How is Herbalife A Pyramid Scheme, Did They Turn It Around
In July 2016 the FTC ruled against Herbalife with the outcome that Herbalife would restructure their business operations and compensate consumers who had lost out financially.
So let us look into the question here which is, how is Herbalife a pyramid scheme.
Well here’s a bit of the back story,
Back in 2014 The FTC strongly believed that Herbalife had been deceiving their representatives into thinking that they could earn significant, life-changing amounts of money by selling the Herbalife products.
With an unfair incentive scheme those people mostly quit after having lost out financially and so the FTC instigated a two investigation into Herbalife.
In this review we will look at;-
- Why did the FTC Go After Herbalife,
- The FTC’s Main Argument Against Herbalife
- The FTC-V-Herbalife Settlement Terms
- The New Herbalife Network Marketing Business Opportunity
- My Conclusion
I am in no way connected to Herbalife therefore only gain here by outlining the facts about Herbalife for you, in your pursuit to make a decision.
Why Did The FTC Go After Herbalife
In July-16 after a two-year investigation by the FTC into Herbal’s practices,
It was hailed as a victory that the FTC managed to get Herbalife without actually having to name them a pyramid scheme and therefore slapped them with a whopping $200 million fine.
If they had attempted to sue on the basis of Herbalife being a pyramid scheme they would have been sure to lose.
That’s because the ‘current body of case laws’ prevents the FTC when they are attempting to restrict MLM companies to its own vision of fairness.
So the FTC needed to make a broader argument against Herbal in naming their business plans as unfair by focusing its incentive plans towards recruitment and not retail sales.
The FTC’s Main Argument Against Herbalife
The FTC found Herbalife to be running business unfairly by incentivising its distributors with rank advancement to recruit downlines to join and purchase the products regardless of retail sales demands.
This had ultimately led to a thousand representatives losing out financially as they were purchasing large amounts of stocks on a monthly auto-shipment basis and in turn encouraging recruited down lines to do the same.
This stock hoarding was going on while there was no real focus on actual demand for shifting the stock via ‘real’ retail sales.
As part of the new strict stipulations, Herbalife was banned from using their Autoshipment of products to distributors obligation.
The $200million fine was therefore divided among those that had lost their money.
The outcome was that Herbalife agreed to the $200 million fine and to restructure the company to act in accordance with its newly prescribed measures as imposed by the FTC.
Here’s a statement that I found on their current website;-
‘Herbalife operates in more than 90 countries around the world with net sales of $4.5 billion in 2015’
We already know these net sales were not arrived at through ethical business practices and $200 million of this was paid back to distributors that lost their money.
The FTC-V- Herbalife Settlement Terms
The basis of the FTC’s involvement in MLM companies
The MLM industry is a diverse and varied industry but the main elements are direct selling.
Person to person selling comes in many different types of forms but the core principles protection rules apply to all practices.
The FTC distinguishes an unfair compensation scheme of an MLM based on it being an unlawful compensation structure.
An unlawful compensation structure is when a distributor is very unlikely to earn any money or even simply recover their costs.
A situation like this will only lead to the distributors being forced to recruit downlines that will themselves buy products, therefore creating commissions.
At the most basic level, the FTC wants to see MLM companies paying their distributors for actual retail sales to real customers.
Below I have outlined the Herbalife’s new rulings as set by the FTC
New Ruling at Macro Company Level
Distributors Rank Advancement
The FTC’s settlement plan had forced Herbalife to significantly restructure their bonus & qualification system.
To ensure their distributors were not being encouraged to aim for promotions based on their own personal consumption and that of their downlines.
With this new ruling, they need to demonstrate ‘meaningful sales techniques’
By proving that they can achieve 80% of the product sales now coming from retail sales and so allowing for Herbalife to pay its distributors in full.
If this does not happen then the company must reduce it’s distributors earnings by 10%. So in effect, if the ‘top runners’ do not achieve this 80% ruling goal then they will be taxed a 10% tax.
Herbalife must also now have a clear difference between those that join the business to purchase the products at the discounts prices for personal use, known as discounted buyers, and those that join for the business opportunity, known as distributors.
Discounted buyers cannot sell the products and earn revenue.
Herbalife Are To Make Only Truthful Claims
According to the FTC’s investigation,
Herbalife was accused of being unethical by wrongly attracting distributors with untruths about how much money distributors could make.
They were falsely led to believe that if they joined Herbalife and created their own franchise they could earn thousands of dollars and quit their full-time jobs.
Whereas the outcome was usually that people lost money by investing in products and not being able to shift them.
During 2014 many distributors earned $300 or less and actually lost invested money.
The FTC used the $200 million that they fined Herbalife, to compensate these people.
The ICA & Herbalife Are Now Working Together
The ICA is an Independent Commission Auditor which Herbalife was ordered to pay for,
They were put in place to oversee that Herbalife maintained all rules stipulated in the new order for the restructuring of the companies compensation plan.
