Herbalife pull misdirection on wholesale customers
Misdirection (n): Misdirection is a form of deception in which the attention of an audience is focused on one thing in order to distract its attention from another.
I’ve been buried under a mountain of work so I’m a bit behind on BehindMLM at the moment (geddit?), but by now most following the MLM industry will have seen the press release regarding the Nielsen survey Herbalife recently commissioned.
Before we get into that though, we first need to put the Nielsen survey into context. Last we checked in on Herbalife they announced back in February that they were going to ‘more clearly identify the wholesale customers among its 3.2 million distributors from April’.
For reasons unknown, that never happened. Or it might have happened, but the results were never made public.
Completely missing the self-imposed April deadline, on May 2nd Herbalife CEO Michael Johnson then announced that Herbalife would be
announcing significant changes to the nomenclature used by the company in the next 30 days.
Anticipated to be the introduction of a “wholesale customer” class into the Herbalife compensation plan, to the best of my knowledge it never happened either.
What did happen?
Around the same time as they were supposed to be releasing figures on their wholesale customer numbers, Herbalife approached Nielsen to conduct a survey on the consumption of Herbalife products by the American public.
Rather than simply introduce a wholesale customer class (something that would take Herbalife a whole 10 seconds to do) and release figures on how many “failed distributors” made the switch, Herbalife instead are now harping on about said Nielsen survey.
The survey, held over April and May 2013
was conducted among a nationally representative sample of entirely adults, aged 18 and over in the U.S., and balanced by key demographic indicators from the U.S. census, including age, gender, race, personal income and geographic region.
With a sample size of 10,525 consumers, the survey had a margin of error of +/- 0.96%.
The results?
3.3% of the general population reported that they had purchased Herbalife products within the past three months, indicating that Herbalife currently has approximately 7.9 million customers when projected to the total U.S. adult population.
Well that’s it then, Herbalife clearly isn’t a recruitment driven pyramid scheme. Case closed and we can all move on.
Not quite:
The Nielsen study found that 87 percent of the 349 respondents (out of 10,525 total respondents) who purchased Herbalife products for personal use in the past three months self-reported that they did not purchase it from the company as a distributor.
Herbalife customers would include their distributor network, which totaled approximately 550,000 in the U.S. as of the end of the first quarter 2013.
Proclaiming the legitimacy of Herbalife on the back of the Nielsen survey is problematic for a few reasons. The first being that, as quoted above, distributors are reported as consumers.
This introduces an abnormality into what would otherwise be a standard consumer survey in that the possibility that disproportionate amount of Herbalife distributors might reside in the areas the survey was taken.
Rather than exist on the merit of the product itself (which is what would happen without the attached income opportunity), potentially you’ve got a bunch of “consumers” existing because they were promised riches if they recruited enough distributors.
Consumers? Absolutely… but what, if anything, that has to do with proving the legitimacy of Herbalife is beyond me.
Another problem is the inclusion of customers who didn’t purchase Herbalife products from the company as a distributor.
Claiming 87 percent who purchased Herbalife products didn’t do so from the company as a distributor does not address whether or not they purchased the products, as a distributor, from other distributors (their upline).
In a pyramid scheme, this would be happening quite frequently as new distributors would be encouraged to purchase product from their upline to self-qualify for commissions (earnt by recruiting new distributors who then purchase the same product the recruiting distributor just bought).
Why is this important?
Revenue. Determining whether or not Herbalife is a pyramid scheme has nothing to do with how many Americans are consuming Herbalife products but rather the revenue going into the company and where it is sourced from.
No matter what Herbalife distributors do with the products they purchase, or how many Americans consume Herbalife products, if the revenue going into the company is coming from affiliates, this indicates that it’s a pyramid scheme.
And this brings us back to the issue of wholesale customers.
Deliberately confusing the matter, Herbalife insist that distributors who earn no money and do not recruit are customers. These distributors, the company claims, are only distributors to enjoy a wholesale discount on the purchase of Herbalife products.
The problem with that is there’s no distinction between failed distributors and your actual wholesale customers. Herbalife know this and continue to this day to deliberately keep actual customer figures obfuscated.
The potential for obfuscation is precisely why the wholesale customer class is used in MLM, as it bars those looking to simply purchase products at the wholesale level from earning via the compensation plan. These customers thus are infact true customers and not distributors.
This is why back in February that Herbalife’s announcement it was going to actually track wholesale customers was so important. Separating Herbalife distributors from actual wholesale customers and then making public the proportion of revenue each class directly pays into the company would prove once and for all that Herblife is viable at a retail level.
Well, it would if the distributor generated revenue was less than the retail and wholesale customer revenue combined.
Given that the introduction of a wholesale customer class would have taken Herbalife all of 10 seconds to implement (well ok let’s be fair, all of ten minutes) and that they first made the announcement almost six months ago now, one can only conclude that
- Herbalife did indeed crunch the numbers and knew that creating a wholesale class would provide irrefutable proof the company is infact a recruitment chain pyramid scheme, or
- That they have no confidence in their so called “wholesale distributors” switching over to a class that is cut off from the income opportunity (thus proving that they are in fact failed distributors who cannot recruit).
