Herbalife Pyramid Scheme: Is It Really a Scam Scheme?
In the list of easy work from home jobs, you often hear reference of organizations like multi-level marketing organizations like Herbalife.
Off lately, you might have heard many references to whether Herbalife is a pyramid scheme.
The FTC too was probing the pyramid scheme claims for a while.
But the question that everyone has is Herbalife a pyramid scheme, and more importantly a scam?
But again, you have many others who will help you understand why Herbalife is not a pyramid scheme.
Well, here is a quick lowdown on both sides of the Herbalife story thus far.
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Herbalife: Basic Business Model
Herbalife essentially is a global nutrition manufacturer.
They specialize in protein shakes and other health supplements.
Essentially all these products are health boosters which are then marketed via the direct selling method.
They distribute these products through a wide network of close to 4 million members.
Herbalife has a presence in over 90 countries, and most times, the members have to buy in bulk.
This direct selling strategy that they have adopted is pretty much in line with the multi-level marketing initiatives like Avon.
So members of Herbalife do not just earn on the basis of the products that they sell.
They also get an incentive for recruiting new members.
But this is exactly where there is a catch in the entire strategy and leads to potential allegations about the Herbalife Pyramid Scheme.
These new recruits have to buy in considerable amount of products as a start-up initiative.
They could either resell it or consume it as per their discretion, but they have to buy that sum.
Herbalife’s market capitalization is about $6 billion and recorded net sales close to $5 billion.
However, the problem for representatives who have to buy them, is huge.
The main risk is that the seller or the new recruit is stuck with a huge supply of health drinks and other supplements.
They need to either sell them or consume it.
The window for returning it is also very minuscule, barely 90 days.
The company has created nutritional clubs.
The members or the recruits or the direct sellers that Herbalife appoints are united together in these clubs.
These clubs operate like social gatherings.
In these clubs, they consume these health supplements and shakes to further the Herbalife cause.
The representatives of the company share details about the health benefit of the products.
They also have to explain how the products can help them adopt a healthier lifestyle.
These gatherings also become forums for Herbalife.
In these forums they offer a cure to many who might be too used to fast food or vending machine food.
Overall, Herbalife also helps in creating a support group for many people.
They look for nutritional assistance or help to tackle obesity or other health issues.
However, on the other side of the coin, for many who consider Herbalife a pyramid scheme, say that their products are very steeply priced and often people are tricked into buying these.
The critics of the Herbalife business model say that the company, in general, targets those groups of people who are vulnerable.
They easily fall into their trap and have to end up buying a lot of product for a steep sum of money.
If they can’t sell it, the other alternatives for them are also limited.
They have to end up losing the entire investment that they might have made into it.
The Herbalife Pyramid Scheme High Drama
Is Herbalife a pyramid scheme and more importantly a scam?
Well, to answer exactly this question, a series of probes were launched.
Many efforts to analyze, and reanalyze facts were undertaken time and again.
What is particularly interesting is that a series of top global investors were also part of this investigation.
In this context, the Herbalife conference call in May 2012 was rather interesting.
This conference call often considered to be the starting point of the entire pyramid scheme controversy.
Several leading top investors of the world joined in to hear the management’s take on the whole business proceedings and operational strategies.
In fact, around the same time, the Herbalife stock took considerable beating on pyramid scheme allegations.
Famous hedge-fund manager, David Einhorn, questioned Herbalife President.
He asked the Herbalife president, Des Walsh, about the ratio of sales to non-member Vs members of Herbalife?
It is needless to mention that given the almost complete lack of any data showing the sales to non-members.
Walsh’s reply failed to satisfy the curious investors.
Especially when Walsh said,
“We don’t track this number and do not believe it is relevant.”
Several other top hedge fund managers and investors also voiced their dissatisfaction with the Herbalife strategy.
Another famous name, Bill Ackman, started shorting the stock by end 2012 and bet even $1 billion against the stock.
Ackman accused Herbalife of deceiving unsuspecting members and claimed that there is no ‘retail opportunity’ in it.
But Herbalife is hardly a candidate to take the claims of pyramid scheme so lightly.
The company’s CEO claimed that Ackman’s claims were false and might mislead customers.
On the other hand, Herbalife also had a distinct set of members who supported them.
One of the most prominent supporters was Carl Icahn.
When Ackman made his huge short position public, Icahn began a reverse strategy.
He started buying a stake in the company and now owns as much as 17% shares.
But the Herbalife Pyramid Scheme drama continued to unravel further.
Newspaper headlines revealed that Ackman took forward his negative bias.
Ackman even lobbied with public officials and contributed to anti—Herbalife groups and called for regulatory action.
Later Herbalife came forward and confirmed that they were indeed being probed by the Federal Trade Commission.
The war of words between the two groups continued.
On the one hand, the naysayers insisted that Herbalife Pyramid Scheme is a reality.
But there were the others who said that all such claims were wrong.
To make matters even more interesting, each party claimed of providing more evidence to support their own individual claims.
But the fact remained that it was not so simple to prove Herbalife is a pyramid scheme or even any form of scam whatsoever.
A simple letter based or envelope mailing chain letter scheme can be easily termed illegal if recruits pay cash to join with a promise to earn more cash in the process.
But a multi-level marketing scheme like Tupperware where you have a great product plus the company closely tracks sales comes across as a more legitimate way of operations.
For Tupperware, even the seller incentive is based on the sales number and not the number of new recruits.