ICA will be in place at Herbalife for seven years and in which time, time will tell if Herbal can achieve this new ‘fair’ business plan.
That safeguards its distributors and customers.
New Ruling at Micro Company Level
Distributors & Stock Hoarding
As I mentioned earlier the FTC found that Herbalife’s incentive program was classed as unfair.
This was because it was rewarding its distributors for recruiting downlines with the encouragement to purchase stock.
Regardless if they had the demand for the stock via retail sales demands.
This was leading to distributors losing out financially and many quits.
How must they stop ‘stock hoarding’?
The new guidelines on the earning of the distributors mean that no more than one-third of the distributor’s rewards can be made up from theirs or their downlines personal consumption.
So in effect, 66% of distributors revenues must come from proven retail sales and 33% can come from the products purchased for personal use or products purchased but not yet shifted,
To ensure this system works the distributors are now limited to spend only $200 on discounted products per month in their first year.
Post twelve months no more than $125 of stock per month or an average of three-fourths of how much their customers have purchased from them over the previous twelve months.
Here the FTC has put strict limitations on distributors gaining from self purchases and those of their downlines self purchases
This is to prevent the continuation of ‘stock hoarding’.
Prior to the new rulings, distributors were opening their own clubs and spending on average $8,500 on expenses such as premises rents and equipment etc.
A shocking 57% of these distributors reported to have lost their money and or having made no profit at all.
Under the new ruling, distributors are not permitted to branch out in this way with their franchise within the first year.
And also unless they have completed a business training course.
The New Herbalife Network Marketing Business Opportunity
I spend a fair amount of my time researching MLM companies and writing up reviews, with the aim to help those considering becoming a franchise owner to ultimately decide if that particular business venture will be a good fit for them.
When I researched Herbalife’s current MLM business opportunity I was in particular, on the lookout for,
-finding out what changes they had made in order to meet the higher ethical standards that FTC was expecting from them, in general.
And, let’s bear in mind that we already know that they have ICA Board are working closely with them to ensure this is the case.
I estimate that the ICA will be overlooking Herbalife’s business structure until the year 2023.
So with this in mind,
You may well come to the conclusion that by joining Herbalife you would be getting a genuine message based on genuine business prospects.
Let’s see… Here Are My Initial Takeaways from my Research
Herbalife’s Code of Business Conduct
I was pleased to see that on their website you can easily find their code of business conduct.
This provides a comprehensive outline of the companies expectations for ethical behaviour and guides.
This is a good sign that Herbalife has taken action to be as transparent as possible. If you are interested in that code of business conduct in more detail you can read it here.
Herbalife’s New Business Opportunity Message
I think we can safely say that the revised business structure and the message we get from Herbalife will now be truthful and realistic,
After all, they do have the compliance police watching their every move right now.
The current message for those considering joining Herbal for the business opportunity says that you can:-
Choose your own hours and build your own business and a team that fits around your life.
In my opinion, this franchise business opportunity would most suit a nutrition enthusiast as you can benefit from their training and support.
You can confidently learn the products that they say are developed by leading nutritional scientists.
The promise is that you can be a coach, mentor and friend to help your customers break old habits & improve their nutrition and live healthier & more active lives.
- Earn an extra income with a flexible income opportunity.
- Join a world of entrepreneurs where its more than just a business opportunity.
- Achieve nutritional and personal success
- Benefit from their proven success as industry leaders and decades of experience
- Lay the foundations of your own business.
What you must consider for MLM
To find success with running your own MLM franchise business you will need a sound business strategy, you should also ask yourself the following questions
- How enthusiastic am I about helping people strive for a healthier lifestyle
- Am I am Leader & a Doer
- Do I have strong work ethics
- Do I consider myself to be coachable and willing to work
- Will I take 100% responsibility for my network marketing business
- Do I love to build relationships with Team team members and customers
- Am I a people’s person
Is MLM For ME!
If you answer yes to all of the above questions then considering an MLM business opportunity is right for you.
Is the hard truth is that you are looking for a way to make an extra income or even change your profession but your not sure that MLM is what you are looking for?
Why not get started where I did and build your own online business by learning affiliate marketing where there is no direct sales and no recruiting.
My simple 4 step guide to affiliate marketing may help you out here.
Or click the image below to read the full review of on the best place to get started where you will get all the tools, training and coaching you will need to succeed.
The New Getting Started System with Herbalife
By signing up with Herbalife you just need to sign up and order your starter pack which consists of;-
- Herbalife Nutrition Welcome Pack
- Your free Herbalife nutrition online store – GoHerbalife
- Herbalife Shoulder Bag
- Formula 1 Shake Mix
- Herbalife Nutrition Shaker
- Access to Online Tools & Training
Herbalife Distributors Don’t Have To Handle Stock
Distributors are not limited to purchasing the stock, storing it at home and then selling it on. The options available are;-
- Purchase products for your own consumption at discounted prices
- Sell them on if you like – you pay discounted prices and your customer pays you retail price.