If there’s any other justification for Herablife announcing they would create a wholesale customer class in April and then quietly drop the subject and instead run around commissioning surveys full of misdirecting facts and figures, I’m all ears.
Johnson concluded, “We believe the results of this study substantiate our belief that many of those who attack our model lack a clear understanding of the direct selling industry, and Herbalife in particular.
Cut the bullshit Johnson. You want to prove Herbalife is not a pyramid scheme? Create that wholesale customer class and release the subsequent revenue ratio figures.
Stop messing about and wasting everybody’s time.
You might be able to confuse the matter and string along the financial industry with irrelevancy but as far as the MLM industry goes we’re still waiting and watching. Pulling stunts like the Nielsen poll whilst continuing to fail to deliver on wholesale customers only further reaffirms the view Herbalife will do whatever they can to bury the issue.
A California congresswoman asked the Federal Trade Commission to investigate allegations that Herbalife Ltd. operates a well-disguised pyramid scheme that victimizes “our country’s most vulnerable populations.”
Rep. Linda T. Sanchez (D-Cerritos) said in a letter to FTC Chairwoman Edith Ramirez that she was “troubled that this company may be harming consumers,” noting allegations that Herbalife’s independent distributors are compensated more for recruiting new distributors than for sales.
Whether the FTC gets involved remains to be seen but why wait for them to reveal the revenue flow of the business? Herbalife could easily do it themselves in less than half the time it took for the ink to dry on Cristiano Ronaldo’s recent sponsorship contract.
Linda Sanchez represents the Latino population in California, and thus, is worried that Herbalife had been cheating her constituents.
It would be really hard for Herbalife to have a preferred customer program. For Herbalife to do that they would have to have equal pricing for everyone who is a monthly customer whether you are a distributor or just a customer and they would need higher pricing for those who are not monthly customers.
That idea would require changing the compensation plan because in the compensation plan as you advance you receive further discounts on your personal orders so there is no equal pricing between monthly customers and monthly distributors.
Distributors are in it for the money and wholesale customers are in it for the product.
Distributors shouldn’t care they’re paying the same price as wholesale customers. If they pay less as they advance then that’s only a bonus.
Eitherway it’s not a valid excuse for failing to set up a wholesale customer class and disclosing company revenue source ratios between customers and affiliates.
It’s not like wholesale customers is some new concept in MLM or something.
I still don’t think it’s that cut-and-dry. Not sure how Herbalife’s comp plans work but in theory a customer whose focus is primarily on purchasing and using product might still rather have access to the comp plan just so they can reap the benefits if their friends try it and want it as well.
Perhaps a wholesale customer class that rewards customers for introducing other customers by offering credit on future purchases would help clarify the lines, although that’s still not perfect. But at least there would still be some incentive for consumers to choose to go the wholesale route.
Another thought I had for Herbalife specifically is the possibility of eliminating the autoship requirement.
Again not a perfect solution as there are legitimate reasons why it’s necessary, but if affiliates weren’t forced to continue ordering then that would really distinguish who actually wants to pay for the product.
That’s fine, they’d be classed as an affiliate then and not a retail customer.
Herbalife are the ones running around proclaiming they have so many retail customers. If they are to be believed then the setting up of a wholesale customer class will prove that.
Why they haven’t done so, despite saying they would, remains unclear.
As for incentives, Herbalife claim a good chunk of their affiliates are just preferred customers and not infact failed distributors, they shouldn’t need any incentive to switch over.
The point is to separate between TYPICAL income opportunity seekers and TYPICAL customers.
A typical customer will primarily be interested in the products or services, “for the desire to own, use, consume or any other normal use” of the product itself.
Most of the products or services people buy don’t have any income opportunities attached to them. Some people can of course have rather extreme consumer habits, but most people have normal habits.
People will buy the product anyway if they like it, can afford it and the product is easily available. Some products may need some special sales efforts to be sold, and MLM and other direct sales methods were initially designed for that purpose = “pay people for the sales efforts”.
Participants in MLM can of course buy products for personal use, just like any other consumers. But internal consumption can only work as an ADDITION to the external customers, not as a REPLACEMENT.
If nearly all the purchases are done by the participants themselves, and you have “qualifying purchase volumes” for different types of rewards, then we’re probably talking about a disguised pyramid scheme.
IIRC, herbalife’s comp plan has NO MLM commission until you reach “supervisor” level. The initial level can easily be lopped off and becomes “preferred customer”.
The fact that they choose NOT to, but instead, again, tried to extrapolate customer base with a “survey” is, well, dodging the issue.
The real problem is MLM does not work and never will. MlM has been around for over 60 years and the currently have 8 USA based Billion dollar per year companies.
On the other hand there are currently 960 traditional companies that offer the exact same services and products as MLM companies that are doing a billion dollars a year.
Why is that? MLM products do not compete in the real market place. Look at Amway the grand daddy of them all. Amway does 12 billion in sales yet they are in 173 countries. In the united states after 60 years Amway only does 600 million in sales there is no residual income or true repeat customers there just burning through market after market.
