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Herbalife (HLF) now tells us that 71% of its distributors are just personal consumers. Does this pass the smell test? Last week I contacted a Herbalife distributor to research this claim. This article shares what I found including e-mail correspondence I received.

From: Matt Stewart
Sent: Thursday, February 14, 2013 1:31 PM
To: help@xxxxxx.com
Subject: Price List

I am thinking of signing-up as a distributor for a discount but not sure if it is better to just buy product as a customer...

r u able to send me a PDF of the Distributor price list so I can figure out what the biz opportunity looks like?

ty

Matt Stewart

Response:

Hi Matt,

We are a group of distributors that have been in the business for over 10 years with Herbalife. (obviously upline Sales Leaders)

For purchasing products, it's important to understand the difference between the "biz opportunity" and simply purchasing from a distributor.

As a rule, if you are spending less than 2000/month then overall, it's cheaper to buy from us as the savings we provide is higher without any membership commitment or monthly requirements.

To add, creating a "biz opportunity" is creating a business so a 1099 will be provided for all products purchased from them whether it is for yourself or for your "business". Use your email address to log into our site to view our pricing.

Distributor pricing can only be viewed when you create an account with a local rep. However, I will caution if for personal usage, you will be surely be disappointed as shipping charges and many other charges apply. It's worthwhile only if you seriously are looking into creating it as a business.

If Michael Johnson is telling me that 71% of distributors sign-up for "personal consumption" why is this seemingly honest distributor telling me the only rational reason to sign-up would be to pursue the business opportunity?

So, I decided to cross-check this candid advice myself:

I surfed around the web to find a wholesale price list for Herbalife (HLF) product. I found a document that detailed pricing for distributors in California.

The #1 Item on the Price list is Formula 1 750g Shake mix (HF1). This is Herbalife's best selling product.

Here are the economics of that product. The Suggested Retail Price (SRP) per container is $36.15. Herbalife then charges a 4% Freight fee of $1.44 and a 7% Packaging and Handling Fee of $2.53. In the State of California Herbalife also collects a 9.75% Sales Tax of $3.52

Total Surcharges are $7.50 or $3.98 without Sales Tax.

Let's assume that the surcharges are $4 in a domicile with no State Sales Tax.

Herbalife Distributors get discounts based upon volume bought:

  • 50% off pays $18.08 + $4 = $22.08 per canister
  • 42% off pays $20.97 + $4 = $24.97 per canister
  • 35% off pays $23.50 + $4 = $27.50 per canister
  • 25% off pays $27.11 + $4 = $31.11 per canister

This is a distributor's COGS net of Sales tax in the USA at various distributor levels.

Then:

I went online to buy a can of Formula 1. I found a great website called Herbalwell.com. This site is very well organized, professionally presented and markets a complete array of HLF product.

In exchange for me providing this site my email address I was automatically qualified as a VIP customer. No business pack required. No fees to be paid.

Q. What price did I have to pay for HF1?

Herbalwell's website lists the SRP of HF1 as $36.15. This is consistent with the L.A. price list I found. Fortunately for me, they were offering me VIP product for $28.50 a canister. And, if I purchased over $35 worth of product I could receive the product with free shipping thrown in. And, because I buy on the internet there is no sales tax to be paid in my state.

Let's look at these economics again.

A junior distributor in L.A. pays $31.11 for a canister of HF1 not including Sales Tax. I can buy the very same canister through Herbalwell.com from a Sales Leader for $28.50.

If I happen to live in a state that charges Sales Tax like California my price as a distributor would be $34.61.

Online I can buy for $6.11 less per can or a savings of 17% with Free Shipping.

Herbalife tells us that 351,065 of its distributors in the USA are buying for "personal consumption". These individuals sign-up as distributors, pay a fee to acquire the IBP, pay Shipping and Handling, Freight and Sales Tax if they order directly from Herbalife. When they do this they pay $31.11 a canister de minimus if not more.

Alternatively, they could buy from Herbalwell.com (and other Sales Leader sites online) and pay $28.50 a canister. Which would you do?

The USA is one of the most tech-savvy countries in the world. 85% of the population own cell phones. 1/2 of these are Smartphones. The internet is ubiquitous and low-income people are some of the savviest price shoppers around. Company's like Walmart (WMT) attract value conscious customers in droves because they have the best prices in town.

Put another way, rational people shop around. Herbalife's "personal consumers" would be no different.

It took me 5 minutes online to find multiple websites selling HF1 at a price point that would make me 100% indifferent to going through the hassle of signing-up as a distributor to buy HF1. I even had an honest distributor telling me not to sign-up as a distributor.

Why? Because the economics make no sense. As a "personal consumer" Herbalwell.com offered me a compelling and professional retail source for HF1.

More significantly, this little research effort revealed the following:

Where is the business opportunity for a new Distributor like me?

1) The only way to even have a chance to make money retailing Herbalife product is if you are a Sales Leader. There is simply no way for a Junior Distributor to compete on price with a Sales Leader for retail customers.

2) Even as a Sales Leader I might be lucky to make a 10-20% mark-up on product after all costs. ($28.50 - $25)

3) Herbalife's marketing of the retail Business Opportunity to Non Sales Leaders is definitely a fraud ($0 profit potential hardly a "business opportunity") and to Supervisors it is a stretch (see 50% annual churn). There is no retail business opportunity unless you are a Sales Leader. There is no way to compete in the USA with the wholesale pricing Sales Leaders enjoy combined with the ubiquitous reach of the internet to sell to any and all prospects who might seek to acquire HF1 at a competitive price here in the USA.

