Herbalife was recently in the news for being fined $200 million by the Federal Trade Commision.
Here is a snip from the FTC press release:
“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” FTC Chairwoman Ramirez said. “Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”
Even with Troy Dooly’s MLM Help Desk and BusinessForHome.org, the average Network Marketer probably doesn’t follow this stuff very closely. This site, MLMBlog.net used to be the go to for news about MLM, but in all honestly, I got really burned out while writing about lawsuits and scams all of the time. So I have since shifted the focus of this site to building a money making Network Marketing business.
But when news comes down this big, (to my knowledge) the largest fine ever levied against a Network Marketing company, I felt like I should post a few thoughts.
Let’s start with the past and work our way forward.
What did Herbalife do to deserve a $200 million fine from the FTC?
First I’ll give you what the complaint says, and then I’ll give you my opinion.
The complaint says:
…(Herbalife’s) compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product, causing substantial economic injury to many of its distributors…”
This is pretty close to what was actually happening at Herbalife. Basically a group of Herbalife Distributors promoted the sales of large products packages (upwards of $8,500), followed by the sales of thousands of dollars in business leads. This would commonly be referred to as “front end loading”, where a new distributor would buy a large amount of product without having a real way to sell the products.
The good news is that Troy Dooly reports that this practice stopped a couple of years ago and the spearheaded this strategy have moved on.
But the damage was done.
Unless you own some type of retail store or gym where you can move inventory, no one should purchase more products than they can legitimately use, sell or use as samples in a given month. So buying $8,500 worth of products not reasonable.
In my opinion, you should be able to start your Network Marketing business for $100-$500. Don’t be afraid to buy a reasonable product package to familiarize yourself with the product line.
What does this mean for Herbalife?
Here are the four things laid out by the FTC:
“The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity. “Discount buyers” will not be eligible to sell product or earn rewards.
Multi-level compensation that business opportunity participants earn will be driven by retail sales. At least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
Companywide, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. Otherwise, rewards to distributors must be reduced.
Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.”
What does this mean for Network Marketing as a whole?
Here’s what we learned:
Vemma’s problems came down to promoting their business model to college students who probably were not prepared to start a business of their own. (Certainly the student’s parents were not prepared for their students to start an energy drink business).
Herbalife’s problems relate to classic front end loading. Frankly, there is no excuse for this practice. It’s been a big NO NO for a long time.
But both companies were dealt with in a similar manner.
The FTC wants to distinguish between people who are building a business and people who are just buying products.
Most people in Network Marketing just buy products. I’m not going to dive into the psychology of why a person would sign up for a business and then only buy products without really making much effort to sell products or sponsor people. There are many reasons.
I will however, offer a simple solution for Network Marketing companies:
Make people qualify to become a distributor, representative, promoter, etc.
It’s common sense really.
I could say that I am a U.S. Marine and you would have a pretty good idea what that means. I would have went through skills training and spent time stationed in a location doing the work that Marine’s do.
Now, what if I told you I am a Marine, because I once signed up to be a Marine, even though I didn’t do anything further other than signing up. Truth is, signing up to be a Marine, does not make you a Marine. Your actions make you a Marine.
Same thing with the Network Marketing profession.
Signing up in Network Marketing and buying products doesn’t make you a Network Marketer. Your actions make you a Network Marketer. Sell a product, sponsor a person, you qualify to be a Network Marketer.
Of course, becoming a Network Marketing professional is another topic altogether.
Ty Tribble is the founder of MLMBlog and author of ‘Double Your Income with Network Marketing.
Ty writes, speaks and trains on the topic of using the Internet to Make Money Online.
Ty lives in Seattle, Washington with his wife of 26 years and two children.
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