Editor’s note: This article was first published in January 2013; it is news commentary, and Bill Ackman’s short position of more than 20 million Herbalife shares, the CNBC investigation and the political attention described are from that time. The Herbalife story developed considerably in later years.
Today, CNBC is leading with multi-level marketing (MLM) schemes in general and, above all, with Herbalife, a listed company that leads the market for weight-loss products and nutritional supplements sold through multi-level marketing.
Herbalife sells the American dream, which basically means having no fixed hours, being able to work from home and selling the products part-time or full-time. Belonging to a network, with the chance to build your own distribution network and, in this way, create an income-producing asset that will eventually make you rich. After a 10-month investigation, CNBC found quite a few cases of people who chased that dream only to see it turn into a nightmare.
According to CNBC, its 10-month investigation shows how quickly people can end up ruined when they are encouraged to invest in MLM businesses, because it can turn into unmanageable debt.
The report tells the story of a woman, Nicole López, who chased that American dream and ended up losing $10,000 trying, and failing, to sell the products. She found that sales weren’t for her, and she was unable to recruit other people to sell the products, which is how distributors make most of their earnings.
After 11 months she finally gave up and lost the $10,000 she had had to invest to join the distribution network.
In her interview with CNBC, Nicole López said that if you are an honest person who wants to run an honest business, there is no way you can succeed in this business.
CNBC’s investigation concludes that it found many more cases of people who were lured by easy money and quick success and then ran into reality, realising that selling the products, as well as recruiting new distributors, was much harder than they could have imagined and than they had been told.
The report notes that most of them make the mistake of persuading family and friends to join the MLM scheme when they themselves have only just started, so some not only lose their own investment but also make their loved ones lose theirs, creating a double sense of having been deceived.
Distributors know that the money lies in the new recruits who join your network and who in turn recruit new candidates. That’s where the money is, more than in selling the products yourself, which would take a great deal more work and time and would stop being easy, fast money.
Now the question being asked in the US is: are multi-level marketing companies pyramid schemes?
The last time I touched on this subject, Easter came early, because some people wanted to crucify me for explaining the differences between multi-level marketing and pyramid schemes.
To begin with, investor Bill Ackman has already opened a short position of more than 20 million shares. In other words, he’s betting that Herbalife’s stock is going to crash, putting the company’s business model on a par with Madoff’s pyramid scheme. The company has flatly denied Bill Ackman’s accusation.
CNBC says it sent several journalists undercover into Herbalife meetings, the kind of events where potential candidates are invited to join the business. There they found upbeat music, applause and plenty of attendees who had supposedly been working with the company for some time and who claimed that Herbalife had completely changed their lives. There were even the usual comments along the lines of “my first car was a Mercedes, thanks to my Herbalife earnings”, along with photos of houses and yachts belonging to other people who had achieved the American dream with this company.
The journalists describe the capital required to join the distribution network: they heard about different options, with bigger benefits the higher the investment, ranging through $10,000, $20,000 and up to $65,000. (It certainly does change your life.)
The same outlet reports that MLM schemes are already on the radar of US politicians. However, William Keep, an expert on multi-level marketing and pyramid schemes, says that from a regulatory point of view Herbalife would not fall within the definition of a pyramid scheme, although it could be investigated how far people who join a multi-level scheme are misled.
Our personal opinion
As I’ve said before, there’s nothing wrong with multi-level marketing as such; it’s a business like any other. But, my friend, if in order for you to get paid you have to hide from me that I’ll have to work day and night for many months (or years) just to earn a living, then you’re already lying to me. That isn’t ethical, and it’s even less moral if I have to invest what little money I have to take part in the business, seriously putting my family’s fragile financial stability at risk.
With the economic crisis, the lack of jobs and the desperation of many people who don’t know what they’re going to do, more and more recruits end up as victims because they don’t know what they’re getting into or how hard this kind of selling and recruiting really is.
In short: there’s nothing wrong with multi-level marketing as long as you know the risk and how difficult it is to achieve any success. And there’s nothing wrong with recruiting someone as long as you don’t deceive them.
Featured image: Senate Democrats, CC BY 2.0, via Wikimedia Commons.
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