty Override point target, they will be paid out at the level they did qualify for (all the way down to the 2% GET Production Bonus rate).
Luxury bonuses (in the form of jewelry and diamond studded pins are also awarded to distributors, based on annual Royalty Override point generation (15,000 for cufflinks and earnings to 1,000,000 for a diamond watch.
Distributorship costs for Herablife are not provided anywhere on the Herbalife website.
Third party sources have pegged Herbalife distributorship between $60 to $200.
Why Herbalife are not upfront about the cost of becoming a distributor on their website I have no idea.
In conducting the research behind this Herbalife review I came to understand why Herbalife was nailed for being a pyramid scheme in Belgium and, despite not having read Ackman’s report, where he was most likely coming from on his claims.
Is it possible that Herbalife is one big giant pyramid scheme?
Before we get into the Herbalife compensation plan, let me preface by stating that it’s not available on the Herbalife website and is extremely poorly presented in a manner I found to be highly disjointed and headache inducing.
I go over countless MLM business models and compensation plans as part of my research for BehindMLM so if I wanted to stab myself in the eyeball with a pen after spending hours making sense of it, I can only imagine what your average new Herbalife distributor must go through.
Seriously, Herbalife’s explanation of encumbered and unencumbered volume is enough to do anyone’s head in.
For a company that’s going into its thirty third year of business I felt this was simply inexcusable. Add to the fact there’s no information on how much it costs to join the company as a distributor and I was finding it hard to believe this wasn’t all entirely intentional.
The hiding of pertinently important information from prospective members and the general public by MLM companies is an age-old marketing tactic, designed to restrict information flow out of the company unless it is via their preferred channels. In this case, that’d obviously be via a Herbalife distributor looking to sign you up.
In 2013? Not good enough guys.
That aside, the single most problematic issue I see with the Herbalife compensation plan is the complete lack of incentive to sell products at a retail level.
Aside from the upfront wholesale and retail commissions offered, all other commissions and bonuses revolve around point generation, with Herbalife counting both distributor and retail customer purchases the same (they both generate volume points).
As such, aside from the Royalty Override and Production bonuses requiring monthly sales to ten retail customers to qualify, it’s entirely possible to set up an endless chain of recruitment, with distributors qualifying eachother via their own product purchases.
No doubt Herbalife will try to explain this away by stating that their distributors go on to sell these products to actual customers, thus counting as retail sales but this is simply not the case.
Distributors are not employees of Herbalife, as per the company’s own FAQ:
Aren’t independent distributors employees?
No. The more than 2 million Herbalife independent distributors are not company employees; they are independent business people. They choose how and when to operate their own businesses.
As such what they do with the purchased products is entirely irrelevant to analysis of the revenue generation by Herbalife. This is true regardless of whether Herbalife distributors do indeed go on to sell their purchased product to customers, toss it in the bin or resell it to other Herbalife distributors.
All that matter is where the revenue comes from and who is buying the product, which in the case of distributors purchasing the product from Herbalife themselves, would quite obviously be the distributors (internal consumption).
One major area of the Herbalife compensation plan I failed to understand was the ability of new distributors to purchase product from their uplines. Apart from generating commissions for their uplines, I fail to understand the motivation behind purchasing product from one’s upline, rather than directly from Herbalife itself.
The glaring flaw in this is that it costs more to purchase from your upline than from the company itself!
Given this, I’m at a complete loss as to why this option even exists.
Even more bizarre is the option for distributors to bypass their own direct sponsor and purchase product from the next qualified Supervisor in the upline. Why on Earth would any distributor feel the need to do that???
Inexplainable as they might be, the existance of both options means it’s entirely possible to set up a never-ending chain of recruitment where distributors join Herbalife, purchase hundreds if not thousands of dollars of product (the more they purchase the greater their commission via wholesale discount), sell it to recruited distributors – who then must do the same in order to earn.
Incentives like the “Success Builder” only compound the probability of this happening, offering a 42% wholesale discount if a distributor purchases 1000 volume points of product (once off).
And of course, under the guise of “duplication”, all of this would be replicable over and over again with all distributors participating earning commissions off of eachother’s purchases.
Retail sales would only come into question to qualify for the Royal Override and Production Bonuses, and even then with only “ten sales a month” required to be made of any value, would most likely wind up being a mere fraction of the internal distributor revenue being generated.
This is precisely what brought down Herbalife in Belgium, after the company unsuccessfully (and rather stupidly) attempted to argue that its distributors were indeed retail customers.
They also unsuccessfully argued that because their distributors went on to sell their internally purchased product to retail customers, these counted as retail sales. Nevermind the fact that proof of this was absent, this is an equally absurd claim to make given that quite obviously distributors purchasing product from the company does not count as a retail sale as far as the company itself goes, regardless of what the “independent business people” do with said product after it is purchased.
Is this happening within Herbalife US or elsewhere in the world?
Now that I can’t say but it’s no doubt the basis of Ackman’s claims and will unquestionably form the basis of the SEC’s recently announced investigation into Herbalife.
On the defense side, despite the Herbalife compensation plan being stacked, dollar for dollar towards recruiting distributors who purchase product over selling to retail customers (a once off 50% commission dead end per order), it’s entirely possible for distributors to generate the bulk of their commissions by actually selling to retail customers (none of this purchase the product first as a distributor and then resell it nonsense).
Whether or not that’s happening? Ackman and his team investigated Herbalife for a year before going public with their claims and no doubt the SEC will be even more rigorous in their investigation.
Simply put, anything than more than 50% of Herbalife’s revenue coming directly from its distributorbase (regardless of what happens to the products purchased), puts them in pyramid scheme territory.
Which in itself is kind of worrying when you consider the flawed definition of a pyramid scheme Herbalife themselves use on their website:
4.Isn’t Herbalife just a pyramid or Ponzi scheme?
No. Herbalife is not a pyramid or Ponzi scheme. Ponzi schemes are set up to fraudulently generate money for people at the top of a pyramid-shaped organizational structure.
These schemes depend on a constant inflow of new participants to contribute money to the longer-term participants in the pyramid’s structure.
Such schemes stay afloat only as long as new members continue to come in and give money to earlier arrivals. Sooner or later, such frauds collapse when they can no longer persuade new victims to keep giving money.
Pyramid or Ponzi schemes are illegal, while multilevel or network marketing organizations such as Herbalife are carefully regulated and are legal business structures that involve the sales of real products of value to consumers.
Consumers yes, but are they distributors or retail customers and is the retail arm of the business providing the majority of Herbalife’s revenue?
That’s the multi-billion dollar question here.
Webster vs. Omnitrition stated very clearly that “ultimate consumer” cannot be a part of the comp plan. If someone’s eligible for the comp plan, they are not ultimate consumers, and with no ultimate consumer, there is no “sales” and therefore the company’s no MLM.
This also brings up an interesting question… just how much “profit” does an average Herbalife affiliate earn via their definition of “retail”? Because according to their disclosure statement in 2009, only 25% of all affiliates qualify for any bonus, and of those, average is 5000 a year.
Click for Herbalife Distributor Average Gross Compensation 2010
This information is conspiciously absense from all Herbalife’s income disclosure statements. I believe they just throw up their hands claiming to not know because they don’t track what their distributors do with purchased product, whilst conveniently ignoring that distributor purchased product doesn’t count as retail in the first place.
The fact of the matter is Herbalife know damn well how many retail customers they have purchasing product from the company but they don’t reveal it.
Whatever the figure is it wasn’t enough to save them in Belgium… and with the same comp plan the world over it’ll be interesting to see if anything develops now that the SEC are involved.
The Transcript between Einhorn, another hedge fund shortseller (May 1st, 2012) and the Herbalife CEO and CFO also raises some interesting points. This is from my blog entry:
Link to transcript:
Well if the SEC demand to know what their actual retail customer revenue is and they pull out the “we don’t routine” that isn’t going to end well for anybody.
It’s a simple search, what is the revenue brought in by customers in your database who aren’t distributors?
Should take all of 5 seconds to pull up.
If they claimed they primarily sold stuff to their “distributors” and from there on how much is retailed they just have “no visibility”, that’s gonna be a whole can of worms.
Not if the SEC have any balls.
Herbalife tried that crap in Belgium and got fried. Selling to distributors isn’t retail, end of story.
Herbalife’s presentation today appears to be a fluff piece,
Uh, just get on with it and reveal how much of your revenue is retail vs. distributor funds. It’s oh so easy.
This is starting to feel like Zeek Rewards’ “we are fully compliant but we can’t answer that because it would put us out of complaince” crap all over again.
I don’t think Herbalife knows or even WANTS to know how much product is being sold “at retail” or to “end consumers not part of the HLF structure.” Because knowing could leave HLF in the position of not following its own 70 percent rule, to say nothing of being open to pyramid scheme charges.
I’d also like to note that just because a business has been around for 33 years doesn’t make it immune from being a pyramid or a Ponzi. Exhibit A: Bernie Madoff.
That’s just it Chang. Herbalife sells directly to distributors, who inturn sell to customers which isn’t much of a profit.
The Distributors out weigh more than retail customers, because those “customers” are encourage and eventually become distributors and so on…
The Herbalife President seems nervous:
Did i hear right? Did he just say that the distributors are their customers???
The truth is they themselves admitted back in May 2012 that they don’t know how many retail customers they have that are NOT distributors, as the WSJ transcript shows above (I linked) thus any claim that they *do* know is going to be weighed against that statement… clearly they can’t both be correct.
This may indeed lead to an FTC action… and it’ll be ugly, but Webster vs. Omnitrition is gonna be front and center stage, and the question is… what did Herbalife pay its distributors on?
My notes on that Des Walsh video:
This is going to get legally messy and stockmarket aside, from my point of view all I see is a multi-billion MLM company lawyering up to sue a critic which is worrying.
They’ve had their chance to publicly rebut Ackman’s claims… so why sue if not to discourage other critics and Ackman himself?
This was a bit ‘hmmm..’:
“You said you’d answer all questions about the company in the coming days. Ackman said he has some questions, do you plan to answer them?”
“It depends on the question…”
If Herbalife are committed to total transparency and I was Ackman, I’d be ramming home the whole “what percentage of your retail customers make up your annual revenue” point home repeatedly.
It’s total BS that Herbalife don’t know this as it’s a 5 second database lookup of their retail customers and how much money they’ve spent, vs. their distributor revenue.
And having just written the above review, I find “the commitment to total transparency” claims by Des Walsh to be a bit of a laugh. Herbalife doesn’t even have it’s compensation plan available for prospective distributors to view, nor does it clearly display joining costs on their website.
Along with the retail figures, it’s all obscured.
Des Walsh claiming that the number of retail customers they have “doesn’t matter from a regulatory prospective” was also eyebrow raising. Of course it matters!
No customers and you’re a scam!
5 million customers were cited, so WTF can’t they publish the revenue makeup these customers bring in vs. distributor revenue?
Walsh’s definition of “distributor” is also massivey flawed and irregular.
Why they are distributors are distributors is entirely irrelevant! Distributors != retail customers – period!
If Herbalife doesn’t have genuine retail customers they are completely up shit creek and by Walsh’s own admission, this appears entirely to be the case (“the majority of our customers are distributors”).
Trying to hide behind the income disclosure only counting sales made through the company was silly too. For the purpose of business analysis, revenue being generated by the company is all that matters.
What the distributors do or don’t with the products has nothing to do with the Herbalife business model, anymore than McDonalds trying to count me selling a BigMac I’ve just bought to a homeless man for $10 as McDonalds’ own revenue.
From who is the money flowing into Herbalife from, retail customer or distributors – and which is the majority?
This our distributors are our customers who sell to customers crap doesn’t cut it. Not by a longshot.
Walsh redefining the definition of a pyramid scheme so as to be determined by “qualification volume” was wonky too. With annual qualification of course the bulk of distributors buying product isn’t for qualification purposes (nevermind the fact that none of it should be).
What’s far more pertinent is are the distributors buying the product themselves simply to generate commissions, by passing said product onto new distributors who for reasons unknown would then buy product from their new uplines at a more expensive cost rather than from the company itself – simply for the purpose of generating distributor commissions.
Herbalife would do well to not try and redefine longstanding termninology that has defined the MLM industry for decades, along with being tested and proven in court.
And Walsh is going to go ahead and deny (“no indication) that regulators are looking into Herbalife, despite the reports yesterday that the SEC have launched an inquiry. Riiiiiiiiiight.
See, they have the retail sales figures but they are obviously not making up the majority of revenue:
A “significant number” != majority. Thus it’s clearly looking as if distributor (internal) money is going to be found to make up the majority of Herbalife’s US revenue.
It brought them down in Belgium and if the regulators are on the ball Ackman is right, it should be enough to take them down in the US too.
We’re talking about retail customers (A) and they keep harping on about end-users (B). It’s good to see the wordsmith games are just as alive and well with the bigger well established MLM companies as they are with the smaller scammy players we usually see this type of tactic from.
Here’s some more which should be familiar to long-time readers:
Attempting to justify one’s self by hiding behind unrelated non-MLM businesses and companies.
“This is all crap! Call me for the real story”, oh please.
It was also mentioned that a major distributor had quit recently in light of whats happening. If Herbalife goes down, then its over for the MLM Industry.
Troy Dooly would disagree hands down. Distributors/Affiliates are the life blood of any MLM business not retail sales period. The products of any mlm is just a “cover” for the pyramid scheme.
I think after the Zeek Rewards common-sense debates we had I think even Troy Dooly would have a hard time arguing that distributors = retail customers.
If distributors = retail customers is at the centre of Herbalife’s “we are not a pyramid scheme” claims then it’s game over.
The MLM Attorney Kevin Thompson snagged a copy of Ackman’s presentation and it’s available here:
I’m looking through it now, and Loeb’s rebuttal of it.
Phew, skimmed through Ackman’s presentation, and he made a pretty convincing case, though some of the more “circumstantial” evidence he threw in, like the low amount of distribution centers and low expenses due to shipping despite higher weight per volume, is pretty thin and really stretching the stuff. Other evidence though, like analysis of income patterns and such, is pretty darn hard hitting.
Loeb’s rebuttal, on the other hand, can be summarized in one sentence… appeal to age (if it hadn’t been prosecuted for 30+ years, it’s probably legal and any suggestion otherwise is crazy)
The defenses company side were pretty paper thin too. Walsh’s opening statement today at the rebuttal meeting was something like “Of course we’re legitimate. Why would we spend all this money opening up new facilities if we weren’t legitimate?”
Gee, where have we heard that before…
This brings up the thorny issue of “self-consumption”, as Herbalife is gonna argue that a big chunk of their distributors are self-consumers (i.e. they joined for the discount).
However, Ackman demolished that argument, by pointing out that Herbalife products are easily available on eBay for 35% off (on the average), so who would pay $55 (to join) to enjoy a 25% discount as a distributor?
Just to be fair, here’s a counterpoint from Robert Chapman, another hedge fund manager, who chose to endorse Herbalife and counter Ackman’s position.
Basically Chapman’s position is Ackman would fail to get FTC to intervene and is now mounting a public campaign to push the distributors and state regulators into action.
There’s very little on why, merely that Chapman did his due diligence by consulting with a MLM attorney (unnamed, but likely Kevin Thompson) who basically said the chance that FTC would sanction Herbalife is when Hell freezes over. 😀
There is *some* water under the keel in Chapman’s position that Ackman is basically doing a “bear raid” on Herbalife.
This self-consumption thing is gonna be the main thorny issue. The Herbalife defenders that are making sense (including Kevin Thompson and those citing him) cited FTC statement back in 2004 and a court case (Wholeliving vs. Tolman 2004) that self-consumption does NOT in itself indicate pyramid scheme.
This is in distinct contrast to Webster vs. Omnitrition, which *seems* to outlaw self-consumption.
I’m no finance guy so commenting on the whole stockmarket is a bit beyond my level of knowledge, I’m primarily interested from an MLM standpoint.
As for internal consumption, yeah by itself so long as there’s retail sales then by itself it doesn’t cause any issues.
If internal consumption trumps retail, then there’s a problem. The legalities aside, this is just common-sense thinking IMO.
But does internal consumption really “hurt” anybody, as long as the self-consumers actually consume the product, and are not buying the stuff just to qualify for income?
What is the difference between a self-consumer and an actual “ultimate consumer”? Is it just terminology? That the company should have just created a term like “preferred customer” instead of distributor?
IMHO self-consumer does NOT hurt anybody, but encourages the wrong behavior in MLM: turn it into a recruitment game… just recruit a lot of self-consumers. But how is that different from selling to people?