Watch what happens when a MLM company does 300 million in US sales they have to expand markets or the company will start to decline.
In theory, they would need an incentive to switch. As loyal customers, if they are entitled to small perks (financial or otherwise), why would anyone choose to lose that option?
Apparently this does not actually apply to Herbalife, but hypothetically speaking it can be an issue in establishing a wholesale class.
I agree with your analysis towards the end, but your premise at the beginning fails to recognize that in this day and age rewards for loyal customers and referrers are extremely prevalent.
My cell phone provider Sprint just sent me an offer this week for $50 for each person I refer. AT&T for my internet and cable has done this too. Southwest Airlines constantly bombards me with bonuses if I get friends to join their Rapid Rewards and take a flight. My Eye Doctor and Dentist do the same.
I’ve taken advantage of bonuses from airbnb, zipcar, and livingsocial for referring other customers. groupon and daily deals also make these offers (but I’ve yet to have an instance to take them up) I’m pretty sure the list goes on much longer..these are just recent ones I can think of off the top of my head.
Typical customers with very normal habits take advantage of these kinds of offers all the time. I think explicitly offering CREDIT over INCOME would be a good place to start though. If you’re a committed customer, you’ll gladly take an offer of credit as incentive.
Oh ok! This does make it a bit more cut and dry for Herbalife. So a normal customer will never reach the point of receiving any benefits. If that is the case then I completely agree.
But how do you reach supervisor level? Is there any possible way to do this by consistently buying product for your own use over a few years? How about just by referring one or two friends? I think that would clearly be within the realm of a loyal customer. But some might have designs of introducing even more friends to a product. 5 people? Ten people? Still possible.
It’s a gray area, but I think if you convert the income opportunity to credit only then you definitely eliminate the developers who are not interested in product. Or you could eliminate autoship 🙂
Herbalife are claiming these distributors are infact wholesale customers. Wholesale customers aren’t interested in the business opportunity.
We’re simply asking that they prove it by creating a wholesale customer class instead of operating in pyramid scheme loopholes.
Hypothetically you need a wholesale customer class to establish retail customers who are happy to sign up for autoship in exchange for a wholesale discount. This boosts your retail revenue.
The first two offers will be like paying any other sales person a one time commission for doing a sales job. It’s a relatively inexpensive sales method, in that they don’t need to hire anyone or train them for the sales job, and they will only pay you for actual sales (nothing for failed sales attempts).
Airline reward programs will be too complicated to analyse. Eye doctors and dentists are too specialized to analyse. Professions like that usually have some ethical rules to follow, you can’t just recommend friends.
The two samples I was able to analyse were more similar to commission sales than to referral sales. You were simply offered an OPTION to do a sales job for them, to earn a one time commission for any sale you’re able to generate.
You had already bought the services anyway. You didn’t sign up with Sprint and AT&T because they offered referral rewards like that? You bought the service itself in both cases?
It becomes illegal if the referral rewards are bundled into an agreement, e.g. “You can earn $50 commission for anyone you’re able to sign up as customers, IF you first subscribe to our services”.
That actually illustrates my statement:
The income opportunities weren’t ATTACHED to the services in your examples either, it was about an OPTION people could choose.
Most products or services people buy do not have any income opportunities attached. E.G. you visited the dentist because of the service he offered, not because of the income opportunity he offered.
I will consider it to be “extreme consume habits” if people are visiting dentists and eye doctors to participate in income opportunities offered there, e.g. “I’ll need to have my eyes checked, but the dentist is offering a much higher reward for referrals than the eye doctor, so I prefer to visit the dentist”.
Oz and Norway,
I don’t understand where I’m losing you guys. Perhaps Herbalife doesn’t work this way, but under a different payment plan with a particular MLM company I’m aware of, a consumer can make money (marginal amount) by referring ONE friend who buys a particular product ONE TIME.
The fact that this opportunity exists means I’d have to have a very good reason to decide to forgo this. Even though I have no intention of making a business out of it, I still might as well take the free money offered me. There needs to be an incentive to turn it down.
So what would make me decide not to take the free money offered from these companies? I stand by my position that you need to resolve this and I have offered two alternatives. Of course I choose my dentist based on other factors and not any “attached income opportunity,” but when it’s offered why would I elect to turn it down? (Presuming I am already of the mind to recommend them)
BTW, Groupon, Livingsocial, and the Daily Deals company from my city have made this a constant for many years. They all reward you for referrals for every single item that they sell. To my knowledge, nobody has ever turned down the reward or been told that they should.
So once again, I think you’d need to create a wholesale class that can receive credit but not any actual income. Or you create a wholesale class that can still receive credit/income but is not forced to reorder. Then we’ll know who’s buying for the products and who’s in it for the income.
What Herbalife needs to do is make everyone a customer that buys directly from herbalife not from a distributor with the option the earn income. But don’t give credit for rank advancement or commision for anyone that purchase more than 150 points worth of product.
