Now, Herbalife is widely considered to be a scam.
What’s the Herbalife scam all about and why does it have such a bad reputation.
Is the product at fault or is it the marketing that is the problem?
Herbalife was created by Mark Hughes in 1980. 34 years later, they are trading on the stock exchange and a multi-billion dollar company.
Now, the company is incorporated in the Cayman Islands. Incorporating in the Cayman Islands is typically used by large companies to avoid paying US Taxes. Often this results in a considerable benefit to the company. Its corporate headquarters are still in California however. Is this just a way to avoid paying taxes?
Most probable is that Herbalife is incorporated in the Cayman Islands to enable it to do business Globally. I distributes its products in 91 countries around the world. So while there is probably a tax benefit, there are other reasons. Distribution is done by independent operators on Herbalife’s behalf. Supposedly, these independent operators are paid a commission on sales. In fact, the business model only pays off if the distributors are able to sign people up under their business. These then become the downline in the MLM system.
What is a Pyramid Scheme?
From the FBI Common Fraud page, a pyramid scheme is defined this way:
…pyramid schemes—also referred to as franchise fraud or chain referral schemes—are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses. At the heart of each pyramid scheme is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment. Promoters fail to tell prospective participants that this is mathematically impossible for everyone to do, since some participants drop out, while others recoup their original investments and then drop out.
Why is Herbalife a Pyramid?
Herbalife falls into this category as the majority of its distributors are acquired by promising future earnings by adding to the downline of their business. Currently 40-50% of the income generated at Herbalife is via Nutrition Clubs. These are designed to teach people how to recruit others into the program through an internship.
The new recruit volunteers their time to the distributor that brought them into the program. As they do this, they earn points toward their own distributorship. In effect, the distributor has people working for him, for no pay, that promote his leg of the “business” while learning the ropes on how to recruit their own network. During this time, they are bringing in people that pay to consume the Herbalife products and get pulled in to the promotion of others.
Although the initial premise is to promote the Herbalife Shakes, in effect the prospects are being trained on how to bring people into the system. This is the classic pyramid scheme.
What is Club 100?
Markets that were once a stronghold for this company have now dried up forcing Herbalife to find other markets and other ways to promote their product. Their current solution is Nutritional Clubs. These are a way to cloak their recruitment in a club that promotes their product through promising to help people earn through their company.
The way that a Nutritional Cub works is that you bring people into the club to experience the shakes. The sponsor buys the shakes for the people that he brings. He then serves up the shakes to his people while introducing them to the business opportunity. The sponsor is working for the Distributor at this point. The Distributor is the Club Owner.
As each sponsor brings in more people, they move up the ladder of their specific group. There is actually a milestone sheet that they complete to keep track of how they are doing. Once they have completed certain tasks, then and only then, will they be allowed to create a Club of their own.
Herbalife has done something here that is seriously shady. They are using the micro-commitment technique to get full buy in to their system. In marketing, to make a sale, you try to get people to engage with you on a small level. If you can get people saying yes to you, they are more apt to say yes for larger and larger commitments. Finally, the main sale is the ultimate goal. Herbalife does this by getting people to invest in the system in small ways over and over again. By getting these small incremental commitments, they are getting drawn into the overall scam and taught to embrace the Herbalife system.
Interesting to note that as the more affluent markets have been saturated or have caught on to this scam, the Herbalife team has developed this new process to bring people in. It is chiefly targeted at lower income and hispanic demographics. Outside the US, they are targeting the “Bottom of the Pyramid” poor that desperately need to find a way to get out of the circle of poverty that they are in.
What investigations are currently underway?
March 2014: The Federal Trade Commision confirmed that they are looking into allegations of a Pyramid Scheme targeting Hispanic customers.
April 2014: A report in the Financial Times indicates that the Department of Justice and the FBI have Herbalife under Criminal Investigation.
Complaints against the company!
While the courts are trying to decide if the business model of Herbalife is a pyramid scheme or not, general consensus is that it does meet the burden of proof. One more nail in the coffin is present in the complaints that the company receives.
These seem to fall into several categories:
- Full disclosure that the job offered is not actually a job but is a “business opportunity”.
- Returns of products are not processed in a timely manner.
- Unrealistic promotions that seem to indicate anyone can reach President level when in fact only about 1% ever are able to reach that goal due to roadblocks in the system.
- Downloading of software (viruses) that enables the spamming of contact lists without notification or permission.
Thousands of complaints are logged, some are shared publicly, others languish in obscurity but are no less valid.
These deceptive and fraudulent practices should be stopped and those that perpetuate them should be charged.
Is there an Alternative to All These Scams?
The Herbalife model is predicated on selling their product to your family and friends, their family and friends and a host of others all linked through a network of personal connections. As life moves online, there is a ready network of people that are looking to find things on the internet. You can provide them with any service you desire. You are not locked into one company or one service or even one country. Your network can cross international borders and expand beyond imagination to people you never thought you might reach.
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