Points to ponder…
In my research I read that Herbalife has a close to 50% retention rate distributor wise. This was not disputed by President Des Walsh in the recent Fox Business video interview (comment #10).
If these people were buying the product for the product then why are they leaving?
As for hurting people, what appears to be missing from Herbalife is a “preferred customer” option which cuts people off from the compensation plan.
One can only wonder why after 33 years of being in business they haven’t implemented one, that is if they are so confident that these people are indeed signing up to purchase the products for internal consumption and not to generate commissions for their upline, and then reselling the purchased products to their downline, who then push it onto their downline etc. etc.
On paper as it currently stands, Herbalife are not disclosing the simply retail sales to distributor purchase (internal purchase) ratio, pushing people to ask “why?”. The obvious conclusion is that in doing so it would identify them as a pyramid scheme.
If creating a preferred customer option that is cut off from the compensation plan bolsters their retail figures into non-pyramid scheme territory then I’m all for it.
Of course again the question begs as to why, if they are claiming such a large number of non-profit distributors who just signed up for the discount, they haven’t already done this.
I can’t help but shake the feeling the reason why is so they can continue to be disingenious in counting distributors who aren’t earning money as “customers not interested in earning money” – which is of course complete MLM marketing spin bullshit.
There is no reason for your genuine customers to have access to the income opportunity, no reason at all. Doing so only guarantees these alleged customers are counted as income opportunity earning distributors (whether they are earning or not is irrelevant), rather than customers.
Herbalife only have themselves to blame for that.
Errr Gang guess what? Herbalife IS NOT A UNILEVEL!! It is one of the old Generational pay plans.
I have been going thru the 300+ slides and think that Ackerman should shoot his Analyst. Understand that the MLM Watchdog does not love Herbalife if you use the mlmwatchdog.com site search engine I have been after their marketing techniques for years.
Plus that to compare them to Equinox is criminal. Equinox hit people for $30,000 and NEVER GAVE A DIME BACK. I was front line to that war and got the ABC 20/20 show on the air that brought Equinox down – Search MLM Insider on the Watchdog Equinox.
very interesting and very shocking too !
herbalife is not legally bound to prove how much retail it’s distributors achieve, are they? they have a contractual agreement with the distributor, and the contract ends with the exchange of money and products.
if SEC wants details of retail revenue of the distributors they should contact distributors independently and ask for their sales bills.
the company may have zero direct retail, and be selling to distributors only.the distributors who purchase products from the company to avail of the discount, may be making the purchase for self consumption, so they are customers as well. so in that sense it is correct to say that Herbalife consumers or end users are their distributors only.
i think i have a problem with the very nomenclature being used. the idea of direct selling and sharing revenue over the entire mass of consumers is very different from the traditional sales methods. we need to throw out some old terminology and probably invent new idea-words to describe this kind of profit sharing.
the lines between the words distributor retailer end customer seem blurred and defining these in an old world sense means sure death of the entire MLM concept.
it is very disturbing to see the business world turned into a multi million betting ring. the mental image i keep conjuring up is that of herbalife in it’s knickers being thrown into the lion’s den with ackman rooting for the lion, and loeb begging herbalife to come out alive .
in india and other cricket nations we have seen how the menace of betting has corrupted the game beyond repair. the games are regularly fixed and even players make huge bets because they know which side is winning.
now this is just a game so one can ignore such a scam as having no impact on the economic life of nations. but the herbalife/ackman/loeb saga is ringing warning bells of the financial repercussions the world could suffer due to the private betting games of a handful of investors.
ackman should be investigated, not to protect herbalife but to protect the sanctity of the financial markets of the world
if we extend the ‘customer’ tag to those distributors who signed up to purchase products for self consumption then this is easily explainable isn’t it.
‘customers ‘ have the choice of changing brand preferences limitlessly,isn’t it ?. so the consumer base will always be shifting , some may come back, some never will .
With a too high percentage of self consumption, the MLM model will be meaningless. It will shuffle money from the bottom to the top, using money from the bottom level to pay people higher up in the system. It will be a true pyramid scheme with some products attached to it.
Self consumption among distributors can have some real meaning for a company, creating a stable platform of monthly demand and making it easier to plan production volumes, and indirectly reduce production costs.
So it makes some sense in cost reduction. Autoship orders to customers will have the same effect.
With a too high percentage of self consumption, the MLM idea will have very little meaning. Distributors joins a company to EARN money, not to SPEND money on products. From a distributor viewpoint, self consumption should be voluntarily and inexpensive, allowing the distributor to earn money rather than being drained.
Self consumption will need to be “balanced”, and primarily be used to reduce costs rather than to reward distributors.
In Herbalife, the average distributor seems to be using $10-15,000 on self consumption in 12 months, in order to qualify for different “positions”. That makes this business opportunity very costly for the distributors, and it makes the business model unsustainable.
Regarding self consumption and the pyramid scheme regulations, I had a discussion with a consultant from the Norwegian Gaming Board last year (in Norway the 70 % rule is actually a 50 % rule).
According to him the law does not automatically consider a company as a pyramid scheme if more than 50 % of the consumption is generated by the distributors. The important thing is that more than 50 % of the turnover must be real payment for the products.
When Wealth Masters International was closed down in 2011, the real value of the products was found to be very poor compared to the price (maybe 10 %). As nobody outside the network bought the products, the self consumption rate was 100%. This leads to the conclusion that 90 % of the turnover was a “pay to play” fee.
The problem with this is that any MLM company selling products that are less than 100% overpriced, can have a self consumption rate of 100% without fearing any reaction from the Norwegian Gaming Board.
Products from Herbalife and similar companies can be difficult to define the real value of, as they do they best to market their products as unique and not comparable to anything else. But there are in fact MLM companies that sell products with a more fixed value.
The numismatic MLMs are the best example. The coins do have a very fixed value, still some MLM companies sell them for maybe 30 or 40 % more than their real value. Of course this will mean no retail sale, as the only obvious reason to by the coins from the MLM company and not a lot cheaper from a regular numismatic shop is to participate in the compensation plan and earn commission by recruiting more participants.
The self consumption rate is close to 100%, but the actual value of the products represents more than 50 % of the turnover, which gives the company full immunity from being prosecuted as a pyramid scheme.
The pyramid effect in such numismatic MLMs is clear to everyone, but they are not illegal pyramid schemes. Of course they behave as pyramid schemes, but according to the law they are legal pyramid schemes.
In Norway Herbalife would probably get away with the claim that distributors are considered as their customers.
The important questions are:
1. How much of the product price is a “pay to play” fee?
2. How much of the total turnover is self consumption by the distributors?
Multiply these percentages with each other, and you will find out if it is legal or not. In Norway it has to be below 50 % to be legal, and if the US laws work the same way, it has to be below 30 % to be legal in USA.
In most juice MLM scams the first percetage is at least 75 %, but misleading marketing can put the second percentage close to and even above 50%, which leaves doubt if it is an illegal pyramid scheme or not.
It is not a good idea to ask the Herbalife distributors if they are real distributors trying to make money, or if they just signed up to get cheaper products. The problem is that people change their opinion and even their memory.
When they sign up, most of them do it with intention to earn money, but when they quit most of them claim that they did it to get cheaper products. It is called cognitive dissonance.
Distributors are not retail customers in MLM. If you want to offer customers a discount set up autoship preferred cusotmer accounts that are cut off from the business opportunity.
Again, the only confusion here lies with those that support pyramid and Ponzi schemes.
By all means extend the “customer” tag, but distributors are not retail sales. Retail sales are made to consumers unable to earn via the compensation plan (true retail).
As Norway states, if you rely on internal consumption to pay commissions you just open the door for pyramid scheme recruiting, making any attached products worthless.
If an MLM company cannot generate the majority of its revenue via retail sales (distributor sales are never going to classified retail), then it shouldn’t exist.
If you want to set up a buyers club then do so, without the multi-level marketing compensation plan and downlines.
When dissecting it thinking of it as a unilevel made sense. Unilevels can have generations within them, it depends on how they’re defined. I even vaguely reading some description of downlines in the compensation plan documentation that pretty much spelled out a unilevel structure (at least that’s how I read it).
There you have it. All Des Walsh’s uncomfortable pleading cannot disguise the fact that he is involved in the worlds biggest pyramid scheme.
Herbalife has gotten away with using shonky marketing tactics for years. It’s about time their business model was exposed for what it really is.
soapbox, if you are adamantly going to stick to this theory , you might as well pick up your eraser and scrub out all MLM companies from the face of the world.
i’m going to stick my neck out and say if this 50% rule is really enforced legally then all MLM companies will get discarded in the pyramid /ponzi bin.
the following paragraph is from a link provided by chang in this thread :
i see the same contention echoed in BF’s post about the Norwegian gaming board.
i think while logically speaking the 50% rule makes empirical sense , the MLM industry and the regulatory authorities have seen over decades that this rule is not working on the ground.
i cannot believe that ackman’s allegations have suddenly opened the eyes of the world, to the fact that herbalife survives on self consumption .
no. this is more like an open secret with regulators choosing to look the other way, because if it is meddled with , the entire MLM industry will come crashing down.
so i say that the laws are not in sync with the market. in the absence of practical laws the regulators and MLM promoters are indulging in a conspiracy of silence, with the companies being dodgy about their sales figures and the regulators not really pushing them to disclose them .
along comes an ackman with a plan to make quick and easy money , by pulling of this mask and daring FTC to analyze herbalife with the 50% rule .
ackman is wrong , FTC is wrong and herbalife is wrong
there are two choices, hang herbalife and by association the entire MLM industry, or really sit down for some open dialogue and redefine legal MLM in a practical workable way.
what the FTC is following in an unofficial manner, is sensible enough ie if the product has intrinsic value then let the company carry on.
of course this leads to additional questions about what or who defines the intrinsic value of a product, since the value in money, of any product depends on the perspective of the buyer and his economic comfort. but then nothing can ever get perfect in this world of imperfections. still, the world does manage to move along!
The old “every MLM company is a pyramid/ponzi scheme” scheme excuse isn’t going to get you far here.
Yet companies have been taken down for having a lack of retail. Ask Zeek Rewards’ management how their 98% internally funded Ponzi scheme is going these days…
Whether MLM companies can meet the 50% target is not my concern, yet that doesn’t change that from being the percentage I set retail sales viability at in my reviews and analysis.
Hasn’t let me down thus far (neither have I seen an MLM company with >50% retail sales ever shut down).
Perhaps, but as I keep banging on like a broken record, BehindMLM is not a court of law and I’m not a lawyer. I conduct practical analysis that by your own admission makes logical sense (and it should by anyone’s standards).
What the courts and regulators do is their business and I can only assume in good faith that MLM companies in business today are operating at >50% retail margins (those that I review that aren’t obvious Ponzi/pyramid schemes anyway).
I think Ackman’s facts need to be seperated from his potential motivations (he’s giving all money away to charity so there goes the profit argument).
The stock market side of things I couldn’t really care less about, it’s his data on Herbalife that interests me as it adds to my own research and analysis. That of course won’t stop people from trying to blur the lines between the market activity and Herbalife business model analysis (as you have done) but that’s neither here nor there as far as I’m concerned.
All that said I’d of course welcome an FTC sanctioned hard percentage figure to guage companies on, if for nothing else than to make my own analysis somewhat more straightforward and less grey at times.
With a set recognised percentage the legal grey area that exists today (practically there’s no grey area, you’re either 50%+ retail or a scam) would be eliminated and those companies unable to hit this target would shutdown or be shut down.
I imagine a lot of compensation plan reworking would be undertaken for those inclined to make it work and at the end of the day if spelt the death of the MLM industry, then it wasn’t ever viable in the first place.
And I of course would have to find something else to blog about.
What exactly did you ask him about? Did you try to identify one single rule that could be used as a “key identifier” for pyramid schemes?
If you asked a question about the specific WMI case, you probably received an answer related to that case, not a general answer. In that case, they spent nearly 5 pages of the report analysing “fair value” of the products. They may give you other answers in other cases.
The first and most important factor is the chain recruitment model, where recruiters recruit new recruiters in an endless chain of recruiters, until the market becomes saturated.
I believe you have misinterpreted the answer, or asked the wrong question. Norway has similar rules as Belgium and the rest of EU, it has only organised the rules differently (article 14 in the blacklist was placed under the Lottery Act rather than Consumer Protection Acts or Commercial Acts).
I don’t believe they will confirm using a model like that. Norway use the same definitions as the rest of EU. And the Gaming Board doesn’t have the authority to make up other definitions or criterias on their own.
The problem is not self-consumption in itself. The high “churn rate” at the lower ranks (well over 50%) indicates that while self-consumption is indeed part of the market, it is but a MINORITY of overall sales.
If the company recruited nothing BUT self-consumers, there should be NO churn rate, but steady growth. The high churn rate suggests that those are affiliates joining, then quitting Herbalife, leaving their money behind, thus enriching those in the upper ranks.
Crunched some numbers. Company claims that 72% of its distributors joined for the discounts (primary reason), and 31% of sales are direct to customers (who are NOT distributors). Thus, if you count self-consumptionas “retail”, you get… 81% retail (assuming their numbers are accurate)
But is a company that only sells 19% of its products through its distributors to customers a MLM? 🙂
Yeah sooooooo… where does this number come from?
All I see is 31% retail revenue and 72% distributor revenue, or in other words a clear pyramid scheme.
The questions were not related to WMI. I’ve tried to translate the questions and answers:
He also explained that the Herbalife decission from Belgian court had very little value as a juridical argument according to the Norwegian gaming law.
I’m quoting from the summary posted on Seeking Alpha (url at the end)
They said that 72% of their distributors joined for discount on the products, and most do NOT expect to make money. Then in a later Q&A they said 31% of products are shipped directly to customers (compared to none that Ackman insinuated)
31% of stuff shipped to customers (not distributors), so 69% are shipped to distributors. Right?
Of that 69%, 72% of THAT (49.7% of all shipments) are to distributors who joined for discounts, i.e. self-consumers.
So you can add 49.7 to 31, and you get 81% “retail”… IF you count self-consumption.
But can you still count the company as network marketing… If the sales force only accounts for 19% of sales?
It was called “the grey area” earlier. Looking at the number of outside customers isn’t enough to establish whether or not a business runs a pyramid scheme. Some companies can have real end customers in the lower distributor positions, or customers who are part time distributors (e.g. buying products 11 months of the year, and selling products 1 month).
I have presented the 50% rule as “a guideline, not a fixed rule”. The few case documents I have read have focused on a much wider aspect than one single “rule”.
The Belgian court looked at the weight of evidence, e.g. how the compensation plan rewarded recruitment of distributors in favour of recruiting customers, or how distributors were encouraged to buy positions as “Supervisors”. It used Herbalife’s own “Handbook for success” as part of the evidence.
Even if we take that as fact (which I don’t as there’s too much of a conflict of interest in asking those participating whether or not they are in it for the money or products as a customer, not to mention the fact it opens the floodgates for “we are not a pyramid scheme because none of our participants expect to make money” excuses), whether distributors expect to make money or not is irrelevant.
They can participate in the compensation plan and are therefore not customers (retail or otherwise), they are distributors. Herbalife doesn’t have a preferred customer setup and I see no reason they shouldn’t. Instead they attempt to count distributors who don’t earn as retail customers and this is simply not the case.
Retail customers cannot participate in the compensation plan (choosing not to is not good enough), otherwise they are not retail customers.
Didn’t you link to Herbalife claiming they have NFI what their distributors do with product (Einhorn)? I’m taking all these figures with a huge grain of salt.
And the fact remains that self-consumer != retail sales.
DSA would beg to differ. 😀
DSA vs. common sense… hmm that’s a no-brainer.
Imagine McDonadlds employees making a commission on every hamburger purchased by employees they bring into the company (payable on multiple levels), and 81% of McDonalds hamburger sales were to McDonalds employees.