They can get paid in commission up to 150 points but not more. That way everyone is only purchasing for self consumption not to resell. If you want to get the products you must go directly to the company.
People will still buy from other people but at least your not buying 2,500 worth of points to qualify as a supervisor and asking others to do the same because you can only use 150 points of your personal order towards supervisor
The wholesale customer class you’re talking about seems to be more interested in joining an income opportunity than buying products?
I’m separating between “typical customer behavior” and “typical income opportunity seeker behavior”. You lost me when you insisted on grouping them together into one big group.
You used yourself as an example, e.g. “I’m a customer, and I have deals with my dentist, eye doctor and several others about referring friends and earning rewards”. But that’s a part of your income opportunity seeker behavior, not a part of your customer behavior.
1. A typical customer is PRIMARILY interested in buying products or services. Some of them can of course be interested in income opportunities, but that’s not TYPICAL for a consumer.
2. Typical income opportunity seekers are PRIMARILY interested in the income opportunity. Some of them can of course be interested in the products or services too, but that’s not the primary motive.
Those two groups should be separated from each other by different types of agreements.
If there really is a retail market for the products or services, you don’t need to have an income opportunity bundled into an agreement. You can have separate agreements for the group of customers that really are interested, but you don’t need to offer it to each and everyone.
If there really is a retail market out there eagerly waiting for a new supply of products, it shouldn’t be necessary for the sales people to buy any personal volume each month to qualify for commissions.
No, I’m trying to separate them into two groups just as you are. However your method wouldn’t actually do it. I’m pretty sure after hundreds of billions of transactions (just an educated guess), there’s not a single person who has turned down livingsocial’s offer and said no thanks for the free product if they referred three people.
Very few of your typical customers would choose a wholesale consumer classification if there was no benefit at all, assuming all other things are equal.
??? I had been with my specialists for years with no income opportunity offered. Only more recently were these introduced and I have yet to try to earn a single reward. Most likely, I will never earn a single reward.
And you know what? If my dentist said: “Ok, you havent earned any rewards by referring clients to us, so I’m gonna ask you to reclassify yourself so that we will no longer offer you any reward for referrals.” I would say I’d rather just stay where I am.
Who knows? One of my friends a year from now might ask me for a dentist in this neighborhood.
And given this definition of a typical customer, what percentage of them will opt out of the free-referral programs I’ve described?
This is exactly what I’ve been saying all along! But your agreement with the TYPICAL CUSTOMER has to provide some incentive or they won’t self-differentiate.
Your first sentence by itself is completely right. Here’s the problem…once you’ve offered that income opportunity to your customers, it’s out there. How in the world do you think you can get the majority of them to opt out with no incentive whatsoever??
In your scenario, you could offer the income opportunity after the fact and make it a little more inconvenient to opt-in. This could work. But the bar of inconvenience has to be set pretty high vs the potential rewards.
And also, btw, you’d be doing what I have been suggesting all along…offering an incentive to join the wholesale consumer class. (or in this case, it’s more like a disincentive not to stay in it)
I agree 100%. This was the reasoning behind my alternative suggestion. 🙂
According to Herbalife itself:
herbalifemail(dot)com/US/EN/Connections/Distributor/html/Day2_Supervisor.html
So no, you can’t qualify yourself with simple purchases, unless you buy a ****load of Herbalife stuff. This is WAY beyond self-consumption.
There’s a difference: company can offer a discount, but they cannot make you provide referrals as a requirement in the discount. THAT is illegal. here’s a relevant Minnesota law (all other states have similar laws)
Groupon’s skirting the line by
1) only giving you Groupon Bucks (not usable anywhere else) instead of cash, and
2) limiting you to lifetime max of $100 Groupon Bucks.
As such, they’re in a bit of gray area that’s small enough that the authorities won’t go after them, but it’s not an income opportunity at all.
Interesting! Thank you for making the first comment that is actually pertinent to my questions/suggestions. I may not be interpreting the legal language correctly, but it does seem to me that this reward for referrals is actually illegal.
Interestingly, I don’t think Groupon originally had a lifetime maximum, so perhaps they were reacting to legal issues.
That said, LivingSocial and countless other companies are blatantly crossing the line then! Can you explain this? For LivingSocial it’s not even a referral to the company itself, it’s a referral for a specific deal. Some of their deals cost a few thousand dollars…that’s a pretty significant reward with no lifetime max!
help.livingsocial(dot)com/articles/how-does-the-me-3-promotion-work
@Max
Being a “consumer” is not enough. An MLM company need to have a high percentage of revenue sales. If consumers in the company have access to the compensation plan, they are still consumers but they are classed as affiliates and not retail customers.
Thus any products they pay for is classed as affiliate (internal) revenue (regardless of what they do with the product they purchase).
If the product alone is not enough to convince you of purchase as a retail customers, then the product is not viable. Product + income opportunity really means it’s the income opportunity being sold which equates to a pyramid scheme (no recruitment, no product sales).
Either is fine. So long as the credit is in no way a financial reward and external to the affiliate compensation plan.