So then the question is what would you term the Herbalife model?
For the FTC too it was an uphill task.
With Herbalife clocking sales close to $5 billion, is the world’s third largest MLM.
The company has spent over $100 million to defend its cause and stand up against the allegations that Ackman.
In fact, they even created a network of supporters to help their cause.
In fact, as many would later claim, proving any MLM as a possible pyramid scheme is a complicate legal conundrum.
Starting from free economics argument to many other strong takes on the capitalist economy, it is a complicated legal procedure.
In fact, if you think about it, many powerful political leaders have vested interest in series of MLMs, including Donald Trump, Jeb Bush, Madeline Albright, Hillary Clinton.
So even for politicians, there is a lot of vested interest in the entire operation.
The Herbalife Consumer Angle
In the entire context about why Herbalife is not a pyramid scheme, the whole consumer angle to it is most interesting.
The biggest support was drawn from other similar multi-level marketing schemes like Amway.
Given the broad range of consumers that Amway serviced and the way they continuously managed to garner support from political forces, Herbalife pyramid scheme had a lot to fall back on.
Even for the FTC probing Herbalife about possible pyramid scheme related allegations, it was not quite simple to take a stance.
After all, ‘what comprises of a consumer’ becomes the moot point to argue about in the entire debate about constitutes a pyramid scheme.
According to the existing legal provisions, those who have signed up as salespersons can also consume the products.
However, a point to remember in this context was that this consumption is generally considered as internal consumption and it cannot be part of any compensation payment calculation.
However, for most pyramid schemes and MLM attorneys, this is a point they choose to disagree.
According to them at this rate, there would hardly be any legal and viable MLM functioning in the entire country.
Hence effort to amend the legal provision was underway.
The concern for most consumer rights activist at this juncture was palpable.
They felt at this rate, not just Herbalife, but for that matter, any MLM might go out of reach of the laws to safeguard consumers against pyramid schemes.
So the tug of war between both the factions gained momentum.
Finally, after a series of back and forth call for action by both parties, a consumer-friendly rule, under the FTC’s watch, was adopted in 2011.
The main target of this rule was to safeguard consumer interest in any MLM operation, be it a Pyramid scheme or direct selling venture.
It also aimed to provide some support to those who fall prey to unscrupulous work-at-home scams.
But MLMs and pyramid schemes have continued to flourish in United States.
According to current data, almost 1 in every 7 US household have been impacted by MLM.
However, it has not translated into flourishing business for most of these people.
In fact, just in Herbalife’s case data reveals that almost 87% of the members did not earn a single penny in an entire year.
Perhaps there is no better way to prove that space and ability to new recruits hit a strong threshold point.
With Herbalife, at one point of time, almost threatening to fight back tooth and nail if the FTC took them to court, the ramifications could be severe.
If the FTC even sued Herbalife for potential deceptive acts, this could mean that they could get a permanent injunction and Herbalife suddenly started softening stance.
Herbalife Accused of Pyramid Scheme
The end of this long saga finally came to some kind of decision in early 2017 after almost a decade-long struggle.
After they were accused of a pyramid scheme, Herbalife had to start paying its representative who had fallen into their trap.
The company entered as a settlement with FTC for as much as $200 million to get over the entire probe on it being a pyramid scheme.
According to the FTC, at the current moment, endless checks are being mailed to over 300,000 Herbalife representatives who joined this direct selling initiative between 2009 and 2015.
Most of these representatives have paid at least $1000 to Herbalife as an initial investment.
The check value, however, was rather paltry and varied between $100-500 in most cases.
It also led to mass dissatisfaction on the entire course of action that the FTC and lawmakers took up in relation to the overall pyramid scheme.
The popular understanding was the compensation was either too less and did not really address the concerns of consumer rights activists.
Most importantly, it was hardly a kind of regulatory action that could help curb instances of potential pyramid schemes in the future either.
The huge number of MLMs mushrooming across US is a proof in itself.
Therefore, you can conclude that while the whole debate of Herbalife being a pyramid scheme might have come to rest, the concerns about pyramid scheme, in general, have not been.
There is a very thin line distinguishing between a genuine multi-level marketing firm and pyramid scheme.
It is also very difficult to discriminate between the two.
The style of operation and the business basics have such similarity that even creating a net of safeguards can often be quite a tough ask in that context.
But at the same time, it can be said that Herbalife might in all possibility be a pyramid scheme.
But they might not necessarily be a scam.
We&8217;ve understood quite comprehensively that running a pyramid scheme business can be very difficult.
It becomes more difficult especially once the warm markets dry up.
Therefore, making money from these schemes is not simple.
The road to success with companies like Herbalife becomes even more difficult.
The problem, in this case, is representatives.
They are very badly leveraged, and barely 5% of them ended up making any profit.
However, this is also a problem that has nothing to do with Herbalife company itself.
It can&8217;t be known as a sign of being a pyramid scheme or scam.
Your Success Depends on You
Your success in any business and with any company depends on you and your efforts.
You can&8217;t expect to make a fortune and become a millionaire just by joining a program.
No matter it is fully legal and legitimate or not.
Therefore, you can&8217;t accuse a company of being scam in case you can&8217;t succeed to make money with it.
Because there are usually so many who are happy with the same company and are making a lot of money with it.
It is the same with Herbalife and all the other companies, no matter they are pyramid schemes or not.
The interesting thing about Herbalife is that they are listed on BBB, but they have no complaints and reviews at all.