Multi-Level Marketing or Pyramid? The Campaign against Herbalife

Bill Ackman’s campaign against multi-level marketing company Herbalife began in 2012. His hedge fund bet a billion dollars the company’s shares would collapse. Is Herbalife a pyramid scheme or a multi-level marketing company?

There are many claims behind the case for a pyramid scheme.  Shorts claim the products are an overpriced commodity.  They say there is no proof of success using the products.  Argue members buy their way into the marketing plan. Some say commissions paid on down-line purchases are not sales to end users.  Others claim they are protecting consumers from being ripped off.  All this talk is an attempt to drive stock prices down.  The truth is money is made betting against the company.

Is There A Difference Between A Multi-Level Marketing Company and a Pyramid Scheme?

Because there are similarities between a multi-level marketing company and a pyramid scheme, it is important to know the differences.  Courts look at how multi-level marketing companies run to decide if they are legal.

  • Multi-level marketing companies sell legitimate products or services.  Herbalife has many competitively priced products.  Shorts ignore this fact.   They question the products when trying to prove the company is a pyramid scheme.
  • Pyramid schemes convince people to buy large amounts of inventory that is not returnable. This is a practice called inventory loading.  Herbalife buys back inventory from participants at the time of termination.
  • Pyramid schemes charge high up-front fees, high returns, and easy income from recruiting others .  Herbalife’s only cost of membership is an official Mini Herbalife Member Pack.  They warn against making unsupported lifestyle and income claims.  Herbalife does not make any income guarantees.  Direct selling is work, and you get out of it what you put into it.

Attacking the Products?

Attacking the products is an easy way to prove a pyramid scheme, because multi-level marketing companies sell  products.  In claiming the products are an overpriced commodity, they try to devalue a product.

Any good sales person knows you don’t let customers treat your product as a commodity.   I would say the sales person was not properly educated of the benefits if customers make these suggestions after a sales demonstration.  Not everyone will buy the products.  Simply saying the products are overpriced does not make it  true.

Claiming there is no proof of success of using the products.  A news report last year showed Herbalife independent distributors in New York on tape making medical claims and the potential for making wealth.  Herbalife makes no success claims about the use of their products.  The company had rules in place against such practices in the 2009 rules for nutrition clubs.  They initiated retraining methods to educate distributors of allowed claims.

Let’s move away from a one product discussion and look at say the skin care line.  There are many facial cleansers on the market, and some luxury cleansers may sell for over $50.  Herbalife sells a competitively priced cleanser with key active ingredients that include Vitamins B3, C, and E.

The cleanser and the rest of the skin care line are paraben free, sulfate free, and dermatologist tested. As a licensed esthetician I believe this cleanser is undervalued because it offers quality beneficial ingredients for skin.  It costs less than luxury skin care lines I have had the pleasure of using.  The competitively priced quality products are a sign of a multi-level marketing company and not a pyramid scheme.

Some argue that members buy their way into the marketing plan.  That commissions paid on down-line member purchases are not sales to end/ultimate users.  Herbalife does not allow members to buy products to advance in the Marketing Plan.   Products are sold to retail customers or used personally by members and their families.  The long debate over ultimate users is over, having been decided by The United States Court of Appeals 9th Circuit.  This is a tiring argument and those continuing to espouse it show a lack of understanding of settled issues.

Consumers don’t purchase on price alone.  Herbalife, as an established multi-level marketing company, has built trust with their consumers. They reward them with repeat purchases.  Some shorts claim they are protecting consumers from being ripped off.  I don’t see their benevolence. I only see people who are making money shorting stocks.   They hurt the very people they claim to be protecting, by taking a bill payment out of their pocket.

By:  David Baker

References:

Judicious, (2-22-15),The SEC Literally Defines Herbalife As A Pyramid Scheme, Seeking Alpha, http://seekingalpha.com/article/2938456-the-sec-literally-defines-herbalife-as-a-pyramid-scheme?page=2

Wrinkle Treatments and Other Anti-aging Products, FDA, http://www.fda.gov/Cosmetics/ProductsIngredients/Products/ucm388826.htm

Mosk, Matthew, Ross, Brian, Momtaz, Rym, Gallego, William, (5-5-2014), Herbalife Launches ‘Re-Training’ In Response to ABC News Undercover Investigation, ABC News,  http://abcnews.go.com/Blotter/herbalife-launches-training-response-abc-news-undercover-investigation/story?id=23595674

Idoubtit, (5-7-14), Herbalife tells distributors not to make miracle claims, Doubtful News, http://doubtfulnews.com/2014/05/herbalife-tells-distributors-not-to-make-miracle-claims/

Nutrition Club Do’s and Don’ts (2009), Facts About Herbalife, http://factsaboutherbalife.com/media/2012/12/Nutrition-Club-Dos-and-Donts-revision-2011.pdf