Unfortunately Herbalife refuse to set up a wholesale customer class, despite claiming they would do so and also claiming an abundance of wholesale customers in the company. Instead they waste our time with pointless surveys and celebrity endorsement deals.
@Larry
That’s fine but they need to differentiate between their affiliate customers and their retail customers.
Why?
>51% of company revenue coming from affiliates = pyramid scheme.
This might be true but doesn’t change my point. All that means is you believe the burden is on the MLM company to show external/non-affiliate revenue.
Regardless, I still think that for the MLM company to do this, they have to do more than simply create a wholesale class and pray that lots of people switch for no reason.
Again, this fact can be true but still doesn’t mean that potential retail customers will ignore the income opportunity. Given the option with no deterrent, they would still choose product + incentives.
Well, credit for purchases might be seen as a financial reward. But other than that, I agree.
That is irrelevant given that Herbalife have publicly declared the bulk of their distributors who have failed to recruit are infact wholesale customers who would give up the income opportunity if given the option to do so.
That was the whole reason they made the “we are going to introduce a wholesale customer class” announcement back in February.
Why they didn’t follow through is kind of obvious… they know if they set it up it’d flop and then they wouldn’t be able to loophole claim failed distributors are wholesale customers.
If you have any other reason I’m all ears.
And if they do then they are not retail customers anymore. Millions of businesses around the world sell products to retail customers every day. MLM should be no different.
If you cannot sell your products to retail customers without an attached income opportunity, there is something fundamentally wrong with your business model.
The problem is we are comparing the MLM marketplace to the traditional marketplace. MLM products are overpriced luxury products that do not compete in the real world marketplace.
So the only way they can sell their products long term is by having an income opportunity attached to it or distributors asking friends and family to try out their MLM product. And thats why there is something fundamentally wrong with all MLM products.
It seems they are doing the same… By offering discounts in “DealBucks”, not in cash. Basically, if 3 folks bought something off your referral you get the amount refunded as DealBucks, which obviously only works within LS itself.
(devil’s advocate mode on)
There’s nothing wrong with an overpriced luxury product sold through any channel (retail or MLM) as long as it’s not sold fraudulently through misrepresentation of facts and/or bait-and-switch and/or other frauds.
“Overpriced” is not the same as “high margin”. Spa and luxury travel are high margin as well. 🙂
(devil’s advocate mode off)
I do agree that MLM requires a high margin business in order to sustain the multi-level payouts. In my experience low-margin MLM businesses are usually fake, or have very limited pay potential (i.e. at best, a few hundred a month).
That’s why most MLMs do food supplement. Those are relatively minimally regulated (don’t cause any harm!), relatively loose standards on what can be implied (don’t claim to cure or treat anything), can be easily “differentiated” by claiming proprietary formulation or ingredient or such (even though it’s usually woo), cost little to actually manufacture and plenty of factories to do it. Nobody cares about scientific plausibility of the woo.
http://www.ted.com/talks/michael_specter_the_danger_of_science_denial.html
Nope, in the US (at least) they just cancel the charge on your credit card. If Groupon is navigating the gray area, livingsocial is so far beyond that they can’t even see it. From their FAQ:
Obviously you are correct about the state statutes, I’m just wondering why so many companies get to disregard it.
No, your point is valid. I just failed to make it clear that I’m talking about a hypothetical company and not Herbalife specifically, with the history and specific rhetoric. I know this was an Herbalife article so I apologize for wanting to discuss the general issue instead of this specific case.
As for the company in question, the writing on the wall seems to be that Herbalife is a recruitment driven pyramid scheme.
We keep going around in circles on this. I will grant you every single statement above…and yet it doesn’t negate my point that you were addressing: potential retail customers will choose to buy their product with incentives attached rather than without if there is nothing at all to discourage this.
It may be incumbent upon the company to get these potential retail customers to choose the retail-only option somehow, but the point is that something must be done or else you’re stuck with the same problem as before, a near 100% group of affiliates.
Being a recruitment-driven pyramid scheme should be discouragement enough on the company end to not leave this open as an potential scenario (no retail activity due to how the compensation plan it set up).
Plenty of MLM companies exist today with wholesale customer options. That of course doesn’t guarantee a majority retail sales revenue source, but it’s a good start.
The word “typical” was used as a method to define the legal differences between customers and participants, not as a method to analyse Herbalife.
Herbalife has operated as a pyramid scheme right from its beginning. It received a permanent injunction in 1986 or so ordering it to clearly separate between retail customers and distributors. It also has several settled class action lawsuits, and the case in Belgium in 2011.
PRIMARY FUNCTION
A customer can logically be defined to be someone purchasing goods or services for personal use. That’s the PRIMARY function of the customer role. It’s also the same definition we can use to defend self consumption.
A person buying goods or services for other uses should be defined differently.
MULTIPLE ROLES
We’re not limited to one single role in business, e.g. if you first are a customer then you should also limit yourself to typical “customer activity”. 🙂
You can have secondary and tertiary roles. There’s nothing wrong in acting in multiple roles in itself, e.g. you can recommend your dentist to anyone you want and get paid for the work, in a secondary role.
