For some time now I’ve seen Herbalife’s logo at races, rider’s water bottles, and sponsoring many athletic events. Advertisers like to call these “impressions”, and it takes many impressions to generate brand recognition in consumers. But what if these impressions are creating a fraudulent or misleading idea for consumers? What if the purpose of the brand was simply to enrich its uppermost officers? That is what many multi level marketing companies do, and why athletes should be very skeptical when looking at how they are being courted. Is Herbalife, the company behind the ubiquitous hand-made “lose weight now, ask me how!” signs, sports sponsorships, and event promotion, selling a genuine product? Or are they operating a pyramid scheme?
A few days ago I mentioned to a friend that I was going to write an article about Herbalife and multi level marketing (MLM). I used the word “scheme” and this set him on edge. As a fierce capitalist he felt that MLM was a strategy just as valid as retail sales or direct marketing. I felt that it was a scheme because if only a few people at the top level of the pyramid structure of revenue were getting the majority of the income, only those few people knew the product was snake oil or bunk, and the method used to sell the product was personal pressure and strong-arm luring, then it qualified as a scheme. To me, it has everything to do with intent – if you know your product is crap you can simply get one generation of evangelists to sell that crap product to create a firewall of believability. Promote membership, teamwork, and loyalty to the brand and your foot soldiers do all the work of lying without knowing they’re committing fraud. Another way to look at it is that retail sales compete in the open marketplace where stores rely upon regulatory agencies to vet efficacy. MLM bypasses the open market, often require membership in the company to buy the product, which in turn requires buying set quantities of the product to offload, and because of quotas forces an evangelism of the product. MLM is a scheme because it places the profit emphasis on the upward pay structure, not the product. That’s not capitalism, that’s a cult.
What is Multi Level Marketing?
MLM is frequently a pyramid-shaped sales structure with one member recruiting anywhere from one to thousands of people to sell product for them on a person-to-person basis. People are encouraged to sell to their friends, family, or neighbors under the pretense that a personal recommendation will do most of the selling. Typically in order to buy the product, the target must join the organization underneath the person from whom they buy their product. Often there is a minimum purchase required, more than one person could consume, and sometimes on a subscription basis where product is shipped regularly whether the member needs it or not. Because the new member is now saddled with excess product they need to start selling it or else they’re going to be stuck with inventory. They are incentivized to recruit more people and are promised wealth through obtaining a percentage of the sales their recruits make. They can try and sell their product, but it is much more profitable to recruit more members and subscribe them as “distributors”.
Why bypass retail? (Condensed and lifted from Pyramid Scheme Alert)
There are several clues that reveal why a company would bypass retail channels and choose MLM. The following criteria in different combinations reveal why this bypass is more scheme than structure:
a) The product is overpriced and could not compete on the open market.
b) Nothing is unique about the product.
c) Personal relationship sales pressure limited choice in products.
d) Profit margin on the product is inadequate for individual net profit. Therefore profit is derived from constant need for new recruits.
e) Saturation of groups as they become members kills any local retail sales.
f) No training for retail selling, the reward and training system is focused on recruitment.
g) Compensation greatly favors recruiter over retailer – hiding the fact that the product is unprofitable.
h) Recruiting new members is the only way to advance in the company where higher incomes can be obtained.
Simply put, a company that bypasses retail sales is likely selling crap and can’t compete in the free market. They choose MLM because the emphasis is on the structure, not the product. This is fundamentally anti-consumer and anti-free market capitalism. Pyramid marketing is a doomed structure: much like the legend of the ancient engineer who requested payment in rice on a chessboard, starting with a single grain and doubling on every square, it bankrupts the kingdom well before the 64th iteration. MLM relies upon recruitment of new distributors to build out an ever expanding buyer base. This exponential increase is self-limiting, which is why MLM businesses desperately try to reach a poorly informed worldwide audience. China, for example, has a strict ban on pyramid marketing schemes because the evangelism to a product threatens allegiance to the state. Amway, America’s most notorious and predatory pyramid scheme, has only been able to operate there by turning into a retail product.
Nothing exists in harsh binary right or wrong lights. Not all MLM structures are criminal organizations selling bunk by churning through “distributors” like Texans at a Claim Jumper dessert bar. Understanding the spectrum will better arm you as you investigate companies that want your business. Herbalife wants to be seen as supporting and supplementing the athlete’s life and they want athletes and enthusiasts to embrace their brand. But are they a scam?
Herbalife has been accused and sued of operating as a pyramid MLM structure in the past. By its own admission they did not do enough to stop these practices. When the company went public they were forced to clean house and bring their MLM structure into legitimacy. They now operate as a publicly traded company, they offer distributors an easy exit from the program, and they now see lower profits now that they are competing as a regular business entity and pay out fairly across all levels of the MLM structure. They do require recruitment of distributors to sell and evangelize their product, and they align themselves with charities and community groups in order to scrub the stain of their former pyramid structure. They also have settled their lawsuits from former and current distributors accusing them of running a pyramid scheme, paying out $6 million without having to admit guilt. This lawsuit strategy has worked well for a number of MLM ventures, most notably for Amway (Quixtar) which donates millions of dollars into Republican politician’s pockets to avoid being prosecuted for their practices. Profit can often be a calculus of comparing lawsuit cost versus overall gain. It is for this reason that companies found guilty of operating an illegal scheme should be forced to surrender all revenue made from the scheme!
Because of DSHEA not a single one of Herbalife’s products needs to be tested, analyzed, or proved effective regardless of how many M.D.s and P.h.D’s sit on their board. Claiming many doctors only creates an argument from authority, and does not prove efficacy of any of their herbal remedies or magic potions. Herbalife uses MLM to evangelize and sell their unregulated and unscientifically tested product. They began as a pyramid MLM scheme and were forced into line by lawsuits and regulatory pressure.
Business operates on a network of personal relationships. Fundraising is done by personally contacting donors and building relationships that last a lifetime. Friends hire friends, or people with referrals from trusted sources, and friends give friends money. Pyramid scheme operators will claim that all they are doing is making the subtle forms of business overt. But in truth, there isn’t transparency in many MLM businesses, so the entire transaction is undermined by lies and obfuscation of the consequence of turning your loved ones into petty salesmen. By underwriting races, athletes, and lifestyles Herbalife hopes to create a brand impression of healthy supplements, not the MLM structure they use to do business. How much do you trust an athlete endorsing a product they may be using to enrich themselves rather than enhance their performance? Is there any difference between a paid celebrity endorsement and a profiteer from MLM? These are moral choices athletes must ask before we hand over our dollars and trust for products. We are driven by personal achievement and success, evangelize what works for us, and have a disposable income to buy lifestyle products. This means we are ripe targets for MLM and pyramid schemes.
Investigate companies that operate in this manner and use your skeptical eye towards determining if they are selling snake oil, bypassing legitimate, proven free market competition or selling a legitimate product through an alternative distribution channel. Who benefits the most from this – the consumer who gets a great product, or the person sitting at the top of the pyramid collecting great reward for a network of lies? You’ll be surprised at the width of the spectrum.