A Look At Herbalife And
They May Not Technically Be Pyramid Schemes, But Nevertheless, Most People Who Participate In These Endeavors Never See More Money Than They Put In
An illustration of a pyramid scheme.
By Wayne Schutsky
Modern Times Magazine
May 27, 2016 — While you may not be familiar with the term “multi-level marketing,” odds are you’ve come into contact with one or more businesses that use the murky model to attract users and sell product. Companies like Beachbody, Herbalife, Doterra, and Young Living, litter Facebook feeds and Instagram accounts as their acolytes attempt to convince friends and family to buy into the latest weight loss or beauty or holistic medicinal trends.
But I am not here to discuss the ways in which essential oils can (or probably can’t) cure any illness or the many ways in which a Beachbody shake can (or cannot) give you the perfect ass. Rather, I am interested in the way signing up as a member for these types of companies can affect your bottom line.
If many of our collective Facebook friends are to be trusted, multi-level marketing could be the answer to our prayers. If we play our cards right, we can all quit our day jobs and earn a decent living from home just by selling oils or shakes or exercise classes to friends.
What these exuberant, brand-loving friends don’t tell you is that, in some cases, mid-level marketing is just, well, new marketing speak for a pyramid scheme.
Yes, that pyramid scheme. The term that is synonymous with shady, underhanded business dealings. According to the Cornell University School of Law’s Investor Protection Guide, “A pyramid scheme is an unsustainable, illegal business model where investment returns are typically from principals of investments or membership fees instead from the underlying investment gains.”
In other words, the initial developers of a scheme make money by charging new recruits an initial down payment or membership fee. Those new “Level 1” members then are incentivized to make money by recruiting even more new members below them, thus building on to the base of the pyramid.
All the new membership fees flow upward, with the those at the top of the pyramid making the most gains. While this model can be profitable for those initial investors, it becomes less and less sustainable because the need for new members to sustain the growth becomes unfeasible, according to Cornell University.
So, are multi-level marketing schemes also pyramid schemes? Not exactly. It is true that the Federal Trade Commission is keeping a close eye on popular multi-level marketing schemes because of the possibility that they could also be duping members into holding up an unwieldy pyramid. However, the FTC has stated that not every multi-level marketing company is operating a pyramid scheme.
According to the Federal Trade Commission’s Consumer Information website, “If the money you make is based on your sales to the public, it may be a legitimate multi-level marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It's a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
The crux of the issue lies in how the company incents members to hawk its product. If members earn money by selling tangible items, then the multi-level marketing company is likely operating in legal territory. But if the company uses membership fees or other investments to incentivize members to recruit their friends, the water becomes murkier.
The FTC has been investigating Herbalife, a popular multi-level marketing company that hawks nutrition and weight loss supplements and had over 500,000 U.S. members in 2015, as a potential pyramid scheme. The FTC is investigating whether members make money based on selling product or are predominantly incentivized to recruit new members.
The FTC received hundreds of pages of complaints filed by Congresspeople, consumer advocacy groups and former Herbalife members. Time and time again, these complaints included former members testifying that they’d spent tens of thousands of dollars on Herbalife products, seminars and marketing materials while only earning back a fraction of that from sales. In many cases, these members wrote that they were pressured to sign up for classes, seminars and marketing plans by upstream members. These plans often included pricy monthly fees, such as a Point/Merchant Account System that cost $380 per month plus set up fees of $958.
Several members even wrote that they purchased backup generators for their homes at the advice of upstream members so they would never lose Internet or power needed to run their business.
Herbalife could be close to a settlement with the FTC that may include a large monetary penalty and required changes to Herbalife’s business model, an anonymous source recently told the New York Post.
What the legal multi-level marketing businesses? Are they any better for members? That, too, is hard to say. That’s because many of them still blur the line between selling a product and incentivizing recruitment by giving members the opportunity to increase product sales commissions through recruitment of new members.