That’s not a TYPICAL or PRIMARY part of the dentist/client relationship, but there’s nothing wrong in having secondary roles.
Even if you are a customer, the referral options are not a typical part of that role. You will probably still buy dental services even if your dentist doesn’t offer any referral commissions. Most goods or services are actually sold without having any income opportunities attached to them.
Hmmm… They did say if you used DealBucks and got 3 referrals you’ll get the DealBucks refunded. Same idea?
I found a court case about referral sales, “Krehbiel v. Oklahoma”. It clearly shows that grey areas and regulatory confusion are existing problems.
http://www.jdsupra.com/legalnews/does-a-referral-sales-plan-violate-state-58668/
“KREHBIEL V. OKLAHOMA”
Krehbiel sold vacuum sweepers to consumers as a direct seller. He asked his clients for referrals AFTER each sale (according to his own description), offering them $25 for each new sale he would make from the referrals. He offered the same to EVERY client.
He received a “Cease & Desist” for his sales methods. It was appealed to a court, and the judgment was reversed.
The important factors here are about that he offered the same to EVERY customer, making it a part of his sales methods. It was interpreted by the first court to be about illegal referral sales, where the referral offer was used as an incentive to close the first sale (it probably was exactly that).
The appeal pointed out that he already had closed the sale when he offered referral rewards, i.e. the evidence in the case pointed in that direction.
Referral rewards were not a part of the signed agreement between the seller and buyer, i.e. the referral rewards could clearly be separated from the agreement itself, it was merely an OPTION rather than a part of an agreement.
CONCLUSION?
Referral offers will have to be separated from the other parts of the deal. You CAN ask a customer to refer other customers, but that offer has to be separated from the primary agreement between buyer and seller.
It can’t be a part of the same agreement, e.g. “You can earn $25 for every new customer you can recommend, if you first buy this product”. It can’t be used as an incentive either, e.g. as a method to close sales.
It’s reflected in the case that the seller obviously had violated some rules. The first court interpreted the facts correctly, but not the evidence in the case.
He had obviously received complaints from customers in an area, e.g. from people feeling they were offered poorer recruitment chances than other customers.
The conclusion the Appeals Court reached is that there was no agreement requiring the referral of additional prospects. That is why the sales program did not violate the lottery laws of Oklahoma.
It does not matter how many documents you use, or if a “primary” agreement is separate from a secondary agreement. If the intent is to agree then you have agreed, and in this case would have constituted the violation of the lottery laws.
Herbalife want us to take their surveys seriously?
But they won’t release the actual survey data? Fat chance!
Just more evidence they’re playing games and clearly aware the data does not support their “we are not a recruitment pyramid” claims.
Not as bulletproof as a wholesale customer class but definitely an alternative.
If affiliate names are on those forms then it’s not retail revenue. If there’s more affiliate revenue than retail, obviously Herbalife is a recruitment driven pyramid scheme.
But please, give the MLM industry more useless surveys instead!
http://www.valuewalk.com/2013/06/herbalife-new-survey/
I didn’t mention “documents”. The Krehbiel salesman probably violated the rules, but the evidence in the case didn’t clearly show it.
I brought in that case as a part of the referral sales discussion with Max. His viewpoint was that Herbalife will need to offer some type of referral rewards to a “preferred customer” class, or else they won’t be interested in signing up for an agreement like that ( = only purchase products, no right to earn anything from referrals).
He’s probably right in the Herbalife case. The company will probably sell less products if it can’t sell them as parts of an income opportunity. Herbalife has primarily been set up to sell the opportunity itself to income opportunity seekers, rather than selling the products to retail customers.
But if the company really has a base of “typical consumers” eagerly waiting for new supplies of products each month, then a preferred customer class should be exactly what those consumers want.
You’re right, you did not mention documents. So what. The Appeals Court ruled that the salesman DID NOT violate the law because there was NO agreement (written, oral, paper, documentary, secret handshake or otherwise).
How do you perpetuate a point of view and discussion based on some erroneous assumption that the salesman “probably violated the rules” when the the Court clearly found that he did not? And more specifically that Krehbiel did not because there was no agreement between the company and the product purchaser that required referrals as a condition of sale.
More paradoxically you argue that the way a company (Herbalife) or any other) can comply with the “no agreement” ruling in Oklahoma is to “offer some type of referral rewards” “or else they won’t be interested in signing up for an agreement…”
Of course!! Suggesting that Herbalife can maintain or improve sales by setting up a referral program with the primary purpose of selling product and a secondary purpose of selling income is diametrically opposite to the findings of the 1963 Oklahoma ruling.
Here you are arguing that separating an agreement into a primary and secondary purposes implies there is no agreement. That’s not the case and it would fail under Oklahoma law. The complete agreement (all its parts) determines what is binding (legal or illegal) under the law.
You are in effect suggesting that a Court or consumer or affiliate or a sheeple, look at one part of an agreement (the legal part) and disregard the illegal part.