The idea that this constitutes the equivalent of retail sales to non-employee customers is absurd.
merely contradicting my stand will not get you far either . i say most , >90 % MLM’s are pyramid/ponzi if defined under the 50% rule.
you say since many MLM’s are in business and have a reasonably priced product range, this must prove they have 50 % retail, other wise they would have been shut down. however you offer no proof of any companies sales data which has been ratified by any regulatory authority.
i challenge FTC and SEC, USA, to compile a list of the 10 most successful MLM’s registered in their country, and evaluate their retail/self consumption data. unless such an exercise is undertaken we are merely in a he said /she said argument which cannot be proved either way.
i say sheer bad luck! Zeek was an unlucky bastard for having caught the eye of the regulators. maybe they didn’t wear a proper smoke and mirrors disguise.
maybe, if they had stayed under the radar for a few years and thrown enough HYPE and constantly smiling CEO’s (case in study -Des Walsh ) at the world, they would have bought themselves credibility and a philosophical silence from the SEC/FTC.
i found this gem in a bloomberg article :
Translated, this means the FTC is saying – hey guys we really don’t know whats legit or not. we’re just following some thumb rules to figure things out for ourselves!
That’s great, but that figure is pulled out of your arse and as such isn’t worth commenting or discussing on.
I can only assume so, since given that if they were operating with <50% retail sales revenue, they'd be entering into pyramid/ponzi scheme territory (which would depend on the business model).
Differentiating myself perhaps from MLM critics, I choose to give the MLM industry the benefit of the doubt. It is not my job or responsibility to regulate them, that is up to the authorities.
Investigations that do not result in legal/and or required corrective action (along with fines) are not made public (in the US). You’re asking the wrong person for this information, ask the authorities!
I more than anyone else would love to get a concrete retail revenue percentage figure from a US authority – but until then I’ll continue to use the 50% “logical” common-sense rule. If the majority (50%+) of your revenue is retail, you’re legit – if not you’re a scam.
It’s really that simple.
Remember, we’re approaching Herbalife from an MLM business opportunity perspective. Follow the money.
HA HA HA ! lovely !
seems herbalife PR juggernaut has rolled into action !
time for a press conference from ackman ?? all he needs to do is collar an unhappy distributor and let him sob in front of press .
In case you don’t know, Zeek was a Ponzi scheme on the verge of collapse when it was shut down 17. August 2012. Even people with huge downlines experienced trouble getting money out in the last few weeks.
It had $3 billion in “debt” (Profit Points) and $225 million in assets when it was shut down.
It was “voluntarily” shut down by the owner himself before it collapsed. So we’re not talking about an MLM company being a victim of “the evil gub’mint” here. 🙂
Ackman should probably stick to his own strategy rather than trying to copy Herbalife’s.
Herbalife’s weakest points are within its own distributor to customer ratio, within its own recruitment driven business model. It will be more vulnerable to factual information than to “stories”.
okay, so they were stupid bastards , as against unlucky ones . you want to sustain pyramid MLM schemes for a looooong time ? learn from the masters like herbalife and amway !
my only contention here , norway , is that whether it’s zeek or herbalife,they are essentially pyramid schemes, if you follow only the 50% rule. some implode due to mismanagement while others can prosper for over 30/40 years like herbalife and amway.
i can bet your last dollar that the 75 odd countries where herbalife has operations, are well aware of the true nature of the company [it’s NOT rocket science ], but don’t meddle because ,hey ! nothing succeeds like success .
i am also surprised by the level of ‘collusion’ at an international level, where country after country is adopting a code of silence, and nobody takes any regulatory action suo moto against these companies.
this means behind closed doors govts believe that 50% rule is an impossible yardstick and they ‘prefer’ to use other methods of determining legality of such companies. This in turn, tells me that this entire industry is in a ‘grey area’ and no company deserves to be judged and discarded using some empirical rules.
the ‘intent’ of the company should also be taken into account – whether they’re in it for a quick buck ,or for the long haul .
all this ‘murkiness’ has me riveted because not everybody is an old MLM dog like you !
yes, and we know what a noble strategy that is. take a bear position in the market, force herbalife stock down, till he’s satisfied with his bounty. if herbalife is a pyramid, he’s a bloody stock market bandit.
After reading through Ackman’s 300 page expose, and the various rebuttals by Herbalife and the people who’s opposed to Ackman’s position, I have to say this is gonna be an interesting PR war.
Ackman basically “crossed the Rubicon” when he made the accusations public. It’s pretty much “do or die” for him. That $25 million donation to charity thing proves he meant business.
Right now, you have the MLM defenders rallying behind Herbalife, because they pretty much *have to*. If Herbalife goes down, every long-term MLM would feel vulnerable (whether they actually *are* vulnerable is something else).
The CNN story highlights the potential problems in Herbalife’s official rebuttal. Apparently there are “Herbalife agents” out there hunting down people who are NOT satisfied? 🙂 And if you can’t make a profit selling the stuff retail, but are forced to recruit, are you really in a MLM, or a pyramid scheme?
Doubt SEC is going to do much to Herbalife unless there are some numbers that are not disclosed properly. The primary hatchet agency is going to be the FTC. And if the states decided to join in, it could be quite interesting. After all Herbalife already got hit in Europe.
I have read it, too. I don’t believe it will become a “PR war”, it’s much more serious than that.
Herbalife’s own material is its worst enemy here. It’s the true Juggernaut, crushing its own devotees in an uncontrollable and unstoppable way. Releasing positive information is a relatively meaningless strategy against a Juggernaut.
Positive information will only temporarily create some confidence among investors, but it won’t solve any of the fundamental problems.
“Pop and drop” (page 248-263) showed the so called “pyramid effect” in different countries / markets. It was camouflaged by entering new markets, so one “drop” in one market could be neutralized by a “pop” in another market.
I can recommend that section to anyone considering to join an MLM opportunity (or recruitment scheme). It shows that after a “pop” the market will be saturated for several years, making it almost impossible to earn any money for a new distributor.
Document: “Full Presentation”, page 248-263
Page 262 and 263 can be recommended for investors. Herbalife seems to be running out of growth markets. “Nutrition Clubs” is an attempt to create new markets in existing ones, but that idea will probably be harmed now.
CNBC’s purported “10 month investigation” into Herbalife:
http://www.cnbc.com/id/100364629 (includes 20 minute video report with Robert Fitzpartrick & Kevin Thompson)
okay, i’m through the first 100 slides of the ackman presentation .
somebody clear this doubt :
ackman says in the hebalife structure some 88% of revenue is shared among the top 4/5 levels and 93 % of the people at the bottom have a 100% loss .since they have purchased a product ,how can this be touted as a loss ?
in a traditional business set up ie manufacturer,central distributor ,regional distributors ,localised retailers ,customers ; the money also flows to the top ,the higher up you are , the more you make .the 99% of customers do not make a penny and can be said to have lost their money. but , since they have purchased a product this is not deemed as a loss.
in traditional marketing the company spends massive amounts on advertising , there is a continuous bombardment of positive assertions about the product and a psychological game to get you to part with your money .whether you are persuaded to purchase the product for its ‘qualities’ is finally your choice and your responsibility . in this system a customer has no chance of becoming a part of the business opportunity, and is forever doomed to giving away money if s/he wants to enjoy the product.
in MLM the advertising is on a one on one level ,with the purchase of the product, you have an ‘invitation’ to be part of the income opportunity . it is the customers choice and responsibility to choose to avail the business opportunity and work it , to succeed. the customer should not blame the company for being ‘misled ‘ into the purchase just as much as we cant blame advertisement for purchases .in MLM the costs saved in advertising etc , can be distributed over a much larger mass of people .even if you say that 93% people end up exchanging money for products and make no income ,it’s 6% less than the number of people who do not make money in traditional systems
we know that majority of the world population is not engaged in MLM . so the market is there .if i do not have the capacity to sell the business to to a fresh distributor , then i should concentrate on retail only , if i cant sell retail , i should find a job . hell, what percentage population has sales or entrepreneurial skills ?this is a business opportunity and not a free income opportunity
so the conclusion i’m getting to, in a muddled [!] sort of way is that if the product has ‘fair ‘value, there is no question of anybody being cheated of their money ,to pay those on the top in either system
The problem again is “self-consumption”, and how much of it is going on at Herbalife (and why Herbalife had not institute any attempt to separate them from the real “distributors” who resell the products.
To the self-consumers, it’s indeed NOT a loss, as they are not in for the profit ANY WAY.
To the people expect to MAKE MONEY, it would be a net loss if they bought inventory and NOT SOLD ENOUGH OF IT to turn a profit (and not receive any commission to offset that either).
Ackman count all the self-consumers among the “make money” people. His view: people who JOIN Herbalife as distributor are out to make money. If they just want the product, they could have bought them from distributors. Herbalife disagrees, claiming at least 40+% of “distributors” do NOT expect to make money… they just want the discount.
Which goes back to a more philosophical question: if you have a SIGNIFICANT percentage of “distributors” not expected to make money, is it still a MLM?
What’s interesting about the Herbalife’s claim about Latino market vs. their rebuttal…
Yet in their official rebuttal to Ackman’s accusations, they claimed that
The problem here is “markets entered more than 10 years ago” could still count the US, which has a significant Latino population, which will overlap with “Spanish speaking customers”.
So these two figures are not exactly mutually exclusive, and does NOT really dispute Ackman’s claims, unless Herbalife gives a detailed breakdown
this is loeb’s stand :
From his letter:
in 15 years the FTC has gone after only 13 alleged pyramid schemes. Does that mean the hundreds of pyramid MLM’s which must have sprung up and disappeared were all approved by the FTC?
all these companies, daily panned by soapbox for being pyramid schemes, are none of them working in the USA? Is FTC understaffed , under budgeted or REALLY asleep at the switch ?
this is an interesting rebuttal from david of sweden to the question about differentiating between ‘distributors’ and ‘customers’ in MLM’s:
Full transparency from Herbalife? Bullshit.
Instead of estimating the percentage of sales to non-distrubutors (true retail), Johnson chose to cast misdirection on Ackman’s “motivation” (as often happens here on BehindMLM by Ponzi and pyramid scheme supporters):
Save us the theatrics Herbalife, how much of your company revenue is from retail sales to non-distributors?
Loeb’s argument is the “the authorities haven’t shut us down so we’re legit” argument that we see often on here.
I personally believe the FTC don’t have the resources to tackle internet scams effectively in their current state, or have simply put it in the “too hard” basket.
You only need to look at Zeek Rewards (which wasn’t even the FTC, it was the SEC) to see this in action. They operated on an obvious Ponzi scheme business model for a year and a half sucking in $600M before getting finally shut down.
Why or what the reasons are is only known to FTC themselves.
And as for the “David rebuttal”:
Yes but how are they earning commissions? Recruiting new distributors who buy the product who then recruit new distributors who buy the product etc.
As I’ve numerous times choosing not to earn via the comp plan is not valid enough differentiation between your customers and your distributors. Why? Because these distributors are generating distributor commissions (contributing directly to qualification of their uplines in a manner that surpasses that of retail customers).
If you want to offer a wholesale discount do so with a “preferred customer” class or some such. There’s a reason Herbalife don’t have a preferred customer class, there’s no income opportunity attached to it.
Many pyramid scheme cases are solved at a state level rather than a federal level. Each state in the U.S. has its own regulatory system.
People will complain to their local Attorney General, or file individual or class action lawsuits against a company in the local court. Most cases will be settled, e.g. by the company refunding some money to the plaintiffs, not admitting anything illegal has been done.
13 cases in 15 years shows us how SLOWLY “the evil gub’mint” reacts, and how FEW cases it prosecutes on a federal level. Most small schemes will slip under the radar. That practice may be relatively correct from a practical viewpoint, e.g. the use of resources.
I don’t think that was Ackman’s goal. Pyramid scheme investigations are rare, time consuming and difficult to prove in court. Ackman focused on much MORE than pyramid scheme laws in his presentation. He didn’t focus specifically on the U.S. either, the focus was on the business itself rather than on one specific market.
Loeb is missing a point here:
Regulatory actions will often have GLOBAL impact after some time, or extend from one country to neighbouring countries. It doesn’t have to start in the U.S., either. The current case started in Belgium in 2004-2011.
Pyramid scheme allegations can also be about a PART of the buniness model, e.g. the “Nutrition Clubs”. Following the same logic, consumer protection laws can restrict PARTS of a marketing model.
More like neglected, but you’re getting derailed. The question you *should* be asking is… will FTC act on Herbalife? As M_N already said, different US states have their own system that goes after frauds too. California essentially shut down YTBI, and multiple states investigated FHTM. Neither hit Federal level.
As for Loeb’s rebuttal… it’s “appeal to age”, which I covered back on 11th.
31% of shipments are to customers directly, according to the Herbalife rebuttal Press Conference. No idea what the revenue is.
Well they’ve already lied about non-distributor sales so who knows what else is officially garbage.
As mentioned earlier if the 31% is retail customer shipped orders that’s a woeful reliance 69% distributor funded revenue.
Johnson’s retraction of the “90% of our sales are outside of the distributor network” comment clearly demonstrates that the company has some idea of what percentage of their revenue is retail.
After admitting the 90% figure was a blatant lie, the fact that Johnson then refuses to publicly reveal what this figure actually is (or even estimate) should be setting off alarm bells.
The 25% discount level can potentially be considered to be a “customer level”. It don’t pay any commissions for recruitment or sales through a downline.
The first levels goes like this:
25% – must purchase IBR – no commissions from downline
35% – 500 Volume Points – wholesale commission from downline
42% – 1000 Volume Points – wholesale commission from downline
50% – 4000 Volume Points – promoted to Sales Leader, eligible to receive other recruitment rewards
The lowest distributor level CAN sell to other consumers, but that doesn’t make them become “participants” in a pyramid scheme. Pyramid schemes are about recruitment, not about sales to consumers.
The 35% and 42% levels will receive recruitment rewards if they have anyone with lower discount in their downline buying products.
This information was found around page 72 in the “Full Presentation”.
Pyramid schemes are about “participants” recruiting other “participants” (rather than “customers”). In Herbalife, you can clearly pay for the status as “participant” through purchase of overpriced goods, but people in the lowest distributor level are probably not “participants”.
Uh, distributors can recruit new distributors and earn commissions on their recruited distributors purchases (wholesale profit).
Choosing not to earn commissions isn’t valid enough distinction between customers and distributors. Otherwise you’d have pyramid schemes claiming anyone who didn’t recruit was a genuine retail customer which is BS.
If you want to offer a wholesale discount offer a preferred customer option with no access to the income opportunity.
It’s not about “choosing not to”. The 25% distributors are not eligible to earn any commission on recruitment. But it will be easier if I start from another perspective, analysing WHY and HOW.
When a distributor joins Herbalife, the first purchase will be an “International Business Pack” plus paying a registration fee. The Belgian court operated with €109.60 for the IBP and €9.60 for the registration fee.
All IBP’s sold will probably show up as “sale to customers” or “sale to self consumers or sales people without recruiting rights”, making the statistics look more acceptable for authorities, investors or whatever.
Even the next qualifying purchase may show up in a similar way, when the 25% distributor upgrades to 35%, 42% or 50% level.
The model I have mentioned here will partly explain the 31% retail customers:
Herbalife is simply dividing its sales to newly recruited distributors into separate pieces, to make the statistics LOOK more acceptable. It will look like they have more sales to retail customers or self consumers than they really have. It’s about manipulating how data is registered and how it can be presented.
i can’t understand why you have no respect for ‘choice’ which along with competition, is the mainstay of free market system .
let herbalife write in bold letters on it’s website and brochures that – ‘we have superior products. you may purchase them simply for their health benefits, OR you may resell them and become part of our distribution network’
if herbalife is distributing commissions even on purchases by discount consumers [ potential distributors ], it is because they do not have direct advertising of their various brands. so the customer who has purchased the product is there because harry knew sally and sally knew tim and so forth. so they deserve a payout.
heres what i think will happen. FTC and herbalife will have an internal dialogue and some cosmetic changes may be made to the compensation plan etc.
by their own admission, the brass at herbalife visit washington dc regularly and they have a list of senators they call upon. guess it will be ‘settled’.
considering that an illegal MLM can suck in money from the public extremely fast, and that money will probably never come back , it makes practical sense to spend money on a better equipped FTC and save much larger amounts of money in the long run
this is des walsh’s explanation to his investors about herbalife being sold cheap on ebay :
Des Walsh, the president, said that eBay prices were not a proxy for market prices. “Most people I know use eBay to buy branded products at a discount price,” he said. “A small, small fraction of Herbalife products are actually sold on eBay.”
*that they know of*.
Maybe they are just ex-Herbalife distributors trying to unload their existing stock instead of engaging the company’s buyback (as not to embarrass their upline with “clawbacks”).
But as they don’t know how much of the stuff is actually consumed by their distributors (“we don’t have that visibility” when responding to Einhorn in May 2012).
