Herbalife and the FTC, by William Taylor
The FTC’s recent suit with Herbalife is
both interesting and instructive. Perhaps most telling is the fact that the FTC went out of its way to not
call Herbalife a “pyramid scheme”. They
avoided even using the words. The FTC
has no concrete definition of what makes a business a “pyramid scheme.” As a common practice seen in our
government, they arbitrarily (“case by
case”) select a business to charge with fraudulent or deceptive practices.
In this case, the 200 million dollar
settlement with Herbalife is one they, Herbalife, can financially absorb. The changes required in marketing and
recruiting practices are also easily incorporated into Herbalife’s policies and
practices. In other words the FTC has
responded to all the complaints about MLM’s and Herbalife easily survives the attack and continues
on. Their stock has actually gone up.
And the FTC has protected society by putting a major MLM in the spotlight of
shame.
Herbalife and 100’s of other MLMs (Multi Level Marketing) who take pride in patterning
themselves after Herbalife as the prototype business model, have become part of mainstreet and are fully
integrated into of our economy. Many if
not most are traded on the stock exchange.
Investment giants like George Soros and Carl Icahn invest in
Herbalife. Many MLM’s have partnered
with sports teams, famous athletes, political figures and even major
universities. Such endorsements and
support help to make the industry more acceptable by mainstreet.
The major allegations put forth against
Herbalife apply to many if not most MLM’s. Things like “there are no real customers”. MLM’s sell the lion’s share of their products
to their distributors who have difficulty selling their stock pile of
products. The industry has dodged this
criticism by claiming their sales people (distributors) also count as customers. Another criticism is that the products are
over-priced. Even when selling the
product to the salespeople wholesale, there are profits available to support
the company and upline distributors. The
primary claim by the FTC was that the true business of Herbalife was making
money from expenditures made by new distributors. With dropout rates of 80-90% during the
first year, the FTC claims the company’s
only use for these salespeople is to receive money from them as part of their
entry fees. They really are the
customers and “source” of income. They
are not the traditional sellers or “means” to income. The fraud is viewed as occurring when the
company “puffs” and exaggerates the potential success available to the new
distributor, as if hard work and persistence almost guarantees the success as
that of the top 1%.
Lessons to be learned
So,
what can you take away from the above to help you in evaluating a
business opportunity? Think about what
you are being asked to spend in order to get into the opportunity. The more you are required to spend, the more likely it is that “YOU!” are their source of income and not the fruits
of your labor. Once you “buy in”, your value to them drops significantly.
Next, what are your ongoing costs? Are there trainings you are required to take
in the future? What are the fees? Some companies use the training fees as
another source of income to be split amongst those above you and the company.
Do you have to buy a certain amount of
products every month? What is that
cost? Are the products worth it? In other words, “if I didn’t have to buy the products would I
still want to buy them? Or would I be just as happy with something comparable at
Walmart?”
This is perhaps the number one
reason most new distributors drop out. The monthly buying requirement increases their monthly budget. Initially they accept it. After a few months they begin to question the
value of their purchases and the strain on their budget. When they begin to feel the monthly purchases
are not a good deal, they start thinking about dropping out.
Building a sales organization under you
is critical to financial success. Keeping them there and adding to them is the key to growth of
income. Having people drop out makes the
job harder. It can become difficult just
to maintain your organization. As you
grow your organization and income, the practice of the industry is to raise
your monthly purchase requirements. Most
often, the quotas do not go down when
your organization begins to wane. So as
the people under you drop out, the monthly quota shifts more and more to you. You may find yourself filling up your garage
with products you can’t use just to keep your income producing potential and
sometimes a prize you received for reaching a significant level (e.g. could be
a great car). If there is a prize on
the line, the trick bag is that your
downline people will wonder what happened if you have it taken away for not
meeting your required quotas. Being
forced to fill up your garage with products you can’t use or sell is what they
call “garage qualified”. All of this regularly happens in the
industry because of the high attrition rates for new distributors (i.e. 80%)
during their first year.
An issue not addressed by the FTC is the
“break away”. The big dark secret of
most MLM’s that is rarely mentioned, much less discussed, is the “break
away”. This is the biggest stopper to
success for the majority of hard working distributors. When a distributor in your sales organization
out performs you, the company takes them away from you. This is a real set back. Often this person has given you the volume of
sales that pushed you over the top and into a higher income bracket and perhaps
a prize. When you reach a higher
level, your quotas go up and it is
expected that you will maintain this level of performance. With the “breakaway” plus attrition of other distributors, you are
really in a bind to get back to where you were at the time of the break
away. What most distributors find is
that successful salespeople (like the one taken away) are rare.
It is not easy to recruit another “cracker jack” salesperson to help you meet your quota.
Here is the real rub. Now that you know what happens when you find
a “great” salesperson, you need to watch them closely and try to limit their
success so he or she does not surpass you.
In essence, you end up rooting
against or even sabotaging your own people.
When the break away occurs, the company
and upline people say it really is a
good thing for you. They often raise the
percentage on sales. However with no
volume the result is you must start over and re-build your organization. Plus,
if it was such a good thing, why
is it never mentioned until the hammer drops on you?
So, if you think you’ve found a good
network marketing company that you would like to do as a business, here are the
questions to ask:
What
is the cost to get in?
Concern: The higher the fee (even if gifts or products are thrown in) the more
likely it is that the company and perhaps the people above you are making their
income from your fee. Your success
in the business may not be expected or
of high priority to them.
What
are the ongoing required expenditures to stay in?
Concern: The greater these required
expenditures (annual fees, training fees, monthly quotas or purchases) the more
likely that is the dollars in your pocket that are being used for income to
others and not the fruits of your efforts.
Are
there “BREAK AWAYS”? Does the company
ever take people away?
Concern: Finding good people should not
be punished. You don’t want to need to
undermine the success of your own people to limit their income as means to
preserve your’s.