The Herbalife / Ackman case seems to have come closer to a conclusion in the last 1-2 months, or actually between March and now.
Some documents in the case:
I posted a critical comment about Ackman’s strategy some months ago, about him filling up too much of the space in the media, not leaving enough room for other people with OTHER legitimate interests in the case.
“Ackman vs Herbalife” had actually become a PROBLEM rather than a SOLUTION. It directed people’s focus away from other aspects of the case, making it become a case about share prices rather than consumer interests / pyramid scheme issues.
Bill Ackman drew too much attention, making it more difficult for others to receive the attention they deserved. I even accused him of not being a “team player” in his work, i.e. to have misinterpreted his own role in the case.
FTC or other authorities will eventually play a much more important role than him. They will respond to different types of concerns than Ackman’s initial presentation.
1. NCL National Consumers League is a consumer interest organization. It has its OWN legitimate “General Consumer Interests” in a case like this, different than Ackman’s.
2. Hispanic Federation has other types of concerns, e.g. about whether or not Herbalife is targeting vulnerable groups of people represented by them. “The ethnicity card” can be difficult to beat.
Both organizations have valid interests, professional interests rather than personal ones. They will eventually become worse opponents than Ackman.
3. Linda Sanchez has legitimate interests in making sure that the FTC will investigate the case and not sweep it under the carpet. “It affects voters in my district” is a legitimate argument.
4. Julissa Ferraras has similar types of interests.
CONCLUSION?
“Ackman vs. Herbalife” would probably have ended up in stalemate. “3 hours presentation” and “245 questions” are simply too specialized methods for the average audience.
It was a wise strategic move of Ackman when he became less “visible” as a main opponent, leaving more room for other opponents to play different types of cards.
“Probably violated the rules” were reflected in the complaints from the consumers.
The court used “weight of evidence” rather than “clearly”. You have interpreted it to be “clearly found”, but the court came to another conclusion.
The court didn’t clearly find that Krehbiel had acted correctly. It found that the evidence presented in the case supported his version, and it reversed the injunction against him. It didn’t give him “green lights” for anything other than his own description.
Krehbiel offered the referral option to ALL his customers, as a part of his sales methods. According to his own explanation the offer was presented AFTER he had closed the sales, as an option people could use voluntarily, not a part of the sale itself.
The complaints reflected that he actively had used it as a sales method, but it was poorly documented whether he had used the method during the sales process or after, as an incentive or as a voluntarily option. The first one is a lottery, leaving better chances to the first customers in a district than to subsequent customers.
You have misinterpreted something once again. I didn’t come to any conclusions like that, I was simply analysing a specific sample case.
Neither Max’ examples nor mine were related directly to Herbalife. Max posted his own examples, and I posted a court case I found when I googled “referral sales”.
Max did clearly state that he was talking about hypothetical scenarios and own experiences rather than Herbalife. I didn’t specify that in my post, since the “example method” already had been accepted in previous posts. My post was primarily about “grey areas and regulatory confusion”.
What consumers? Where do get this from…its not in the material you linked to.
As it always does.
Where are you getting this idea that customers complained? Complained about what? They all received the same offer.
And you think the AG of Oklahoma obtained a cease and desist because some people complained that they “were offered poorer recruitmant chances than other customers? That’s an interesting reading of it since the Appeals Court made no mention of disparities existing between one customer and another.
And its pretty implausible to think the AG would take action against a ponzi lottery because one lottery participant got more lottery dollars than another, when the point is to shut down the lottery regardless of whether participants are treated fairly by the promoter of the lottery.
To my mind its more likely a competitor of Kehlbiel complained because he was losing market to Kehlbiel.
The case was from 1963, 50 years ago. I used it as an example for “grey areas and regulatory confusion”, not as a suggestion for a case we should study in detail and discuss in itself, or as an example for Herbalife to follow.
Yeah you mentioned that but you also drew specific conclusions based on those “old” 1963 grey areas and rulings. Beep Beep. Don’t try to back out now. You cited the case.
That old case will be rather off-topic to discuss, don’t you think? It’s neither related to Herbalife nor directly to current MLM laws.
Consumers WERE mentioned in the case, competitors WEREN’T. The consumers were mentioned as groups of consumers.
“Weight of Evidence” can typically be found if there’s doubt about something in a civil case. Other types of cases will use different “Burden of Proof” criterias. It can also be found in the highest appellate courts, reviewing a lower court’s decision.
So now you claim its neither related to Herbalife nor current MLM laws after you cited the case and reached a conclusion concerning it in a thread about Herbalife on a website about MLMs.
No wonder I am confused. I thought I was on the the Oklahoma Vacuum Cleaner Manufacturers website.
The discussion was about “Do companies NEED to have income opportunities attached to the products to be able to sell them?” and “Does Herbalife need a method like that?”.
Herbalife probably does need a method like that, but most products and services sold in a market don’t need to have income opportunities attached.
Another part of the discussion has been about “What’s legal / illegal?”, in general rather than specifically about Herbalife.
