If you have not been keeping up, the recent Herbalife controversy emerged when hedge fund leader, Bill Ackman claimed that Herbalife is a pyramid scheme and therefore illegal. Following Ackman’s allegations, Dan Loeb (another hedge fund leader) bet against Ackman’s claim and began buying stock. As I read over Ackman's claims, I came up with about eight arguments. Most of these claims about multilevel marketing (MLM) have already been addressed on MLM.com. The following response is not meant to defend or attack Herbalife. That debate is well documented on the internet. The purpose of this article is to look at the argument brought against Herbalife and see if they are unique to Herbalife or industry-wide issues that companies and distributors in other multilevel companies need to consider.
The first claim was that the amount of retail profit is not a true reflection of sales because Herbalife adds the 25% of retail product to the amount sold. Reselling product for retail is an unknown amount for most companies. The product goes from the company to the distributor who then is supposed to resell the product. How you report the amount of profit a company makes depends on how a company wants to market (private) or report (public companies) those dollars. The Direct Selling Association lists sales in retail dollars. In 2010, 23.56 billion dollars’ worth of product was sold in the United States. Of course, the DSA goes off the voluntary report of privately and publicly held companies. Whether the amount is listed as distributor volume or retail sales has traditionally been up to the company policy. Many companies estimate the retail sales by adding the suggested retail price to the distributor price of product sold. The practice at Herbalife is not uncommon in our industry. Typically, the report of retails sales is not meant to be deceptive. Rather, companies need to be able to present what they believe is happening in the field. However, distributors are independent contractors. Therefore, what a distributor charges may change. Obviously, if you are not familiar with how MLM works, you may not understand the dynamic between the company and the distributor and therefore conclude deception. Each company has a preference for how they like to list the sales of distributors.
In addition, Ackman stated his team went on the website and were allowed to purchase product at 40% off of retail. Again here is an issue: how much is the mark up and how much is the distributor price can be tricky to figure out in MLM. The Herbalife plan ranges in distributor discount price ranges from 25% (all distributors receive this discount) to 50% for top level distributors. Although Ackman may say he went on Herbalife’s website to purchase product, more than likely, the link took him to an independent distributor’s website who has decided to sell the product at 40% off retail. The distributor makes the 10% and then the makes the amount off the product sold by members of his/her downline.
The amount made off downline member’s sale of product leads us to the next of Ackman’s concerns. He states that downline commissions are essentially paying for recruiting which is illegal. However, the issue that Ackman seems to selectively ignore is that the upline commissions are paid on sales of product by recruits. As long as product is the basis for commissions then the upline is not being paid for recruiting.
Ackman’s second argument against paying for recruiting is that a percent of sales is paid in the form of trips and cars. Most car bonuses are paid off the rank of the distributor. Rank advancement occurs based on different qualifications based on company rules. However, most rank advancements happen as a result of personal volume, and organizational volume. Sometimes the volume has to be spread out over the downline. Having the organizational volume come from different downline members helps maintain healthy distributor organizations. (Distributing downline volume is an article for another time). The point remains that the sale of product is the key to rank advancement, and rank advancement comes from the sale of product by those in one’s downline. Ackman is not clear on why he thinks trip and car bonuses are paid for recruiting. Most companies, that I am familiar with the compensation plan, pay based on again volume of sales of product. I am not sure why Ackman does not see the difference between the commission on product and that paid for recruiting. Paying another person a percent of the product purchase is a common sales practice technique.
The next of Ackman’s arguments states that the compensation plan is difficult to understand. InfoTrax spends a considerable amount of resources analyzing and developing compensation plans. Plans can be complex. I recommend using a clear compensation plan as a great way to help sell product which again is the main purpose of any legitimate company. However that does not mean that the average person understands the nuances of how compensation plans are programmed. Sometimes even for MLM business people, compensation plans are confusing, If you want to know more about how your company plan actually pays, there are several places and people you can contact for more information such as Mitch Stowell at InfoTrax Systems, 801-431-4900. A good consultant can be a tremendous help. So back to Ackman, the compensation plan of Herbalife is not the simplest one I have seen (I have reviewed over 40 different plans over the past 10 years), and it is not the most complex. I have reviewed Herbalife’s plan in detail. Again, here it seems that Ackman lacks a basic understanding of the industry.
The last argument that I will address in this issue is that Herbalife targets the less educated. I have a little trouble with this argument. I am not sure how Ackman arrives at this claim. Most media material has been written on a 5th grade reading level. That is for all types of products and company types (including hedge fund materials). Despite the fact that most marketing materials are written on a relatively low reading level, the DSA reports that 42% of distributors have a college degree or post graduate degree.
Ackman raises several other questions that will be discussed in the next article. The purpose of this article was to demonstrate that for the these claims, Ackman’s arguments have been addressed by the industry for years. If you are interested in how Herbalife responded or Ackman’s continued attacks, you can read more on the internet. My caution (as always) is do your homework. Herbalife seems to be following the guidelines set out by both voluntary ethics guides (see DSA.org) and federal guidelines and are not a pyramid. Next time I will discuss some of Ackman’s claims that are about Herbalife business practices that are not directed at being a pyramid.