Editor’s note: This article was first published in March 2014, when the FTC had just opened an inquiry into Herbalife amid Bill Ackman’s short campaign. The FTC settled with Herbalife in 2016, with a 200 million dollar payment and changes to its business model, without formally calling it a pyramid scheme.
One of the questions I get most often by email is my personal opinion on multi-level marketing businesses. With the Ackman–Herbalife scandal and the FTC (US Federal Trade Commission) inquiry, new questions and concerns are coming up. To keep this article from getting too long, let’s go straight to the heart of the matter.
Why don’t multi-level marketing companies use the traditional business model or distribution channels?
Herbalife sells a full range of nutritional supplements and skin and hair care products. But you won’t find its products in Carrefour, Mercadona (a Spanish supermarket chain) or other big retailers. Why?
Like most multi-level marketing companies, it relies on this sales system for several reasons.
The first is that its products have no competitive advantage over the rest of what is on the market. They are neither better quality nor better value for money, so they would be entering a tough competitive battle they probably wouldn’t win.
The second reason is the cost of selling. It is much cheaper for a company to have 10,000 salespeople without putting them on the payroll, without paying social security contributions and without having to cover sick leave, poor sales periods, opening new outlets…
This sales system is very cheap for the company, and the company takes on no risk at all, because all the risk is carried by the people who join the system.
The truth is that most multi-level marketing companies don’t really sell products; they sell a business opportunity, financial freedom and the creation of a supposed asset that generates passive income. They sell freedom and dreams of wealth. And that freedom and those dreams of wealth, which people will have to achieve through their own work, are offered to everyone alike, whether or not they have any sales experience.
In any company where you look for a sales job, they ask for sales experience or some other requirement. In this kind of company, as long as you have the money to join, you’re welcome.
The income gap between the top of the pyramid and the base speaks for itself.
A company like Herbalife sells you the dream of wealth, and it is true that there is wealth, especially at the top of the pyramid. As we showed in a previous article, 0.6% of those who started out in Herbalife’s early days make more than 300,000 dollars a year, while the 25% of salespeople considered “elite sellers” earn around 700 dollars a year on average. The same happens with most multi-level marketing companies. (Read: Now we know how much Herbalife sellers earn)
Differences between Avon and Herbalife.
I have to draw a clear distinction between Avon and Herbalife. On one hand, Avon pitches becoming a distributor as a way to earn some extra money in your spare time without investing anything at all. You take on no risk whatsoever, and you go in knowing it is very unlikely you’ll end up buying a Ferrari and a 15-million-euro house in the Cayman Islands. In fact, they don’t waste time trying to sell you that.
Herbalife sells you absolute wealth and financial freedom, but to reach that dream, you first have to buy a batch of products. In fact, most of Herbalife’s revenue probably comes from recruiting new distributors, not from sales to repeat customers. If that is the case (and it is what the FTC is going to look into), we would not be talking about a multi-level marketing business but a pyramid scheme.
See also: 8 business lessons every entrepreneur should remember
Both have one thing in common: neither company has a competitive advantage in its products over other brands, and that is also why neither uses traditional distribution. But at least Avon is more honest in how it presents itself, and its business is 100% certain to get its revenue from product sales, since its distributors don’t have to buy or pay for anything. And that is a huge difference.
I know many Herbalife distributors and people from similar companies fill the forums saying these companies create jobs for many families. Allow me to disagree. They may generate extra income (more or less of it), but they are not creating jobs, because the distributors are not employees with an employee’s working conditions. And considering the hefty income they generate for other people at the top, who are employees of the company, I would rather call it a very dishonest system for attracting people on low incomes and selling them a fabulous lifestyle that not even the seller has achieved.
So, would I join a multi-level marketing company? I can almost guarantee I wouldn’t. On the other hand, would I create a multi-level marketing system? Of course. That is where the money is, and as long as there are people willing to work for me under those conditions, I’m happy to oblige.
“They say empires aren’t built without blood. I’d provide the empire. Will you give me your blood?”
Further reading
Featured image: Gunnar Klack, CC BY-SA 4.0, via Wikimedia Commons.