The discussion has also been about “Participant or customer – what’s TYPICAL for both groups and what are the differences?”. That topic is close to Herbalife’s primary defense strategy = “Our distributors are actually customers, wanting to buy products at reduced prices”.
….which is EXACTLY why you cited the decision in the 1963 Oklahoma case.
And then I went on to analyse the current status of the “Ackman vs. Herbalife” case, bringing the topic back to “Herbalife”.
If you want to elaborate on specific parts of the Krehbiel case, you can of course write something about it.
No I do not think I can bathe myself any further in your “grey areas and regulatory confusion”,
Queens (New York) councilwoman joins in chorus of requests that the FTC launch an investigation into Herbalife:
http://www.timesledger.com/stories/2013/25/ferrerasherbalifeletter_tl_2013_06_21_q.html
I mentioned Julissa Ferreras letter in post #41, among other initiatives from different organizations. The letters can be found at http://factsaboutherbalife.com/ (Pershing Square’s information website about Herbalife).
I identified 4 of the letters I found to be “important”, but without analysing them very deeply. They are important because of some “magical formula” they contain, something called “right intentions”.
None of the four are directly interested in Herbalife itself, in Herbalife’s share prices or in the battle between hedge fund managers. None of them are directly interested in MLM or pyramid schemes in general, either. They are interested in “society related issues” or something.
Ferreras “letter of concern” will actually have much more impact than any frontal attack on Herbalife itself. The very core of the case isn’t about Herbalife itself, it’s about consumer protection issues.
Sounds good to me. If Herbalife are going to continue to play games and mislead people with silly surveys, rather than just come clean with the data needed to determine the revenue flow of the company then the regulators need to step in.
I haven’t seen anything that convinces me the bulk of Herbalife’s reveue is coming in from anything other than recruited distributors.
traditionally companies have not NEEDED to share profits with consumers, but times have changed and technology connects us all in real time. So having income opportunity attached to a product today, just makes selling so much faster.
50 years ago it would have been next to impossible for a company to maintain records and transact payments of say 10 million distributors around the world in differently legislated countries and cultures and languages. Technology has changed all that and so there IS a NEED to change traditional methods of selling too.
So the question is not about NEED, but rather CHOICE; how does a company today choose to sell it’s product? By traditional distribution systems or the MLM distribution way?
MLM is relatively new and and lacks regulation and legislation, but it is a faster and more inclusive method of selling, so it will grow as CHOSEN METHOD by companies to sell.
norway, nutritional products comparable to herbalife are sold by traditional marketing companies around the same median price, so you cannot say that herbalife NEED the MLM way to sell.
This is the way they have CHOSEN, and as it is with all new concepts which reshape markets and economics, they will suffer the ‘growing pains’.
Sounds like you’re advocating “solution in search of a problem”.
Selling has not changed. Only the medium had (in in conjunction, reach and targeting). There will forever be a difference between a customer and a salesperson. Attempts at mixing the two resulted in ethical problems and legal problems.
Furthermore, just because something *can* be done doesn’t mean it NEEDS to be done.
MLM is not new, and it has NOT changed the world in 40 years it’s been in existence.
The discussion wasn’t about that. It was about “Which changes can Herbalife make to avoid or reduce the problems it currently are facing?”.
It’s facing escalating problems of a different nature than earlier.
The case has evolved like this:
* 2011: The Test-Ankoop case in Belgium
* May 2012: David Einhorn’s 3 questions, drop in share prices
* December 2012: Bill Ackman’s frontal attack
* January/February 2012: The hedge fund manager war
* March 2012: National Consumers League
* May 2012: Hispanic Federation
* June 2012: Linda Sanchez / Julissa Ferrara
The next upcoming event will probably be a FTC investigation.
Somewhat of an update, with Herbalife announcing they are going to start calling distributors/affiliates who fail to recruit “members”.
They’ve ambigiously used the word “customers” though, so I’m not sure if this is actually a new retail class that is being created (with distributors cut off from the compensation plan) or a temporary class of distributor until they recruit a downline.
Ie. You are a “member” until you earn a commission, where upon you are referred to as a “distributor”.
I really don’t understand the difficulty in just creating a seperate wholesale customer class, like pretty much every other major MLM company has done.
This dragging of the feet and continued deliberate obfuscation of Herablife’s revenue source is begging for an investigation.
http://www.businessreviewusa.com/business_leaders/herbalife-stops-calling-customers-distributors
In other words, same thing Empowered Network was doing. 🙂 Talking about ahead of the curve! 😀
Well speaking of EN, I didn’t think it warranted a separate article but I saw something about a new contest while I was away.
Basically Wood wants his affiliates to go out and recruit “customers”, with those who do the most recruiting winning prizes at their next event.
Trouble is he hasn’t explicitly specified whether it’s retail customers or affiliate customers (defacto affiliate recruitment), so it’s a bit ambiguous whether he’s gunning to increase their retail numbers or affiliate numbers.
Of course just like Herbalife it’s deliberate marketing ambiguity on the company’s behalf, as clarification either confirms a lack of retail or an affiliate recruitment drive.
Such is the state of the MLM industry…