How do they really know how much of their stuff is sold on eBay and other venues, vs. sold directly by them, vs. sold via their distributors?
well ,neither has ackman quantified ‘how many’ herbalife products are actually sold on ebay .
acman said ‘herbalife products are cheaper on ebay ‘
herbalife said ‘other brands can also be cheaper on ebay ‘
if it is true that other brands can also be cheaper on ebay , then the above conversation of acman/herbalife is complete and goes in favor of herbalife. the numbers don’t matter
Sign up new members get them to buy products to qualify for commissions and earn a wholesale commission on the sale.
Supervisor etc. merely extends this wholesale commission, it doesn’t enable it – baseline distributors are able to earn it from the get go.
If basic distributors weren’t able to participate in the compensation plan (preferred customers) we wouldn’t be having this discussion.
Two words: “Pyramid schemes”.
Scammer: ‘It’s not a pyramid scheme, members don’t have to recruit’
Judge: ‘Yes but they do, right?’
Scammer: ‘Yes but it’s not required, therefore we aren’t a pyramid scheme’
This is why you must seperate your retail customers entirely from the compensation plan.
If Herbalife distributos aren’t failed distributors self-qualifying themselves for commissions (net overall loss of money) then there should be no problem creating a preferred customer class in the compensation plan.
Thirty years on and it hasn’t been implemented. Gee, wonder why that is…
Neither did Herbalife. They just flashed a slide that says 0.1% of Herbalife stuff was sold on eBay. Where did they get their numbers? Good question.
I crunched a few more numbers, got interesting results.
Based on some projecting, I got a number of $2450 per “active distributor” as annual orders in the US (based on estimated sales of about 1.2 billion US sales and 480000 active distributors).
To qualify for “supervisor”, you need to do 2500 GV a MONTH, not per year.
In fact, to do “senior consultant”, you need to do 400 PV a MONTH.
Thus, there is confirmation via number crunching that Herbalife distributors are indeed mostly self-consumers. It is consistent with Herbalife’s own announcements.
However, here’s a case involving Herbalife that may shed some further light on this:
Or in other words, there is sufficient gray area that while the court stated that Herbalife’s comp plan “leans” toward pyramid scheme, it has not crossed the threshold to deem it a pyramid scheme.
The only way a 25% distributor can earn commissions on recruitment is by selling an “International Business Pack” to a recruit (a mandatory part of joining Herbalife). He won’t earn anything in downline commissions after the first sale, before he has upgraded to a higher level.
Technically, every distributor can earn something DIRECTLY on the recruitment of new participants. Only upgraded distributors can earn something INDIRECTLY on recruitment.
The difficulty here is how the regulators identifies the “International Business Pack”, whether it is a joining fee or a product sale. The Belgian court identified it as a “pay to play” with some products attached to it, while the FTC has accepted it as a product sale.
Did I miss something in the compensation plan? As I read it all distributors earn a wholesale commission on the purchases by their recruited distributors.
The supervisor level and above just increases that commission.
In anycase, earning a commission on the business pack makes it a moot point as that’s straight up “paid to recruit”.
Can you earn commissions without a International Business Pack?
Of course it’s a joining fee…
25% is the lowest level. You CAN recruit new distributors and earn 25% commission on the recruitment, but you won’t earn anything if they recruit new distributors.
A distributor can THEORETICALLY earn money on sales without recruiting anyone, but I don’t think that’s the reality.
Herbalife’s business model is about bending rules and make things look more “acceptable” than they really are, but the court in Belgium didn’t accept it.
* By renaming “commission” to “wholesale discount”, it sounds more like sales than recruitment. It sounds more “acceptable” to authorities or investors. But in reality, most distributors seems to be selling to their downlines rather than to customers.
* By attaching a “starter kit” to the recruitment fee, it can be disguised as “sale” rather than “recruitment”. “Starter kits” should normally be sold for cost price and not generate any commission, but Herbalife pays a full 73% commission to the recruiter + upline.
Herbalife clearly has some legal issues. I’ll guess nearly all sales are to the network itself, “pay to join”, “pay to upgrade” and “pay for the paycheck” sales.
Here’s a definition for a “participant”, from Nehra & Waak:
From that definition, all distributors in Herbalife are actually “participants”, with the right to introduce other “participants” into the system and earn rewards directly or indirectly from recruitment.
About self consumption:
The way Herbalife counts “commission” is frustrating and confusing.
What really happens is as follows:
Customer (did not buy IBP): buy from distributor, at retail
Distributor (did buy IBP): buy from upline or Herbalife, gets 25% discount from retail price
As you advance up the rank (through sales volume) your discount increases, to 30+%, 40+%, and finally 50% discount off retail.
Herbalife counts this “discount” as “retail commission”, thus assuming every distributor will be selling at full retail, when that is often NOT the case.
On top of this, there are sales bonuses (MLM commission) if you achieve “supervisor” or above, which means 1500-2000 GV per month (roughly speaking).
So yes, I think you misunderstood the comp plan somewhat, Oz.
There is a plain-er language version of the Herbalife comp plan in that court case document I linked to earlier. It’s full of law-speak, but I think makes more sense than Herbalife’s version.
Argh, even I get confused by my own writing. I think this is the proper interpretation
A “higher level” distributor (which as M_Norway explained before) can sell their stuff to a lower level distributor and earn the difference in their discounts as “wholesale commission”.
For example, a 33% discount level distributor can sell their inventory to the lowest rung (25% discount), thus earning that 8% difference, as “wholesale commission”.
But you don’t earn MLM commission until you hit the 50% discount level, i.e. ‘supervisor’.
The more I look at it, the more I see evidence of a “money game”, where the products (as proxy for money) are moved around, and the company is basically keeping a blind eye on it.
But the fact remains the entry distributor level can still earn wholesale commission from their downline right? Remember, new distributors can purchase directly from the company or from the recruting distributor.
If the recruited distributor purchases from the company the recruiting distributor still gets the wholesale discount. That’s plainly not retail, regardless of what Herbalife claim.
Distributors don’t sell to other distributors. When you become a distributor you purchase your product through the herbalife site but your Upline sponsor which is a distributor will get a commission.
Distributors only sell to customers until those customers become distributors.
It would be stupid if the newly distributor would still purchase from there higher distributor (sponsor) at “retail” prices. Thus the reason for becoming an Herbal Distributor is to get the 25% discount. That’s of course after paying the $67 bucks.
The option is there though. I noted that the price difference makes it silly but I think if the upline Distributor convinces their newly recruited distributor to buy from them rather than the website they get more commissions.
Then of course the idea is that the new distributor recruit someone else and convince them to buy the recycled product from them rather than from the Herbalife website and so on and so forth.
The fact that this is more expensive only highlights that it’s being done for commission qualification.
Meanwhile you have Herbalife throwing their hands up in the air going they don’t know what their distributors do with the product, whilst at the same time claiming the above counts as “retail sales to customers”.
instead of nehra and waak only telling us what is illegal ie 100% self consumption , they should tell us what percentage is acceptable for an MLM to escape pyramid allegations. soapbox’s 50 % analysis clearly does not have the vote of the FTC, and by ‘devotion’ the rest of the world.
though belgium has taken a tough stand and declared herbalife a pyramid , BF says that ‘ the Herbalife decission from Belgian court had very little value as a juridical argument according to the Norwegian gaming law ‘. BF should explain this statement. also is herbalife shut down in belgium or, while they are pending appeal, functional ?
this is the conclusion i am coming towards. if herbalife products were priced at par or less than comparable products in the market, even soapbox would have given them benefit of doubt, and allowed distributors who purchase for self consumption, be categorized as customers.
they would not be viewed as failed distributors who had to pay a high price for products, in order to ‘pay to play’.
why cant they just reduce the prices??? halve the commissions on the top levels. instead of getting rich in one year let those guys get rich in two years.
and they should get rid of the IBP. these days established MLM’s which are entering india for the first time, are coming with no join up costs. but you have to pay to encash commissions.
important news for herbalife : .
1] Herbalife says program underway to change nomenclature for distributors –jan 10 th
2] Herbalife February volatility at 70, August at 54 as shares trend higher – jan 14 th
Herbalife February put option implied volatility is at 70, May is at 60, August is at 54; above its 26-week average of 51 according to Track Data, suggesting large near term price movement as shares trend higher
3] Herbalife investors says SEC investigating Bill Ackman – jan 15 th
Right, the company actually dropships the stuff, but the IMPLICATION is those different discounts are the individual profits, except the final ‘retail’ profits (which, according to the company, most people do NOT enjoy)
FTC choose NOT to put an exact percentage, because they know the companies then will design a system with the threshold JUST BELOW that limit, i.e. “push the boundaries”, whether intentionally challenging the law or not.
Kevin Thompson discussed this in that CNBC report. You may want to read it.
The 50% rule can’t be used ALONE. There’s several other criterias that has to be met, and “chain recruitment” is the most important. Chain recruitment is about participants recruiting other participants rather than selling to consumers. Recruitment isn’t SALE, even if there’s products or services involved in the transaction.
Pyramid scheme will require a consideration from the participant, a “pay to play”. That can be any type of contribution from the participant that has some value and can be used to reward other participants directly or indirectly, and it’s not limited to startup contributions.
Overpriced products can be used to disguise “pay to play” from participants. The same goes for any other overpriced contributions, e.g. training, marketing material, membership fee, shipping & handling fees.
Recruitment can be used as a “pay to play”, too. It means that qualification requirements like “You’ll need 4 direct sponsored members …” can be a “pay to play”.
Pyramid schemes will require:
* Chain recruitment of participants. Without chain recruitment it will be another type of “scheme”.
* “Pay to play” from the participants
* Rewards to participants for introducing other participants
* Recruitment has to be a PRIMARY source for rewards to the participants
* In addition, you can also look at the primary motives for participants to join and participate in the plan, and how the plan is being presented to new participants.
Herbalife failed the tests in Belgium, and I believe the Belgian court did a fairly decent job there. Courts will look at “weight of evidence” and “reasonable doubts” before they make any decisions.
I don’t believe Herbalife appealed that case, or an appeal may have been rejected by a higher court. There are no signs of any on going or upcoming case in Belgium on the internet.
A couple of additions to my previous post:
A PART of a business model can be a pyramid scheme, too. And pyramid schemes can also be extended beyond the limits of a single company, e.g. by using “third party” companies as part of the scheme.
A scheme like Liberty League International offered special “positions” where top leaders could run their own third party services and sell it to participants, e.g. website design and setup, “sales training”, “leads” and other third party services.
“Carbon Copy PRO” was a typical position based third party service offered to participants in a pyramid scheme. Jay Kubassek held the role as VP in Wealth Masters International, and was allowed to sell his own marketing system to other participants. It was even protected by WMI’s management, by not allowing any competing marketing systems to be used.
A pyramid scheme is simply “a plan or a system” that meets the criterias for being a pyramid scheme. It’s really not important whether the plan is exactly following the boundaries of a company structure, is limited to only a part of a company structure or is extended beyond the boundaries of a single company structure.
Here’s a short biography for Bill Ackman, partly explaining the strategies he’s using:
The most typical strategy seems to be “doing extensive research, much more than your opponent” and “be confident enough to know when you’re right and everyone else is wrong”.
The fight against Herbalife isn’t the first battle he has fought. He wins some battles and loses some.
Sometimes the battles can be about something else than what it looks like, e.g. about other related investments or about a general market situation (e.g. indirectly protecting other investments in a market).
A few quotes (related to strategy):
WHY I linked to that biography is because it fills in some pieces in the puzzle, e.g. whether the battle is about short term profit or something else.
The 334 pages presentation contains alot of extensive research, e.g. sending people out and take pictures of Nutrition Clubs, hire third party to collect data from eBay, analysing other markets than the U.S., analysing Herbalife’s previous cases in court, analysing other pyramid cases in the last 15 years.
Here’s a few other pieces in the puzzle. Kevin Thompson has covered “Battle of Millionaires”, Dan Loeb’s letter to investors.
Dan Loeb is using a more classical investor analysis, e.g. looking at Herbalife’s previous growth and estimated market value.
I prefer “fundamental analysis” rather than “investor analysis”. How a company has performed in the past can’t solve a fundamental problem in the core of its business model.
Pyramid schemes will normally perform very well financially. They have much lower R&D costs than real businesses, since people are paying for the opportunity itself rather than for the products.
Loeb has NOT checked the pyramid case in Belgium, or else he would have known about some flaws in his own arguments about Herbalife’s internal rules:
And here’s an interesting viewpoint:
“If it fails in the U.S., other markets won’t be affected”. He’s seeing “regulatory intervention” as something that only will affect a local market, something that can be corrected.
He has looked at other pyramid cases, e.g. for how many years those other companies had been in business:
I don’t believe he has checked how many of those 13 companies that are still in business today, “generating revenue from markets outside the U.S.”.
Here’s Herbalife’s “Investor Day Presentation” to the shareholders (8.55MB pdf):
CHAPTER 2 – CONSUMERS:
Lieberman Research Worldwide‘s research shows that 92% of Herbalife’s purchasing households in the U.S. are non-distributors.
The primary reason why people join as distributors is the discounted prices (73% joined for that). 23% joined because they wanted a part time income, and 4% joined because they wanted a full time income. Lieberman’s conclusion: “Vast majority of Distributors do not join for a business opportunity”.
Lieberman’s research for “Monthly earnings expectations, when people joined as distributors”:
* 44% expected nothing
* 28% expected to earn $1 – $499 per month
* 14% $500 – $999 per month
* 12% $1,000 – $9,999 per month
* 01% $10,000 or more per month
87% of former distributors would recommend Herbalife’s products to friends and family. 63% of former distributors would recommend becoming an Herbalife Distributor.
Herbalife’s own numbers (not “research”) has already partially been quoted here, e.g. the 31% of orders shipped to non-distributor customers in the U.S.
Johnson admitted this figure was pure BS a few days ago.
In anycase, you have to wonder why Herbalife have, in over thirty years of operations, not implemented a preferred customer option if there is such non-income opportunity demand for their product.
I think the reason they haven’t is pretty obvious…
Retail customers cannot earn money via the compensation plan or they are distributors/affiliates/associates etc.
And the FTC hasn’t “disagreed” with the 50% rule. Name one MLM company that has been prosecuted with over 50% true retail sales (not this Herbalife internal consumption is retail bullshit).
Generally speaking the authorities have been pretty strong on the side of common-sense when it comes to regulating MLM. Those companies try to spin whatever they can marketing wise but time and time again when things go to court common-sense rules the day (see: Burnloung, Zeek Rewards etc.).
I have some problem with their methodology.
They surveyed 2000 people off websites, found enough to match the US census for breakdowns, and 72% “heard of” Herbalife (positive or negative? no idea)
5% of that 2000 (100) claim to have purchased Herbalife product in past 90 days (could be as little as one shake to full distributor).
Of that 100, 67% (67) claims they will buy again.
So 67 out of 2000, and they extrapolated that to number of US households, and claimed the Herbalife market is that many, and those are “retail customers”.
Divide that by 480000 US active distributors, and they got the 92%.
That’s a bit iffy. In fact, that’s a LOT iffy.
Here’s a short biography for Bill Ackman, partly explaining the strategies he’s using:- norway
i think he forgot to analyze the most important part of his strategy – ‘ what are the chances FTC will take on herbalife ?’ seeing the history of herbalife and FTC and seeing that reformatory action is preferred over prosecutory action , i am expecting some changes to be announced by herbalife and then it will be business as usual.
Retail customers cannot earn money via the compensation plan or they are distributors/affiliates/associates etc.- soapbox
well then, don’t call them retail customers if you’re going to define them in a straitjacketed way . for MLM marketing get a fresh word for a person who buys a product for self use but always retains the potential to resell it for profit .the world is changing, people can deal with more choices.
and if people don’t believe lieberman’s research about consumer satisfaction , they should not just accept ackmans claims of 93% herbalites being failed distributors, unless he can back up his claims with a better survey.
the low intensity of consumer complaints and the low percentage of buyback [1%] of products in herbalife , do not support ackmans allegations
FTC did not seem to have allowed Equinox or Burnlounge a chance to “reform”.
And they should not, because both are talking about the SAME people, albeit from different viewpoints. It’s all in the wording about “self-consumption”, which was always the contention… how *do* you count self-consumption?
Koscot case and Omnitrition case have defined that “ultimate consumer” cannot be in the comp plan if the Koscot decision “is to have any teeth”, the court stated.