4) There is no rational pricing incentive to join Herbalife as a distributor for "personal consumption". In practice, the economic incentives offered by the tax-free distribution of goods via the internet would incent "personal consumers" to stay outside the MLM salesforce to avoid paying Shipping surcharges not to join it to pay extra "taxes".

5) The collective efforts of rational economic participants including motivated distributors and equally motivated personal consumers naturally drive the rational retail price of HF1 below 25% off and closer to 35% off allowing for some retail margin to upline retailers.

6) Herbalife's arguments that there are 350,000 "personal consumers" and another 5.2 million retail consumers (absurd claim!)in the USA implies that these people are either ignorant or irrational or both. Unlikely. Or perhaps they are stretching the truth about their real motives behind signing up? Might they be pursuing the business opportunity? Hmmm?

Alternatively, it is likely that upline Supervisors who sell product to downline distributors are lowering their retail prices to match the pricing available on Herbalwell.com and other sites like it.

As for who's making money at Herbalife? Well, the more you look at it the more obvious it gets. The cream in this pyramid scheme rises to the top based upon the efforts of the grunts down below. Recruiting rewards get paid even if evidence of retail profit is hard to uncover.

More importantly, day in and day out Herbalife and its distributors are marketing a "business opportunity" that simply doesn't exist for the marginal distributor.

If 350,000 people are buying as distributors for 25% off and I can buy online for $28.50 a can, how can I possibly find legitimate customers out there willing to pay more? Where is the retail opportunity?

Of course, this is how the sinister side of the Business Opportunity kicks-in. New recruits are told that if they want to have any chance of making serious money they have to get to Supervisor. How do you get to Supervisor? Buy more product. Pony-up for Volume Points. Buy your discount, etc. Bingo: Product purchases "facially unrelated to retail sales." = pyramid scheme.

Junior Distributors at Herbalife are playing Pin the Tail on the Donkey if they ever try to retail HLF product. They are blindfolded (pay 25% more for product), spun round and round (surtaxed with Shipping and Taxes), misdirected ("You can do it!") and then blamed when it all goes sour.

There is no way for an MLM to charge its wholesalers vastly different prices for the same products without biasing the economic results of the entire program to the benefit of those in the upline. This is the full-effect of Herbalife's price discrimination. This is why Nuskin (NUS) doesn't price discriminate. This is why price discrimination is illegal. This is what the 9th District revealed in the Omnitrition ruling.

In particular, in mature markets Sales Leaders enjoy such a material competitive advantage over new recruits that the game is fixed before it starts.

In fact, websites like Herbalwell.com reveal how unlikely it is for even Sales Leaders to make a material return retailing HLF product. 10% -20% margins are likely too skinny to make a difference. At least that is what this honest distributor told me too.

The e-mail thread continued as follows:

I asked:

2) You say you are a group of distributors...interesting that you have banded together...I guess that works well for you? Is most of your business done over the web?

Answer:

No we have a very solid local distribution channel in several states and have been selling local (at higher price points of course) for many years before even considering an online distribution. It's not practical to simply sell online as the margins are too slim to sustain a real business unless you've already created a solid network locally. I would recommend if you are really considering doing a business, check out your local Herbalife club and join them. It takes many years to get the business to even break even so start small and where you can comfortably develop and learn from your mistakes. Trust me there are plenty. The most important part is your ability to develop your customers and help them achieve their goals. It's a slow process but as you invest time in your customers and they see the results, they'll naturally spread the word and provide you with referrals. In general, it takes 2 years to solidify your name in the business and from there while there are still challenges, it becomes more stable as is with many other businesses. What will make you successful is when you yourself see the change and understand what it takes to succeed. Understand most of the distributors started out the same way as customers and going through the struggles. This is not a business for everyone, you truly need a heart to develop your customers and there's much resistance, you're asking them to change their lifestyle but as you develop that relationship, it'll pay off slowly.

How's that for a sales pitch?

To be sure, Herbalife is moving a lot of product annually. As for who is making money? If you're not in the upline - forget it! Longs make the argument that because Herbalife moves lots of product that it is impossible that HLF could be a pyramid scheme. This argument misses the mark. The relevant question is:

Why does the product move?

Any detailed analysis reveals that the product moved by Herbalife is moved because the company's compensation system deceives new entrants to believe that their economic prospects are more significant than they really are. The result is that the business model produces short bursts of economic activity at the granular level (think one year or less) and then moves on to recruit additional prospects who are naive to the Herbalife deception.

The process is, de facto, a juggernaut. One must be impressed with its capability to deceive. But, the presence of sales volume does not, in and of itself, make the scheme any less deceptive.

Today, in the late stages of the company's life-cycle, Herbalife is selling a business opportunity that simply doesn't exist to those at the bottom of the chain. The fairy tale is designed to get new people purchasing product as soon as they can - to get them hooked on the product or the opportunity or both - to get them to Supervisor. Inevitably, these unsuspecting individuals discover that the deck is stacked and churn out and so the endless chain continues until, of course, it doesn't.

Still not convinced? Soundcheck: If you joined Herbalife today for the "business opportunity", how would you make money?

Shattering the personal consumption myth is an important element of revealing how HLF is a pyramid scheme. Signing up for "personal consumption" makes no economic sense.

Furthermore, if junior distributors who wish to buy product for personal consumption would be better off staying outside the sales force and buying from a Sales Leader then obviously the idea of actually becoming a success as a retailer by competing head to head with a Sales Leader becomes ludicrous.

Herbalife moves tonnes of product for one reason. The Sales Leaders and the company live off the junior recruits by deceiving them. Then the cycle repeats.

How do I know? An honest Herbalife Sales Leader just told me. Maybe he should be the CEO?

Source: Herbalife: Shattering The Personal Consumption Myth