- Alternatively, Herbalife can drop ship your orders directly to your customers.
Your earnings will be based on the income level that you are on.
Due to the fact that you have to place your customer’s orders at the discounted price and then have your customer pay you.
It seems it’s impossible to start out as an MLM distributor for Herbalife without some initial financial outlay
Herbalife’s New Compensation Structure
I could not find any detailed information about the compensation structure on the main website but after some further digging, I found the information you would need on my myherbasupport.com.
Which I have outlined below.
There are three types of income levels including Royalty & Bonuses. At each level, you get the tools & training you need.
Plus you can qualify for free vacations, special parties and more.
Herbalife say their PRES system is one where you Promote, Recruit, Educate and Support to help you get o the higher achievements.
The full tier of achievement levels is below.
In this review, we looked at how is Herbalife a pyramid scam, why the FTC went after Herbalife.
What they were doing wrong and what their new rules and regulations are nowadays.
Having looked at the current Herbalife Business Opportunity I personally feel it’s safe to say that it seems there is a much better and fairer system in place.
Where distributors do receive the training required to actually acquire retail sales.
With an emphasis on having the ability to create a team of downlines that with have the same vision.
But, and it’s a big but. Can Herbalife come back from the bad press and the wrist-slapping they got from the FTC?
We are three years into the new rulings for this company now.
Is it worth your time creating a business with this franchise?
If they do climb their way back up into the public good books would you have made the right decision then?
Thank you for Reading My Blog Post.
I hope I managed to help you to decide if Herbalife is a Pyramid Scheme or a legit business opportunity.
The comments section below is there for you if have any questions or experience with Herbalife or any other MLM business in general, I would love to hear from you.
If there is a particular MLM business you would like to see a review on my website just let me know.
Well said Dianne!
There are not many who dare to touch on this topic though many actually know about Herbalife’s MLM chain in fear of being cyberbullied. I have personal experience in Herbalife being one of the members there myself back in the days and I have to admit, stock-hoarding is getting really annoying.
It’s wasteful but it gets the products to flow for the company and money moving which is what the owners want to see. Glad I’m out of there now! I hope many can get insight from your article, thanks for sharing!
Herbalife is a company that I have heard so much about over the years, but I never considered joining or trying to sell their products because I also considered their business model to be essentially a pyramid scheme, albeit a toned down one. I have been approached by members, and their push has been to get more members over the products.
This is not my style of selling, and unless you want to lose a lot of friends and family relationships, this should not be the approach to selling. So it was no surprise that your article explains how the FTC got to Herbalife and the corrective actions that have been taken, nor that they paid a $200 million fine.
It does sound like they are moving in the right direction and it should be like a shot across the bow for other similarly structured companies to make such changes as well or face the same consequences. I appreciate your drilling down on the whole story and laying it out for us.
MLM is not for me. It may be for some, as it is thriving, but I just do not like how loosely regulated the market segment is and the chances of making money are not as good as using other methods that are easier to set up and grow (for me anyway) such as affiliate marketing, drop-shipping, training, etc. Herbalife may have changed their business model, but it is not an easy business to make money in, so it still would not be for me, MLM or not. Thanks for this in-depth review!
Thanks for the detailed review of Herbalife. My mother actually got into Herbalife back in the 80’s. She bought a ton of stuff trying to build a downline. In the end, she lost a bunch of money. I like the fact that you offer a different avenue of making money with Affiliate Marketing. I feel that is a much better and cheaper opportunity than MLM. Thanks
I think almost all legit MLMs operate like Herbalife and that’s the reason why I moved away from doing MLMs. I used to be one of their strongest defender online and was operating a blog called “The Good MLM”. It stopped when I myself ran out of money because of the constant pressure my company to spend in monthly maintenance in the form of product auto-reorder system. If a person like me with strong belief in MLM has suffered, then what more with ordinary people?
The good article makes us blown and this is a very useful and informative article you have written. Thanks for share about Herbalife. People who want to earn something for their daily survival, get fraud and disappointed by these MLM business done by these Herbalife and like companies like this who.
Your article will help people to know about these and will be aware of doing business with them. It will save them to waste their valuable time. It is great to know that FTC managed to get Herbalife without actually having to name them a pyramid scheme and therefore slapped them with a whopping $200 million fine.
I am actually pleasantly surprised that Herbalife is still around after all the court problems. Because in spite of how they were running their business the product itself was and is quite good. I have always had a problem with MLM’s in general because wether they are pyamid scheme or not they all seem to be riding that thin line of being unethical. Especially when it comes to how a company is recruiting. And it is a shame really because like I stated the product is actually quite good.