Maybe the solution, as you said, is to formally define “self-consumer”, as different from being a regular retail consumer (I think Melaleuca use “preferred customer”), but the way Herbalife handled the situation “we don’t know how much retail was really sold” is not helping their own cause.
Name one MLM company that has been prosecuted with over 50% true retail sales -soapbox
impossible question . since we have no information on whether FTC has analyzed the business model of a company or not , how can one know whether the company is running because it has cleared regulatory tests , or running because nobody bothered to check it out .
on that note, i’m dead sure amway will not pass this test inspite of being the holy grail of all things MLM .
Don’t shift the goalposts and refuse to answer a question that was never asked.
How can FTC prosecute a company without analyzing its business model?
Even your derail makes no sense.
That would have to be one of the most commonly used red herrings used by fraud apologists in the past few years.
What does a theoretical “business model” have to do with what’s actually happening ?
Zeek Rewards had a business model AND it had a compliance department AND it had the blessing of several high profile MLM gurus.
Oz is warning potential Herbalife recruits what CAN happen within Herbalife under its’ current arrangements and what HAS happened in Belgium, thus allowing thinking people to make their own decisions.
Herbalife is now “on the radar” so to speak.
What has been allowed to happen under some sort of “nudge, nudge, wink, wink” arrangement is now likely to come back to bite it.
Here’s another piece in the puzzle, David Einhorn’s questions to Herbalife in a conference call to investors, April/May 2012.
He asked 3 simple questions, and the stock price fell from $70 down to $50 within a week.
The transcript is courtesy of FactSet Research, as stated in the source I linked to.
first you name one MLM company that has over 50 % true retail and also post the proof . such a company may not exist in the real world for all you know .
i bought an amway product from an amway distributor [true retail], but i paid cash and there was no bill or receipt .so how does this distributor prove to the company or the regulators that she has actually made a retail sale ? it could very well have been self consumption .wheres the proof ?
this is why the companies cunningly call their distributors independent business owners so that the onus of proving true retail can never be legally thrust on their shoulders .
see that interview with kevin thompson on cnbc . there is some mumbling about self consumption and lack of ‘bright lines’ to define MLM companies , but zero % clarity .
this is why, littleroundman , soapbox’s threats about the 50 % rule do not carry weight and are merely a wasted exercise .nobody is listening to him ,especially not the FTC . norway’s middle of the road analysis is closer to the truth being followed in practice .
okay what is the problem with self consumption ? – it leads to pyramid marketing .
what is the problem with pyramid marketing ? – it leads to saturation and eminent collapse .
so how come herbalife survived 30 years ?is the majority of the world population a herbalifer ?- no
is there some inherent mistake in calculating that pyramid shaped schemes are doomed to collapse ? – possible
and talking about saturation ,what is happening in the so called traditional markets ? why are american companies using political clout to establish new markets in asia and africa ?
who coined these new buzzwords of ‘global economy’ and ‘free trade’ ? for whose benefit ? take off your rose tinted glasses, all is not perfect in the traditional methods either !
In “global economy” and “free trade” no one is asking the man-on-the-street to cough up money for the right to “sell” an opportunity.
Which is why this blog is known as “Behind MLM” and not “let’s discuss the world economy” and is aimed at that very man-in-the-street who is thinking of taking his/her first steps into the unknown and would like to know about as many possible pitfalls as possible.
A company like Herbalife moving to cover “overseas” markets could be viewed as meaning that “market saturation” has been reached in its’ US markets.
NOT because “everyone” is using Herbalife, simply because a great proportion of the US population has already been “prospected” If not by Herbalife itself, but by any one of a squillion other MLM “opportunities” out there in the US market.
The FACT is, Herbalife HAS been challenged in a court of law and HAS come up short.
Any other interpretation of what’s happened is pure speculation.
That “court” is a member of the European Union and it’s rulings are very “likely” to be accepted by other EU member nations.
Given the fact there ARE a squillion other MLM opportunities out there, why would a possible new MLMer take the “risk” Herbalife is going to be forced into making drastic changes ??
The product/s are that good ???
The product/s are that different ??
The products are cheaper ???
no , of course they’re not . in traditional marketing ALL the man-on-the-street has to cough up is the ‘squillions’ of dollars the company spends on brand advertising to ENTICE that very man-on-the-street.
on TOP of that ,do they ever offer the man-on-the-street any profit sharing ? naah , they’re tooo selfish for that , all the money in their purse please !
product + business opportunity = empowered customer
product + advertisement budget = guess who got suckered
and i really don’t know enough about world economy to talk about it. all i said was market saturation is not a problem unique to pyramid MLM marketing. too much choice has put traditional markets in the same boat.
and surprisingly even after a whole year no other country has raked up this issue . even in the US ,if ackman hadn’t shorted the stock, nobody was really concerned about the ‘retail’ of herbalife . in fact, it appears FTC isn’t really concerned even now.
but, i do have a problem with herbalifes pricing . with a lot of self consumption ,they should have a fair idea of the quantities of products they will require in the next fiscal. so they should be able to convert this into a price advantage for themselves.
from bloomberg business week, jan 10th:
from the FT , jan 17th
Fuck off. You want to make assertions you back them up. The fuck is this?
“Hey Oz, X is a fact!”
“Oh really, prove it.”
“Nah-uh, you prove Y first!”
In anycase, what the FTC do and don’t do is up to them. The fact remains that using common sense, if you have less than 50% of your revenue coming in at a retail level (the company itself or via distributors (not reselling)), in MLM that makes you a pyramid or Ponzi scheme.
This is not a court of law and I am not a lawyer. All I do is apply common-sense to the MLM industry, which at times comes up woefully short. Herbalife appears to be a case in point.
Had I of reviewed it pre-Ackman short sell my conclusion would have been the same as I did not read his presentation prior to writing the review. I based the bulk of the review on Herbalife’s compensation plan, as I do all reviews.
Not as far as Amway are concerned. Revenue wise the distributor purchased a product and whatever happens after that is irrelevant – it’s between you and the individual you bought the product off.
Amyway are very clear that their distributors are not employees and are independent business operators or entrepreneurs (or similar terms). Thus all they can claim is direct revenue which, in the example above came from the distributor.
If I buy a book and sell it to someone else that’s not another retail sale for the book shop I bought it off.
If you want to ignore or dismiss common sense, do so at your own peril. For a recent example, ask Zeek Rewards how that worked out for them.
False logic. Traditional markets can saturate and still be sustainable. Pyramid schemes saturate and it’s game over (or launch in another country until you run out of them).
Saturation as defined by companies competing against eachother is most certainly not the same as a pyramid scheme running out of recruits to pay their uplines.
As for the rest of your rant, the global economy and all the other crap is off topic. Last warning.
false logic . if i operate in 80 countries and have reached saturation in say 10 ,at the end of 5 years , i keep them in the cool off basket. i revive sales in this market after 5 to 10 years, when i have a whole new generation of people of different ages facing the same economical crunch, as did their predecessors of the same demographic a few years back – and voila i have a whole new market to sell too.
while the population of the world may be a somewhat fixed number, the demographics within this number is constantly on the churn.
every year, i can have a whole batch of new parents looking for some extra income or somebody dealing with say , retirement issues. so if i handle my market carefully i will always have people to sell to.
(Ozedit: removed offtopic spam)
It’s not very “cunningly” if they can’t prove their own claims, is it? That logic is flawed, and it didn’t work very well in Belgium. It made Herbalife look “uncunningly” when the case was tried in court.
I don’t really believe he want bright lines and clarity. He would lose most of his current clients. If his job had been simple, his clients wouldn’t need him as an advisor. 🙂
Kevin Thompson should be more careful in his wishes. “Bright lines and clarity” has to be based on something meaningful, e.g. on business principles and basic ethical principles.
MLM has gradually become more flawed and more meaningless as a marketing and distribution model. “Bright lines” would probably put most of the existing companies out of business, they’re simply not able to sell enough to real end users.
Multi Level Marketing is a distribution method rather than a business model or an “industry”. Distribution is the CHAIN between a manufacturer or a service provider and the end users.
In MLM, independent distributors are meant to fill a part of that chain, e.g. ordering products, do some marketing efforts, sell the products face to face, deliver the products, handle reclamations and complaints, handle payments, and so on and so forth.
In most MLM companies, distribution of products have been replaced by recruitment of new recruiters as the most fundamental part of the business related activities.
An income opportunity is neither a product nor a service, but most MLM companies seems to spend most of their efforts on distributing income opportunities in different markets, rather than distributing goods or services.
Any bright lines will have to fit within some main business principles, e.g. the distribution chain model. Distributing income opportunities is rather meaningless. Distribution is about products or services.
For an income opportunity to have some meaning, there has to be some realistic business calculations about the number of potential end users in the market, and the efforts required from the distributors.
For an income opportunity, it’s rather meaningless if most of the income is distributed upwards in a chain. That will stimulate recruitment rather than sale to end users.
“Self consumption” is rather meaningless if it’s about “pay to play”, “pay for the paycheck”, “pay for advancements in the system” or anything like that.
I don’t believe Kevin Thompson really want those “bright lines” he’s talking about. Bright lines has to be based on something meaningful, and then he will lose most of his clients. A bright line could be to ban MLM in its current form, and set up new standards based on more meaningful principles.
5 years? Usually takes much sooner than that for a pyramid scheme to start to fall apart.I suppose you could look at the South American market in the US as a return to the US after the “western” market was exhausted but that’ll crash eventually too.
Pyramid schemes don’t come back to life because you wait a generation… which is more than 5-10 years in anycase.
If Madoff (Ponzi scheme but same idea) restarted his scheme today, how many people would invest with him? You take a rather simplistic view of the world and its inhabitants.
I’ve forgotten what we were discussing… Oh right, Herbalife is a pyramid scheme with little to no retail sales.
False logic. When you first are established in a market, you’ll need to keep the business ALIVE as best as you can. In a saturated market that will usually mean having a “plateau” in the bottom rank of a pyramid, contineously recruiting new participants to prevent it from complete collapse.
Herbalife has been able to keep itself alive by targeting new markets, some of them within the same geographical market as old markets. A geographical market can be divided into different sub markets with different needs and expectations.
The CORE ISSUE here isn’t about HOW Herbalifee has managed to keep itself alive. It isn’t about stock prices, either. It’s about whether or not its business model is a pyramid scheme, and about whether it should be shut down by authorities or being allowed to continue with the same business model.
The only defense against pyramid scheme accusations is to deliver some real proofs about having a number of external customers that actually are buying the products in retail. It has to be REAL customers, not some meaningless “qualifiers”.
“Real proof” isn’t the same as publishing manipulated statistics. Herbalife’s defense have mostly focused on that strategy. It clearly needs one or more regulatory authorities to look into it, to separate the truth from all the manipulated data.
Or if you study HLF policies and proceedures there is a 100% return policy Not 79% per ackerman. 100% return x 12 months.
Best in Industry. Ackerman skipped that.
There’s several other inaccuracies there, too. He has used data from many different markets and from several years (back to 1997 or so) to get an overview over different parts of the business. Some of his information was from old cases against Herbalife, e.g. the Ford case in 2004.
79% buyback price is probably calculated INCLUDED the “7% surcharge” on purchase, plus a 10% restocking fee. The restocking fee was eliminated in 2012, after David Einhorn had asked his questions. The calculation methods are shown as footnotes on page 310.
The CORE ISSUE will be about whether or not Herbalife’s business model is a pyramid scheme, not about Ackman’s accuracy in his presentations.
Becoming a distributor to earn a discount is fine if there was no MLM compensation structure.
Many internet savvy website owners join affiliate programs to get a discount on their own purchases, e.g. a website about dogs, for your typical medium sized website, the owner probably makes more in self consumption than actual affiliate revenue.
But once you thrown in an MLM comp plan everything changes…
so how can this be done ? herbalife and other MLM’s too, say that they sell only to distributors. Some distributors purchase products for retail.however since they are independant business owners they are not bound to disclose the details of their retail sales to the company. so how does the company track this retail ?
some distributors are actually self consumers who purchase from the company only for the discount. the company does not track these distributor-customers either, to see whether they have consumed the product or quietly sold it to their neighbor .
even if the company tells it’s distributors to raise a bill every time they make a retail sale , who can guarantee that these bills will not be fake ?
but WHY is a ‘real’ customer only one who has no stake or financial interest in the product? why cant this outdated selling concept be thrown out instead of discarding MLM. the words customer / distributor are not carved in gold in world history. redefine them .
Nobody said anything about “real” customers. We’re discussing retail customers.
If you have the option of earning via an MLM compensation plan you’re a distributor/affiliate/associate etc. You’re not a retail customer and you can’t be both.
One earns money via the comp plan, the other buys products and cannot earn money via the comp plan.
This isn’t some “outdated” concept, anymore than you asking why bananas can’t be called apples and claiming modern day fruit terminology is “outdated”.
Next you’ll be telling us the definition of “product” in MLM needs to be updated because handing over money for nothing is now all the rage and we need to get with the times.
yes, things have been this way in the traditional system and you are habituated to them . but new systems are adopted and slowly become part of the daily life.
i say what is the need of this retail customer in MLM. retail is the mainstay of the traditional system , it should stay there.
there is nothing wrong in selling a product from person to person , by word of mouth and taking a share of the profits. you will say that people will purchase the product only because of the business opportunity, but all products are sold under an opportunity, like eat this for perfect health and use this for perfect skin. even there, people are buying into the dream rather than the product.
if selling the dream of a possible business opportunity is illegal then ban all advertising too . as i keep saying and it appears that even the FTC thinks the same, if the product is not a packet of nails for Rs 1000/- then go ahead and sell it with whichever dream you want to package it in. a money dream, a self esteem dream or a be beautiful dream.
in person to person selling there is no need of this “retail” buyer. you can be a ‘custodist’ or a customer and a distributor both in one.
no soapbox , that would be money circulation, punishable by three years in an indian jail
riiight . BUT if i splice the DNA of a banana and apple together, i could create a new fruit ‘banapple’, which could combine the health benefits of both the fruits. like buy a product and earn off it as well.
yes,and they can continue to stay alive indefinitely by rotation . they are not doomed to collapse . so if ‘failure’ or ‘collapse’ is NOT the inevitable end result , why should this way of distributing /consuming products be illegal?
If you honestly need me to explain the difference between an MLM income opportunity and healthy skin (and lack of an MLM business opportunity therein), I think we’re done here.
Somebody already tried to “splice” MLM with no retail sales, it’s called a pyramid scheme.
The only retail customers in MLM are people who purchase from a distributor.
In consumer direct marketing it’s totally different from MLM the manufacturer markets directly to the consumer no middle man so as a result no high price products to pay out multiple people in the network, plus the mlm company, plus the manufacturing cost or start up fees to pay out bonuses in the comp plan
Population of Earth is NOT infinite, and it seems you actually AGREE with Ackman that Herbalife is staving off collapse by moving to new markets, which Herbalife CEO Johnson denies. Or did you not bother checking Johnson’s rebuttal?
I don’t think it’s too difficult for a company to get statistics from a distributor, if they had been interested in getting statistics like that.
Statistics showing lots of external customers would actually increase the value of the company, but Herbalife doesn’t seem to be interested in that type of statistis. It could also be used as a defense against pyramid scheme accusations, but Herbalife prefer “self made” defense systems, e.g. Lieberman’s market research.
A pyramid scheme is a plan or a system where participants are recruiting other participants rather than recruiting external customers. That’s why statistics could have been used as a defense.
In a pyramid scheme, participants CONTRIBUTES with something to join and/or participate, e.g. by buying over priced products that are not sold to external customers. That’s why external customers are important.
The contributions from participants are used to reward other participants higher up in the system, and to reward the owners of the plan.
The new contributors will be able to get a positive ROI if they recruit other contributors into the system. If that’s the only realistic method to get a positive ROI, we’re probably talking about a pyramid scheme.
For an MLM company like Herbalife, failing to track statistics for external customers means its defense system is heavily flawed. It might possibly have been flawed if they HAD tracked statistics, too.
Simple, by not shipping to distributors, but only to customers. Which Herbalife already do to 31% of US customers (their own claim). As orders had to be placed through the distributors, such stats are VERY easy to obtain.
As Norway said, they are NOT interested in obtaining such statistics, because it would then have to be disclosed.
I have found another “piece in the puzzle”, another hedge fund manager betting against Ackman.
Chapman Capital LLC bought Herbalife shares when the prices were relatively low, in the first week after Ackman’s presentation (January 20 2012). He released a letter to his investors on January 2 2013.