One of the best ways to determine how profitable a particular multi-level business—pyramid or not—is for members is to look at a company’s annual members earning report. While these reports can be a confusing array of numbers and stats and company jargon, a look at the hard stats reveals a disturbing trend.
For instance, in Herbalife’s report from 2015, we learn that 39,240 of the company’s members, or 7.2 percent of total membership, are classified as Non-Sales Leads With a Downline. Of those members, 29,119 were eligible for payments for wholesale commissions on downline product purchases made directly with Herbalife. Of those 29,119, only 16,730 received a payment from Herbalife and the average of those payment was just $51.
Additionally, 68,768 Herbalife members, or 12.6 percent of membership, are Sales Leads With a Downstream. This must be where the real money is as the report includes a chart documenting earnings from $0 to over $250,000 per year. However, quick investigation of this chart reveals that 89.5 percent of that group made $5,000 or less per year, which is startling considering several FTC complaints included statements testifying that members could easily spend $10,000 or more on supplies and marketing tools alone. Comparatively, only 1 percent of those members earned over $100,000 from Herbalife.
Another company, doTERRA, uses the mid-level marketing model to sell essential oils. The company's income statement for 2014 looks impressive on an initial look. According to doTERRA, 1,772 people attained a Silver leadership level in 2014. Those members earned an average of $25,500 per year. Another 1,099 members achieved the leadership rank of Gold, Platinum Diamond, Blue Diamond or Presidential Diamond (with average payments of between $56,000 and $1,282,000). While that seems like a good return, those members account for only a fraction (under 2 percent) of the 150,000 members doTERRA made payments to in 2014.
Additionally, reporting on average earnings per group can be misleading. For instance, in Beachbody’s earnings report from 2012, 2.3 percent of members earned an average of $90,746 per year. That seems great until you realize the number is vastly skewed as the top earner in that group brought in $1,645,484 while the low earner got $1,299.
In Beachbody’s 2012 Statement of Independent Coach Earnings, the company also states that 71.4 percent of its coaches earned an average of $467 during that year. Additionally, coaches at the Emerald Development level (21.5 percent of all coaches) earned an average of $3,353 per year. Yet that number is misleading as the high earner from that group earned $261,621 and the low earner earned just $14.
So, as you can see, the vast majority of members in multi-level marketing schemes are not making much money, especially when you factor in the added costs of running a small business, such as marketing, shipping and time spent selling the product.
One argument often made by proponents of these companies is that most members aren’t even interested in making money. Rather, they sign up to receive discounts on a given company’s products.
doTerra states in its income statement that only 15 percent of its members sign up with the intention of starting a profitable business. The rest sign up just to receive a discount on “high quality essential oils.” By signing up with the company, these members are required to order a minimum amount of essential oils per month. Similarly, 80 percent of Herbalife members signed up as Single Level Members with no downline, meaning the only incentive they received was wholesale pricing on products.
The discount argument does not hold much water, however. That’s because most of these companies charge above-market prices to begin with for their products and justify those price hikes by making dubious quality claims.
For instance, doTERRA and another essential oil company called Young Living, both make dubious quality claims regarding the methods of production and potency of their oils and charge prices higher than the average market price based on those claims. However, since essential oils are not regulated by the FDA, it is difficult to actually determine whether these oils are any more effective than comparable oils found at cheaper prices in retail stores or online marketplaces like Amazon that do not require a membership.
The companies also state that these members have the opportunity to earn income by reselling these products; however, there is no reliable information on how much profit, on average, those sales can net a member.
So, even in the event that a member has no expectation of profit and is not being incentivized by the company to recruit, there is still a realistic chance that they are overpaying for product and being duped by these companies.
Is it possible to earn money as a member of a multi-level marketing scheme? Of course. However, the odds of losing money by participating appear much higher. So, before you choose to fall down the Facebook rabbit hole and join your friends who are selling the latest fad, make sure to research the product and search out the company’s member earnings report before you sign on the dotted line.
Wayne Schutsky is a senior contributor to Modern Times Magazine.
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