His stake in Herbalife is around 35% of his total portfolio, but the exact number of shares wasn’t disclosed.
He has calculated the risk of FTC investigating Herbalife to be relatively low, but existent. He has also seen the possible risks, e.g. if Herbalife is shut down in the U.S. it’s automatically shut down in the rest of the world.
Dan Loeb didn’t see that, he assumed the other markets would continue to bring in revenue.
Ackman has shorted around 20 million shares, out of a total of 108 million shares. Ackman investigated Herbalife for 5-6 months, until May 2012, and has gradually bought more short positions between May and December.
Herbalife’s trouble in the U.S. is a side effect of the pyramid case in Belgium in 2011. Both Einhorn’s “3 questions” and Ackman’s presentation were initiated by that case. Indirectly the trouble is related to a poor defense system, and that reflects the management of the company.
Two minor bits of info…
1) This guy went to a nutrition club, and concluded that nutrition club alone makes Herbalife legit. Well… Those only showed up in 2003. So what was Herbalife doing for 23 years prior to that?
He even states that everyone who went to the club are distributors… “for the 25% discount”, the club organizer/distributor said.
2) Nutrition clubs are NOT allowed to put up Herbalife logo on the outside, according to Bloomberg report:
So how the heck do you find them, hmmm? And since most of them don’t really make anything (confirmed by the previous article, many have moved or ceased to exist) what they did is they made their UPLINE rich (confirmed by the CNN report)
Kevin Thompson posted that on his blog back on Jan 1st.
yes chang ,i am aware the population is not infinite, but the possibilities of fresh markets in this finite number are very large.
see it this way, if life is an escalator with say 80 steps and my market is people who are on steps no 20 to 50. now every year i have a fresh batch of people on step no 20. between step no 21 and 50 i have people with a fresh PERSPECTIVE every year.
when rahul was on step 25 he couldn’t be bothered to hear about herbalife products. but the same rahul at step no 30 is probably inclined to a business opportunity which will bring him some extra income.
so he says hey, why should i purchase my health supplements from abott labs, i might as well buy it from herbalife and try to work the opportunity .
if walmart can chase new markets around the world to stave off collapse, then herbalife can do the same. if walmart was restricted to the shores of the US, with the bad economy, rising costs and fierce competition, they would probably be staring bankruptcy in the eye.
so, as a distributor forced to show some retail, i can merely receive my herbalife parcel at my neighbors or friends or relatives address.
i can say my neighbor is a die hard herbalife product fan and buys from me every month. and if my neighbor is doing amway with a similar requirement, i could receive his parcel from him. easy schmeasy
haha , this really reads like a PAID article . tone it down herbalife !
It’s a bit more complicated than that. They’d have to pay for the product.
You could re-emburse your fake customer but then you’d not only be proving Herbalife had no retail customers, you’d be engaging in fraudulent activity yourself.
One day anjali is going to blow all our minds and use facts instead of his seemingly endless array of twisted analogies.
I doubt it. Ever since I first wrote about Speak Asia, anjali (also known as “anju”) has been pushing for the legalisation of Ponzi and pyramid schemes in India.
A lot of the nonsense she’s published here is actually quite tame in comparison to what she published in the Speak Asia article discussions. Completely offtopic derailment to the extreme point of absurdity is quite the norm for her.
She seems to think pyramid schemes are some sort of new marketing business model destined to hit the mainstream at some point. Despite Speak Asia being shut down and dead, she continues to fight the good fight arguing that we’re all just not getting it (or living in the past and refusing to embrace “the future”).
It may be “very large”, but the segment you can reach yourself (or any specific Herbalife “distributor”) is actually quite tiny.
Thus, that’s basically claiming you can’t ever go hungry because there are bazillion fish in the ocean and you have a fishing line, without evaluating your own skill at fishing and local water conditions.
The problem with your case is Walmart actually runs BETTER in bad economy… being a discount place. Even so, it faced a sharp learning curve in China before finding a proper mix of merchandise and marketing practices that worked.
It is certainly NOT ‘staving off collapse’, thus comparison to Herbalife is… not valid.
proving to whom ? will there be door to door checking of herbalife distributors ?
all i’m saying is, if somebody makes silly rules which can be easily broken ,then the rule is not worth it .
for instance, everyone was screaming ‘show retail ‘, so herbalife set up nutrition clubs . now who is checking on a daily basis about the number of ‘retail’ customers visiting these clubs .and who is going to prove that these ‘retail’ customers are not just the upline/ downline of the club owner ,helping to whitewash the company image ?
all this stock market betting ,paid/biased media reporting from both sides , cosmetic but ‘useless’ introduction of nutritional clubs etc ,is ludicrous .
the problem is self consumption and here’s what the FTC cleared about that , for those who have forgotten
in 2004: “the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme” is a quote from an FTC letter dated 01/14/2004.
Essentially, the letter states that if a product is marketable, the FTC is OK with the MLM, making Einhorn’s 05/01/2012 call focusing questions on this internal consumption issue far less relevant than was (mis)understood.
well then , prepare to be amazed when the dead come alive.
really ! i deserve better than that !
i just demonstrated there is a fresh market every year . the location is the same as the last year .so why should accessibility change ? just what are you saying chang ?
Well the SEC for one, should they come knocking.
Zeek Rewards revenue makeup was 98% affiliate funded, despite the thousands of dummy affiliate created “customer” accounts they had.
Right. Most laws can be broken with ease so let’s just dismiss laws in every country than shall we.
Honestly anjali, engage brain before typing please.
Nutrition clubs aren’t retail because those people are all signed up as distributors. Herbalife needs to create a preferred customer account class if they want to argue distributors who don’t earn income are customers just in it for the discount.
Till then they are distributors purchasing product and not retail sales.
As for the FTC and internal consumption, read up on Burnlounge. They were bitchslapped for having 97% internal revenue (not retail).
Take away the business opportunity (preferred customers) any the problem fixes itself. It makes no financial sense for a distributor to create fake customers to buy product through in Herbalife (spend $x and get less than $x back as a retail sales commission).
Market research & analysing will usually NOT operate with “1-year markets”, e.g. assuming a 21 year old have a completely different perspective than a 20 year old. Your logic doesn’t reflect reality?
Some markets are relatively stable and unaffected by age, e.g. people use relatively similar shoe sizes whether they are 20 years old or 50 years old. You can’t expect a “size 10.5” to suddenly drop to “size 8”. As a “size 8” shoe seller, you can’t expect any of the “size 10.5” people to suddenly pop up as new “size 8” customers in the next few years.
The article is about an on going case. The main topic is about whether or not Herbalife can be considered to be a pyramid scheme. Discussions about market segments or sub-markets in general will be rather off-topic.
The pyramid scheme issue is about Herbalife’s business model, e.g. whether the business model is set up as a recruitment scheme or as a distribution channel to end users. It’s about whether the recruitment part is the PRIMARY part of the business model, and HOW primary it is.
* “Distribution channels” are set up to distribute goods or services to end users in a market, as a primary function.
* “Recruitment schemes” are set up to distribute “contributions” from participants upwards in a system, from the bottom to the top in a chain of participants.
It’s not about internal consumption in itself, it’s about whether or not the internal consumption is used as a disguise for a pyramid scheme, e.g. if internal consumptions are “contributions” from the participants.
Purchasing over priced products can clearly act as “contribution” to the network and to the company itself.
People have been saying “show retail” for 30+ years (since FTC settled with Amway).
Nutrition Clubs were NOT invented by Herbalife, but by one distributor in Mexico in 2003. Which means Herbalife ignored the demand for 23 years, and only “tolerated” nutrition clubs as it was not a corporate directive to establish them. So your premise that “Herbalife set up nutrition clubs” is NOT valid.
You’re ignoring people DYING, thus taking themselves off the market. Half truths again?
There’s a problem in this thread, first visible in my post #137.
Last time I saw a similar problem, it was related to a LIST in a previous post, or an unfinished list-formatting. It can be related to the “Less than” sign in your post #136 ???
It makes the “Post Comment” button disappear in IE8, only showing a little dot where the button should be.
Thanks for the pickup and yes that seemed to be the problem. I’m sure I’ve used that symbol with a dollar sign before so I’m guessing it was a combination of the other characters in the comment messing it up.
edit: nope, seems that combination breaks the HTML code.
And, you are ignoring the fact that, in MLM, “market saturation” can mean both “product” saturation and “opportunity” saturation.
“It’s not Amway, is it” is forever embedded in the modern lexicon immediately the word “opportunity” is used.
Herbalife itself showing improved turnover has little or no bearing on whether a potential new “opportunity sharer” has any chance of receiving any income at all, much less turning a profit.
The “potential” for a new Herbalifer to recruit and/or sell product outside his/her immediate marketplace is also smoke and mirrors MLM word games.
chang, whether herbalife OR it’s distributors started the clubs [under advice and suggestions flowing downline ?], is not the point. point is these clubs are encouraged, because they act like retail outlets and support centers for weight loss, and can be used to slap people who complain about internal consumption.
this article about nutritional clubs , is trying very hard to pump up herbalife . wonder if ackman read this?
Michael Johnson – Chairman and CEO:
from the above quote ,soapbox , it is obvious that johnson is positioning nutrition clubs as the distributor/retail interface of herbalife and thus ‘proving’ the credibility of the herbalife oppurtunity.
no MLM with millions of distributors, is going to collect retail details from the every person. if some half assed shipping requirement, or something equally silly is established, it can never be used to ‘really’ prove retail but will have the same whitewashing kind of effect a nutritional club does .
in fact, if this makes people shut up about self consumption – more power to such rules !if people/govts/stockmarkets are satisfied with some sort of farcical public display of legality – great !
the hard truth is, proving retail or lack of it, conclusively, is very complicated .
for every slide ackman shows, about how skewed the compensation for recruitment versus retail is , herbalife can show beaming hispanics in glowing health .neither party has conclusive hard evidence about self consumption /retail. so it will be about showmanship, i suppose
norway, don’t introduce shoe sizes into a discussion of perpetual markets for nutritional drinks + business opportunities. you cant compare oranges and apples.
Blahblahblah, if the distributors who can participate in the compensation plan are buying the product it’s not retail. What they do with the product is irrelevant.
They don’t have to. If the product is being sold at a retail level they’ll already have records of who is buying it.
It’s painfully simple, if you’re not selling product through the company to retail customers who cannot participate in the compensation plan (earn), you have no retail sales.
End of story, thanks for playing, see ya later etc.
that’s ridiculous soapbox , how can ANYBODY keep track whether the guy with the $2 drink in his hand is a distributor or a customer ?
that’s ridiculous soapbox ,if the company is to retail directly to customers what does it need millions of distributors across the world for ? how are they supposed to make their money?
tata ,see ya later alligator etc
All businesses keep track of the money going in and out. If customers are buying product through distributors (via the company) they’ll have records, similar to how they’ll have a record of distributors (non-retail) buying product.
Nobody said anything about the company selling anything. Learn to read.
No they are not. They are not even allowed to use Herbalife logo on the outside, as not to take customer away from distributors that don’t operate one of these clubs.
No it isn’t. It is only when you ignore my obvious solution:
Next time you’re reading through a 334 pages presentation, try to focus on “understanding the content” rather than “reading the words one by one”? 🙂
Nutrition Clubs have MEMBERS (distributors), not retail customers. They’re recruitment centers rather than shops.
Their 2 primary goals is to promote 2 new sales leaders per month and to replicate the club (recruit 1 new club owner). They’re prohibited from doing retail sale of the products, and can only serve the same 3 beverages each day.
Read page 285 in the presentation?
This is correct M_Norway, I was interning in a Nutrition Club for a few weeks. You learn how to make the shakes,Tea and Aloe shot.
They told me that they don’t make money selling smoothies, but recruiting new distributors. You would target people who are over weight and ask them if they knew there body fat%, most people don’t know this.
Then we get them on the weight scale that measures body fat %, water % visceral fat rating..etc. after that, we pitched them healthy nutrition, and direct them to the herbalife healthy meal plans. ranging from 100-500 dollars.
After they pay the retail price, then the next appointment is encouraging them on becoming a distributor to get the 25% discount.
Then they are drawn into the “Yes Man” type meetings ( Jim Carrey movie )..etc Thats how the Nutrition Club works. I don’t do it anymore, its hard to get people committed to do anything and the product is too expensive.
It’s not about EARNING in itself, it’s about WHERE the potential earning derives from. Low level distributors without the right to recruit other participants could have been a solution to the problem.
To analyse “promotional pyramids”, it’s better to start from ordinary pyramid scheme perspective than to start from MLM perspective. Start from “What’s illegal?” rather than from “What’s legal?”.
Starting from the opposite perspective will mislead you to look at details that are not important.
ORDINARY PYRAMID SCHEMES
If we look at an ordinary pyramid scheme, participants pay a “contribution” to join and participate (not limited to a joining fee). That “contribution” is used to REWARD other participants, and to reward the organisers. 100% of the rewards derives from the participants themselves.
Participants in ordinary pyramid schemes are selling the income opportunity itself to other participants, with no products attached to it.
The main keywords here are “participants”, “contributions” and “rewards”.
In promotional pyramid schemes, the “contribution” is disguised as consumption of products or services. In BurnLounge, 97% of the rewards derived from the participants themselves.
Participants in promotional pyramid schemes are primarily selling the income opportunity itself to other participants, with some products attached to it.
You can use similar keywords here, “participants”, “contributions” and “rewards”.
MULTI LEVEL MARKETING
MLM is supposed to be a distribution method. Distribution is the CHAIN of services between a manufacturer or wholeseller to end users (retail customers). It’s not about selling income opportunities to new participants.
Rewards derives primarily from external customers buying products or services, not from the participants themselves. Buying a product as a customer is not a “contribution” from a participant.
SOME “GREY AREAS”
1. Products sold at FAIR PRICES to internal consumers may not necessarily act as “contributions”.
2. Rewards that derives from internal consumption does not necessarily act as “rewards”. There can be some work or expenses related to the distribution to internal consumers, so there will be a difference between “gross rewards” and “net rewards”.
And Herbalife is intentionally exploiting this grey area through “willful ignorance”.
That’s one thing I like about Kevin Thompson… his paper written in 2011 or 2012 addressed this issue… on why did the MLM industry not tackled this issue head-on, though he also blamed the FTC for a bit. It’s a double-edged sword, basically… If MLM industry don’t regulate itself, then don’t blame the government when they do come investigating.
Judging by the facts dug up about the nutrition clubs, Herbalife may be in trouble.
One of the more informal test for pyramid scheme is… can you make money off selling retail? Or are you forced to recruit to make money?
According to Hempton’s visit, corroborated with Ackman’s presentation, most nutrition club “owners” (i.e. distributor) is either losing money or barely holding even. Hempton visited one of the more successful clubs in Queens NY and that guy, with 200+ members (all distributors to get 25% discount) is making less than minimum wage after all the hours and costs are factored in.
In other words, Herbalife retail does NOT profit. Yet it’s clear Herbalife itself is making oodles of money, and the top distributors (from their own disclosure) are making oodles of money.
Clearly that’s done through… recruiting?
well obviously herbalife cannot show preference for one group of distributors [club owners] over ordinary distributors. that is why legally speaking they have to keep themselves in the clear, which would explain slide No 285, norway.
herbalife cannot allow any resemblance to store front type retail BECAUSE they use a multilevel marketing system and you cant start mixing the two up.
however there is a lot of confusion and no clear stand is emerging :
chang says, clubs are not encouraged but CEO johnson is full of sparkling praise for these clubs – ‘Over the past several years, a growing portion of our business has been driven by our distributors around the world moving to daily consumption business methods with long-term sustainable customers’.
norway says, ackman slide no 285 is clear that retail cannot be made in these clubs whereas NHRA says ‘after that, we pitched them healthy nutrition, and direct them to the herbalife healthy meal plans. ranging from 100-500 dollars. [for which]they pay the retail price ‘. this shows SOME retail is taking place.
so legally speaking while these clubs are not engaged in retail CEO johnson believes they attract ‘long-term sustainable customers’.
so it appears these clubs and their functioning is another gray area , much like MLM law itself. something on paper, something else in practice.
gray areas are very difficult to deal with in law. norway comes close to the solution, and this in fact is what appears to be in practice too – ‘Products sold at FAIR PRICES to internal consumers may not necessarily act as “contributions’.
stop being supercilious . “understanding the content” still wont reflect the “reality on the ground ”
Nobody[ FTC etc} said anything about 50 % rules .Learn to give rational solutions instead of ivory tower FATWA’s
this from HERBALIFE TERMINOLOGY :
it’s like everyone is a ‘potential’ distributor,and there is no red line demarcation between distributor and customer .
Yeah, because logical rules (as admitted by yourself) are totally void of rationality.
Another anju gem.
The FTC has said (not enforced) that 50% of MLM Distributor’s checks should come from sales to customers who do not belong to the compensation plan.
When they originally filed the Burn Lounge case that was a loud and clear point. However after the Burnlounge case finished going through the upper court that push for ruling did not survive.
HOWEVER WHENEVER I DESIGN ONE OF MY NEW GENERATION OF MLM PAY PLANS I HAVE A TARGET OF MEETING THAT 50%. IF IT IS CRAPPY PRODUCT AND CAN’T DO IT I DON’T TAKE THE CLIENT… ROD COOK
I didn’t say THAT, e.g. “retail cannot be made”. I said they have MEMBERS rather than retail customers.
The MAIN purpose of the Nutrition Clubs seems to be to attract distributors and to duplicate the club, not to sell in retail. They are recruitment centers rather than retail centers.
A recruitment center is a place where members (distributors) can bring in new prospects (either retail customers or potential distributors), to meet more experienced sales people and to meet other distributors in general. And to taste the products, measure body fat, or whatever methods they use to sell the products and the opportunity.
“Healthy Meal Plans” will probably qualify as retail sales to external customers, but NHRA also explained it was very hard to get that type of customers becoming interested enough to commit themselves to long term purchases (among other things, the retail price is too high to attract retail customers).
“CONTRIBUTIONS AND REWARDS” VS “SALE OR CONSUMPTION”
Pyramid scheme isn’t about internal/external sales or consumption, it’s about “contributions” and “rewards” distributed among “participants” in a plan or a system. Companies rewarding more for recruitment of participants than for sales to external customers will probably be in trouble.
Herbalife pays ADDITIONAL rewards for selling to its own distributors. The only realistic way to make any money is to recruit new distributors into a downline, rather than recruiting a strong base of retail customers.
The ADDITIONAL rewards derives from “contributions” from other participants, making monthly purchases of over priced products and paying different “fees” (e.g. “surcharge fee”, over priced Shipping & Handling fee).
So you’re saying that Herbalife is intentionally encouraging the gray area by NOT defining such a difference?
I found an example from FTC where a case has been extended to several companies. It’s not a pyramid scheme, it’s a $130 million “Internet Business Coaching” fraud.
The 22 companies in that case were “interrelated” in some ways, e.g. part of the same group of companies or organised by the same group of people. I don’t know how important that is.
A company selling leads to participants can be interrelated if it pays for the right to sell leads, e.g. paying a percentage of its net sale as a “fee” to the other company.
A “free to join” entity (e.g. SiteTalk) can be interrelated to another entity (e.g. UNAICO), making both of them become parts of the same scam.
You also said:
How can you encourage, yet not show preference?
Clearly, either Herbalife is conflicted… or you are.
this is from an article ‘5 years of herbalife drama in review’
so how many times is the SEC /FTC going to look into herbalife ? einhorn had asked questions about self consumption and SEC investigated . so after just 6 months why will they repeat the process just because ackman repeats the question ?
Was it seven times Madoff was reported to the SEC before he went down? I forget now.
To be completely accurate, your question should read:
DECEPTIVE ACCOUNTING PRACTICE?
I have looked into the investor presentations in the 334 pages “Full Presentation” (around page 143). It looks like Herbalife is using a deceptive accounting practice / presentation practice, misleading its potential investors. One example for that is the Suggested Retail Price.
Herbalife’s distributors have positions as Independent Business Owners. When an IBO buys products from the company at a 50% discounted price, that should be the price showing up as “sales price” and “revenue” in the company’s accounting (and in reports to investors).
The discount is not an “allowance”, “commission” or anything like that, i.e. payouts from the company to the IBO, generating a taxable event. Discount on products are not taxable nor deductible.
If the IBO decides to use the product for self consumption, he only has to report the discounted price (+ costs) in his tax declaration. A company owner does NOT have to pay full price for products he’s buying from his own company.
If the IBO sells the discounted product to another IBO or a customer for a higher price, that’s a transaction unrelated to Herbalife itself. It should normally not be calculated into any financial reports.
Herbalife is misrepresenting its financial results in its reports to investors (and probably to authorities).
* Revenue has misleadingly been inflated by ~75% in the reports (2008), from around 2,359 million to around 3,811 million USD. This has been done by presenting imaginary (calculated) numbers as “Retail sale”.
* Discount on products has misleadingly been presented as “Distributor allowances”, reducing “Net sale” down to around $2,359 again. Discounts are not PAYOUTS, and they have no real function in a financial report other than to mislead investors.
The company looks more “solid” than it really is in its reports to investors, creating an impression of a much higher value for the investors. It makes a difference for investors if a “$5 billion company” only is worth $3 billion.
SEC didn’t “investigate” Herbalife in June/July 2012. SEC sent a letter asking TWO simple questions about WHY the 10-K had been changed, and accepted the answer from Herbalife.
Using the word “investigation” is a mild exaggeration of the reality. 🙂
Question from SEC:
Actually, it’s 5 letters total:
* SEC asking the first question
* Herbalife sending the first answer
* SEC asking a followup question about the 70% rule
* Herbalife sending the answer
* SEC accepting the answer
Documents can be found in the EDGAR database:
First of all, SEC and FTC are separate agencies. SEC regulates investments and public companies, FTC protects consumers from scams (including pyramid schemes)
Second, Einhorn asked 3 questions, and why the 10K statements no longer includes such details. SEC basically says “you’ll have to explain to us too”.
SEC’s job is to make sure all stuff that *should* be made public (so investors can make proper decision) is made public (and to beat up Ponzi schemes). They are NOT in the business of ruling whether a business is a pyramid scheme or not.
It’s not an investigation. It’s a “request for info”.
Here are some of the numbers from Herbalife’s 10-K/A (“annual return”) for 2011. Amounts in 1000 USD.
PRODUCT SALES 2,944,722 7% surcharge included = 360 million
S&H REVENUE ……. 509,815 Overpriced shipping and handling
NET SALES …….. 3,454,537 S&H added to net sale
COST SALES ………. 680,084 Includes products and S&H
GROSS PROFIT .. 2,774,453
ROYALTY OVR. . 1,137,560 Recruitment rewards
SG&A …………….. 1,074,623 Partly used as rewards
OPER. INCOME ……. 562,270
When a sales leader is buying a $100 (retail) product from Herbalife. the company adds 7% “surcharge” (non-refundable) to the full price, plus 8-10% (of the full price) in shipping & handling. Then they subtract the discount from the Suggested Retail Price (SRP).
SRP + surcharge + S&H – discount = price to distributor
$100 + $7 + $9 – $50 = $66 (50% Sales Leader)
$100 + $7 + $9 – $42 = $74 (42% distributor)
$100 + $7 + $9 – $35 = $81 (35% distributor)
$100 + $7 + $9 – $25 = $91 (25% distributor)
The 7% surcharge is actually a 14% fee, not 7%.
this is from mlmlegal
guess this is why des walsh couldn’t stop smiling when he said ‘our distributors are our customers’ or words to that effect.
it appears these questions of self consumption and distributor purchase versus retail definition , is old hat and my prediction is that ackman has an uphill journey all the way.
besides he himself admitted that he was not so confident that FTC would take cognizance of his allegations , but was depending instead on the breaking away of the distributor base of herbalife.
seems he hasn’t heard of the ‘cult’ mentality MLM distributors are always alleged to subscribe to !
BurnLounge was shut down by FTC / a court, in case you didn’t know? 🙂
And Herbalife failed when they tried to use similar arguments in Belgium. Des Walsh’ smile is probably related to a prescription from his psychiatrist or something?
“Reasonable amounts” does not include “pay to join”, “pay to play”, “pay for promotions” or “pay for your paycheck”.
Pyramid scheme is about the distribution of contributions and rewards among participants in a system. Over priced products or fees can clearly act as contributions from participants.
herbalifes answer on this is :
“pay to join”- norway
from ‘hallmarks of a legitimate direct selling company’
from ‘hallmarks of a legitimate direct selling company’
The starter kit for herbalife costs $100 . that is well within the advised < $200 norm
norway, the FTC seems to follow double standards ? it’s stance on self consumption swings from tolerant [2004 letter kohm/DSA] to rabid [burnlounge] ?
i get a feeling FTC did not LIKE the burnlounge product, found it unworthy of the cost or something.
had it been a ‘tin’ or ‘bottle’ of SOMETHING , with magical healing properties, they probably would have left it alone, or just asked for some polite clarifications via letters [as in herbalife/SEC].
I don’t believe the “distributors breaking away” strategy will work very well. FTC (or other regulators) is probably a better strategy, but rather slow.
I have tried to analyse his and the other hedge fund managers’ strategies. Ackman has focused on the CORE of this issue, i.e. whether or not Herbalife is a pyramid scheme.
ACKMAN’S STRATEGY UNTIL NOW:
* Investigate for 5 months, and make a DECISION.
* Build up a short position, make a presentation (in 7 months)
* Publish the presentation where it can reach many people
* Follow up?
I haven’t identified the “follow up” strategy here. He’s a typical “make a decision” guy, focusing on getting started when the first elements of a strategy are in place, assuming he will FIND the right methods when he first has started to move in the right direction.
FOLLOW UP STRATEGY?
He has mentioned SOME possible directions:
Make FTC (or other authorities) investigate Herbalife and potentially shut it down? The presentation is aimed in that direction. A follow up strategy could be about speeding up that process.
Make existing and potential Herbalife distributors aware of the pyramid scheme issue? The presentation will partly fail to hit that target, it’s too long and too “technical” for that market. He has released a short version too, an “Executive version”. That version is also too “technical.
Make other “investigators” aware of the pyramid scheme issue? “Investigators” will find alot of useful information in the presentation, and probably add something.
Make the general public aware of the pyramid scheme issue? I haven’t analysed that part, it’s too unspecific.
IF I HAD BEEN …:
I would have done a few things, if I had been a hedge fund manager risking $1 billion. Starting with one of the points he already has completed:
* Make sure I have interpreted the pyramid scheme issue correctly. He probably has checked that out. Then I had focused on how to communicate that issue to a wider audience or to different specialised audiences.
* Make sure I have interpreted the potential outcome of a company shutdown correctly, e.g. what will happen if the company is suspended from stock trade? A short position should normally be TRADEABLE, e.g. it should be possible to reduce or increase your positions.
* I would have focused on points #1 and #3 (in the 4 points I listed), e.g.  trying to speed up an investigation (in reasonable ways), and  delivering more information to other “investigators”. Point #1 is about the core issue here, and point #3 is the only other target audience he’s communicating effectively to/with.
* I would have tried to contineously improve my own strategy and methods, within some reasonable amounts of efforts and time.
* I would probably have spent a minimal amount of money on a few advisors, e.g. someone familiar with FTC’s work and methods, “to find the right buttons to push there”. Ackman is familiar with how to push buttons in the stock market, but he’s not very familiar with how “the evil gub’min” works.
* If point #2 (of the 4 points) is important, then I would have provided some information directed towards that specific audience, existing and potential distributors.
* I would have directed the attention away from myself (after the initial strategy has been finished), and directed it towards the “core issue”. The core issue is about whether or not Herbalife is running a recruitment scheme, where most of the participants will lose money to reward a few on the top.
The other hedge fund managers considered the risk of an investigation to be low, but existent. Chapman summarised it as “FTC has been there and done that”, indicating that FTC won’t repeat a fruitless investigation. But he didn’t analyse the core issue in the case very deeply.
A good strategy should probably focus on identifying the most important parts of that “core issue”, from the viewpoint of different target audiences.
* FTC will probably need other types of information than investors, or it will need to have the information organised differently (or have it presented in a different way, e.g. as a complaint). Government agencies will usually prefer original documentation rather than “individual research”.
* Often it’s better to tell them WHERE they can find information, and let THEM analyse it themselves (only point them in the right directions).
“THE CORE ISSUE”
That is about whether or not Herbalife is running a pyramid scheme, disguised as an MLM company. It’s NOT about stock prices or “presentations”. It’s not about having support from different “industry experts”. It’s not about hiring the best lawyers, market researchers or any other “experts”. It’s not about “credibility”, or about “knowing the right people”.
“THE CORE OF THE CORE”
That should normally be about identifying the most important parts of the core issue, and how to deliver the right set of information to a target audience.
People WILL generally respond to the right set of information, and Government agencies shouldn’t be different. HOW people will respond to something is a different story.
A good communicator will usually start from the viewpoint of his target audience rather than from his own, trying to solve some of the potential “issues” that might occur between the different viewpoints.
If FTC is a “target audience” here, and the wanted response from them is to make a decision about starting an investigation into Herbalife’s business practice, a good strategy will normally require being able to see it from THEIR viewpoint. Focus on what’s important for THEM, limit the case to the core of the core, and provide them with some useful information and sources.
Please refer to the original source?
“The hallmarks of a legitimate direct selling company” sounds like it comes from MLM companies, participants or lobbyists. A lawyer or a regulatory body would have used different expressions. It sounded like “marketing statements” rather than factual info.
If the original source is Herbalife itself, then it’s meant for its own distributors rather than for people outside MLM. BTW, Herbalife’s own information has been vague and rather meaningless, as the Belgium court pointed out.
If the original source is a lobbyist organisation, it’s clearly biased in one specific direction.
I don’t think THAT is the real problem. I’ll guess the real problem is that MLM operators are trying to identify the issue from a very onesided viewpoint, and to identify it in their own favour.
Pyramid scheme isn’t about “internal/external” sales, consumption, customers or anything like that. It’s about participants paying contributions for participating in a plan or a system, where they can be rewarded from other participants’ contributions. 🙂
“The hallmarks of a legitimate MLM company” should be as simple as “… is designed to distribute products or services to end users, rather than distributing contributions and rewards among the participants themselves”.
I’ve found the source myself:
Jeffrey Babener / mlmlegal.com seems to be the original source, but I found the report quoted on several MLM marketing sites, filling up most of the first search hits.
Here’s something the FTC is offering on their websites, a report from Jon M. Taylor / Consumer Awareness Institute.
It’s a bit old, rather critical and a little “one sided”, but he’s identifying and analysing some of the “core problems” that Babener seems to miss. I didn’t bother to read it now.
BTW, Jeffrey Babener tried to invite Oz as a speaker to an MLM conference back in August 2012, when Zeek was shut down by authorities. He’s a qualified MLM attorney, but that’s also his “core field of expertise”.
Oh, gee, I pointed that out almost TWO WEEKS ago.
Aren’t you a bit late to the game?
When there are too much self-consumption, the system is no longer MLM, but a “buying club”.
Basically, Herbalife just admitted that it’s not a MLM, but a buying club, which operates by a totally different set of rules, but insists on being called a MLM.
I put a short article on SeekingAlpha about Herbalife discussing what’s pyramid, and what’s not.
Because Burnlounge itself is an egregious pyramid scheme. Its self-consumption is well over 95%. For 2+ years in operation, 28.5 million in revenue, only ONE MILLION of revenue was generated from “non-members” (i.e. actual sale of music).
Clearly, you’re just glancing at headlines instead of actually looking at the issues.
“What happens if I hold a put option in a stock that is suspended from trade?” (source: thebull.com.au)
I’ll guess Ackman knows what he’s doing here. The source was from Australia, but rules like that are probably relatively similar in the U.S.
fyi, Dr. Taylor and Robert Fitzpatrick are well-known anti-MLM advocates that often butted heads with Len Clements and other MLM proponents.
That document you pulled was a part of the “public comment” process in response to FTC’s BizOp proposed rules in 2004 (?). It’s not an “official” FTC document, more like an “amicus brief” in court.
how brilliant of you chang .
meanwhile i was not talking about self consumption per se , but about how states like washington have statutes giving reasonable amounts of distributor self consumption the SAME STATUS as RETAIL .
many other states, including Louisiana, Texas, Oklahoma, Montana, Idaho, Utah ,South Dakota and Kentucky (with more states considering such amendments)have sought to clarify the issue, amending pyramid and MLM statutes, to recognize personal use in reasonable amounts as not amounting to a pyramid scheme.
no boss. i got the part about burnlounge being a egregious pyramid .i swear .i was merely voicing an ‘opinion’ that maybe FTC dint LIKE the burnlounge product .
a manufacturer is only interested in distribution of it’s products to consumers .in the old method due to the narrow distribution channel , the end customer was necessary and was a much larger no compared to the distributors.
to copy paste this idea onto a completely different method [MLM]is one of the reasons there is so much confusion about this industry .
i say look at the matter with a whole new perspective. instead of calling it multilevel MARKETING call it multilevel commerce and consumption. set up checks and balances for avoiding pit falls like inventory loading etc .dont throw it, FIX it
this is from mlmlegal:
any idea why this was not pushed and what the status is today ?
A “dead bill” in the house of representative basically was proposed, but not approved by the HR (one chamber of congress). Likely, DSA fought it to death, as it is, well, “vague”.
If you read ALL the 11 points in “The hallmarks of a legitimate direct selling company”, you can see it’s clearly about selling to external retail customers, with the addition of reasonable amounts of self consumption among the distributors themselves (including family).
The illegal part in promotional pyramids is NOT about self consumption, you can ignore that part. The illegal part is about a system designed to receive contributions and distribute rewards among the participants themselves, rather than distributing goods out into a market.
The end consumers is necessary today, too. The old system is still the preferred model. Your “new model” isn’t something that can REPLACE the traditional model.
Your “new model” is an illegal model, and illegal models will often have a place in the market, but most often it will only be a tiny fraction of the market. In some markets “new models” can grow for a period of time, e.g. because of some flaws in regulations. Growth doesn’t make an illegal model become more legitimate.
Most long term manufacturers will prefer to operate a legit business, and your “new model” doesn’t offer that option.
* It can offer a fair chance for “passing under the radar”
* or a fair chance for that the rewards will outweight the risks
* or a fair chance for being able to change the business model in time, and thus avoiding the worst risks.
* it does NOT offer a fair chance for that it eventually will become legit
The “new model” works well until it fails miserably. People should avoid it if they don’t have any plans for “HOW do I plan to fail miserably, without failing TOO miserably?”
In other words, “self-consumption” in a pyramid scheme is a symptom, not the cause, of the illegal pyramid selling structure.
People in Burnlounge do buy stuff (it’s a part of the membership) but FTC was able to show the judge that they are buying memberships because the stuff counts toward satisfying their sales quotas (or those of their upline) in order to qualify for better commission rates. Self-consumption, in the case of Burnlounge, is a DISGUISE for real e-commerce (selling music online).
I am NOT convinced that Herbalife is a pyramid scheme due to its high level of self-consumption. Self-consumption in itself is not illegal in itself, but it points to fundamental misunderstanding of business model.
If everybody is a self-consumer and does not expect to make a profit, then you have what’s essentially a “buying club” (see Grimes and Reese mlmlaw.com website), not MLM. A “buying club” primary purpose is to arrange discount for its members through its buying power.
It seems Herbalife does not know what itself really is.
If HR1220 2003/2004 had been approved, then sales to other participants would have been counted as equal to sales to non-participants, making it more easy to disguise a promotional pyramid scheme. “If it HAD BEEN approved”.
“If it had been approved” reflects the reality here. “Could have been” or “should have been” reflects something people want to believe in, a personal belief system.
If DSA really wants to make the laws become clearer and more easy to understand, THAT attempt was a failed one. It wasn’t aimed towards the target it PRETENDED to be aimed towards. It didn’t try to protect a meaningful system of laws and regulations, it tried to protect some very specific interests.
“MEANINGFUL SYSTEM OF LAWS AND REGULATIONS”
Anti Promotional Pyramid Laws are normally a part of Consumer Protection Laws and/or Unfair Commercial Practice Laws.
HR1220 2003/2004 doesn’t fit well into the contexts of “consumer protection” or “fair commercial practices”. It would probably have violated the MEANING of those two areas of legislation.
Why will an organisation like DSA fight for something meaningless like that? The majority of its members should normally prefer a meaningful system rather than a corrupted one (assuming most of its members tries to operate legally).
Not quite like that. It can BECOME a part of the cause.
Most retail businesses will normally have some self consumption, e.g. employees buying for personal use at a discounted rate. That’s perfectly normal, and it won’t cause any problems.
It becomes a problem when self consumption is about disguise for a promotional pyramid, used to collect contributions from participants. The main problem here is the collecting of contributions from participants, not the self consumption.
The CAUSE here is how the system is organised in ALL its parts, e.g. people wouldn’t have started promotional pyramids if Risk/Reward possibilities had been quite different.
Promotional pyramids have the potential to come in direct conflict with my own interests, professionally and personally. I’m analysing them for vulnerable parts and for how to shut them down, in case I will need that insight later sometime. But normally they don’t come in any direct conflict with any of my interests.
Bill Ackman has decided to get FTC or other authorities to shut Herbalife down, as a primary goal. I’m analysing his methods to see how they work, in case I can use some similar ideas (not the $1 billion, but other ideas). Some of my posts have contained theoretical “What would I do?” analysis, and maybe I will try to get some of them tested.
Herbalife IS vulnerable to pyramid scheme laws. It IS already under attack. It WILL probably fail in one way or another, e.g. being shut down or reorganised. I may try to speed up that process, as some sort of “training”. I’m clearly working in that specific direction.
the purpose of HR1220 is to distinguish between illegal pyramids and the proposed ‘legal’ promotional pyramids which is based on product sales .
it appears to want to resolve once and for all this gray area about internal/external consumption which continuously haunts the industry .i think ,it tries to ay that ‘compensation’ earned on internal sales should be treated as ‘commissions’ on the product and thus be legal .it seeks to dissolve the boundary between distributors and retail customers .
it seems like a good idea if enough checks and balances are included to ensure consumer protection and fair trade practices .
every system is capable of being abused .but some tough regulatory laws could reduce the occurrence of misuse .
let there be whetting of the product ,pricing and compensation plan at the registration stage of a new MLM company .
let there be rules to stop inventory loading [any suggestions ?] and easy buy back policies .once distributors have the rights of being treated like a customer too, they will be free to use normal consumer protection forums for redressal .
there could be stern advertising norms to avoid overselling of the economic independence dream .the idea should be that ‘this is a fantastic product and IF you’re able to sell it further we will reward you ‘
chang , MLM should be like a ‘buying cum selling’ club . you’re free to be only a buyer and you’re free to be a seller too for as long as you like .
well legality is not a ‘NATURAL’ law. things are illegal only until they receive legal sanction .
the fact IS that several states have adopted statutes that give similar status to distributors and retail customers in ‘reasonable’ numbers [that’s a whole new issue waiting to blow up ].
so the idea may not be as illegal as you’d think .
Disagree. It would expand the gray area between legal and illegal, when it should be REDUCED.
Without a clear separation between customer and distributor, the Koscot 4-item test for pyramid scheme will be next to useless. Webster vs. Omnitrition already established that.
All attempts at legitimizing “self-consumption” beyond reasonable amounts is an attempt to erode the Koscot test.
Or put it another way, I have no problem with Herbalife setting up a “preferred customer” class (gets the same 25% discount, but CANNOT retail, and CANNOT recruit).
The “nutrition clubs” would have the members as preferred customers. Then there’s CLEAR delineation between retail customer and “distributor”.
Herbalife’s argument is that it’s primarily a discount buying club (72% of its “distributors” do not expect to profit) and only a small portion of its distributors actually sell retail.
In other words, it’s a operating as buying club with a MLM subsidiary, instead of a true MLM company.
That is just WRONG, on so many levels.
Herb Greenberg posted another commentary on LinkedIn:
but WHY can’t a buying club be set up along an MLM structure where some of the discount is paid as commissions at various levels ?the retail price of the product would still be considerably lower than comparable products in the market.
it appears wrong at a moral/ethical level only because the pricing of the product gives the impression of being inflated .if a tin of health supplements from abbot labs was the exact same price as a tin from herbalife, the entire argument against MLM would go out the window .
let me give you an example chang .in a recent TV disclosure ,it was shown how pharma companies have retail prices that can be upto 60 times the actual cost of the product.unbelievable but true!
so if there are products in traditional markets which have a mark up of say 15/20 times the cost of manufacture, there is enough profit space to set up an MLM selling system?
MLM needs to exchange greed for respectability .
It tried indirectly to legalize something that currently is considered to be Unfair Commercial Practice. That doesn’t fit well into the framework of “Consumer Protection”. It tried to protect the interests of the organisers of promotional pyramids, on the expense of the consumers and other businesses.
The proposed law could have fit well into the framework of “Pyramid Scheme Organiser Protection Laws”, e.g. laws designed to protect the organisers from angry consumers or participants, and to protect them from being prosecuted by regulators or enforcement agencies.
Proposed laws should first of all try to fit within the framework where they normally belong. HR1220 didn’t fit well into it.
The lack of bright lines will not become any problem for most business organisers. It will first become a problem when a business model is flawed right from the beginning, in its most fundamental parts (e.g. lack of real customers). So the real problem is flawed business models rather than a lack of bright lines.
A business model can be flawed in many ways, e.g. it will be flawed if you can’t sell the products to external consumers without attaching an income opportunity to it. Theoretical customers rather than real customers is a flaw, too.
Show me one of those states? (I didn’t mean “show me the STATE”, it was about “Show me the RULES in that state you’re talking about”).
Internal consumption in a network IS actually completely legit, just like any other customers’ consumption. It will first become a problem when it becomes part of a promotional pyramid, e.g. where product purchases indirectly are used to buy or maintain “positions”, “rewards”, “rights” in the income opportunity itself.
An income opportunity is NOT a tradeable product or service, so people shouldn’t pay anything for the opportunity itself, or pay for “positions”, “rights” or anything similar.
If a business organiser is able to apply simple business logics, anti pyramid rules won’t become any problem at all.
Just forget the “Show me one of the states”. It won’t give any meaningful answers anyway, it will only show that each state can have slightly different rules and definitions.
it will only show that each state can have slightly different rules and definitions.-norway
‘slightly different’ norway ???
i think a statute which gives same status to internal consumption [yeah reasonable numbers and what not ] and retail pretty much upsets the apple barrel .the implications for MLM are huge and game changing .
Australian hedge fund manager John Hempton, who uses the world “scumbag” to describe Herbalife and the industry — say it really doesn’t matter because the cops are politically muzzled and therefore won’t do anything.-greenberg/chang
chang ,herb greenberg is complaining about how the FTC/cops etc are ‘muzzled’ by the DSA . well, where does he live ?if he’s american he should know that political lobbying is a part of daily life there and practiced by businesses across the board .in india we call it plain old BRIBING , but then what do we know .
If a business organiser is able to apply simple business logics, anti pyramid rules won’t become any problem at all.-norway
norway, in the real world we need laws to keep things in line . we cannot depend upon the wisdom and honesty of individuals .which is why a law with no ‘bright lines’ is an invitation for colossal confusion as we are witnessing in the herbalife/ackman drama .
ha ha watch SENIOR hedge fund ‘experts’ argue like schoolboys . really ! people actually trust these jokers with their money ?
It’s only confusing when people want to run an MLM business as similar to a pyramid scheme as possible, but without risking being prosecuted for doing that.
But if you’re trying to make an MLM business become as similar to a pyramid scheme as possible, the business won’t be an MLM business anymore. It will be a chain recruitment scheme rather than MLM.
I can’t understand why that is causing confusion? 🙂
A bright line in MLM is this one:
A participant can earn commissions derived from his own sales to external customers, and earn commissions derived from sales to external customers, made by someone he has introduced into the business.
That is a 100% bright line, “sales to external customers” for both his personal sales and for sales made by his downline. This is a basic rule, and it’s very easy to identify.
Courts have later accepted SOME sales to internal customers, and SOME rewards deriving from that sale (allowing for distributors to be different, too). That is the “grey area”. The “grey area” is NOT about sales or consumption, it’s about the rewards deriving from it.
Seriously, you can’t expect anyone to set up a bright line about sales and consumption? Sales and consumption do NOT define whether something is legal or illegal.
And seriously, you can’t expect legislators to make rules in conflict with fundamental rights, e.g. EQUALITY BEFORE THE LAW? Different businesses can have completely different business models, and the rules will have to be adjusted so they’re FAIR to any variations.
* A “bright line rule” will require all affected businesses to be 100% equal to each other in most parts, to be compliant with other rules with higher ranks in the system.
* “Grey areas” will allow businesses to be different from each other, allowing the law to be FAIR to any type of business variations. And that’s much more important than bright lines.
Your “in the real world” logic is flawed. Your ideas would be rather dysfunctional in the real world, violating more important principles in legislation. The “grey areas” protects the more important principles rather than the less important ones.
I have found some reasons for this:
I found the similar problem at Nu Skin, when I tried to do a basic check for a Norwegian wannabe distributor a couple of months ago. The products were clearly presented, but all the important details about the compensation plan were not available, or were spread around so it was impossible to get a quick overview.
That strategy has several functions:
1. People randomly visiting the website will get an impression of a solid product based company, rather than recruitment based. “People” includes regulators.
2. People looking at the opportunity will have great difficulties in getting an overview on their own, and will have to ask and trust sales people. They will usually have to buy something before they can ask questions.
* It will prevent prospects from having too much insight, more insight than the sales people, e.g. asking too many difficult questions.
* It will allow the sales people to use predefined sales methods, e.g. follow “scripts” and “trained methods”. It will allow the sales people to direct the prospect’s focus in certain directions, e.g. focus on the income potential rather than the costs.
* It will allow for using sales techniques like “foot in the door technique”, methods where the prospect gradually will accept lots of different things they will have to buy.
Methods like that have been reflected through almost all the complaints I have read, the 192 complaints to FTC. It has been reflected directly through the descriptions, and indirectly through the TYPE of complaints (an overweight of “unprofessional complaints”).
I spent nearly 1.5 hour trying to do a basic check before I gave up. The wannabe distributor had probably decided to join Nu Skin anyway, before she asked questions.
I posted a few red flags, but kept my answer completely neutral. Some weeks later, when the forum thread had been dead for weeks, a Nu Skin distributor posted an annoyed comment about “asking the wrong people”, i.e. “If you’re looking for a job, normally you will ask someone working for that company, not everyone else”.
The behaviour of sales people can often tell more than words, e.g. about how dependant they are of using sales scripts or trained sales methods, or how comfortable they feel when other people are trying to look into their business.
That Nu Skin distributor did absolutely not feel comfortable discussing Nu Skin on a public forum. She limited her comment to “trained sales arguments”, and ignored to follow up that comment and answer questions.
Companies like Nu Skin and Herbalife don’t want people to know too much about them before they have become distributors. It will probably ruin many of their sales methods, e.g. Herbalife’s method for encouraging people to buy higher positions.
Just to be on the lighter side, I have read ALL of the comments here. 🙂
Been working with Herbalife for some time now. Although I can spot bullshit from the door, it doesn’t seem to have a pyramid scheme going on.
People earn commission when they sell products. If you don’t sell … no money. Same goes for distributors and supervisors alike.
If a supervisor can’t make personal sales, then no royalty for him. As I have read through the site, and followed OZs advice … follow the money. And i did. Every commission comes from selling the product (either your self or your down line)
Even when you recruit someone (109$ + 9$) you receive PRODUCTS in this value – 109$ (minus 9$ annual membership fee)
I am failing to see how this is a pyramid scheme.
Google “product based pyramid schemes”.
If the majority of revenue Herbalife generate is from their distributors (regardless of what said distributors do with the product they purchase), it’s a pyramid scheme.
The above scenario clearly demonstrates a reliance on recruitment (distributors) to survive.
Herbalife pegged retail sales at 30% or so, so it’s obviously a pyramid scheme. The wildcard is wholesale customers, which they have announced they will clear up in April.
Whether they do or not remains to be seen.
As I’ve seen it these distributors fall into two categories:
1. people who eat at discount at 25% (I think … don’t know really … that this is the majority of the distributors that you are talking about)
2. real distributors
Don’t know really how they can track to see which is which.
Would be a shame to shut them down, a really like the chocolate shake 😀
They can’t until they introduce a perferred customer class (who can’t earn anything but sign up for monthly autoship to get the 25% discount).
Hopefully that’s what’s going to happen in April.
And it is your opinion that sorting this out would put them out of the shady zone?
It will if there’s more revenue generated by wholesale and retail customer orders than affiliate orders.
That is if the wholesale customers actually exist and aren’t just distributors who can’t recruit.
I’m necro’ing this topic, but news of the day:
Thanks for the tip-off Jimmy, I’ve put up an article here – https://behindmlm.com/companies/herbalife/ftc-herbalife-investigation-they-had-it-coming/