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How HLF Pays A Recruiting Commission And Gets Away With It

|Includes: Herbalife Ltd. (HLF)

From Herbalife's website:

How can you distinguish a legitimate MLM from an illegal pyramid scheme?

It's a simple test, based on the definition above: an illegal pyramid scheme awards payments to participants for mere recruitment. In contrast, if the distributor earns income only when sales happen, the business is not an illegal pyramid scheme, but rather a legitimate MLM company.

True, HLF does not pay explicitly for the recruitment of a distributor. However, they do pay a commission to the up-line on the sale of product that the new distributor purchases. This would seem fine, except that the product the new distributor purchases is a "forced sale". They don't just buy a nominal amount of shake mix, and then go attempt to sell it. They have to purchase thousands of dollars worth of shake mix, and try to sell that. All the while the new distributor's mentor (up-line) is encouraging them to build their network, and reassuring them they are doing well and on the path to making the big bucks. As they are trying to build their network, the 90 day return policy window closes. The company even takes back any commission paid to the up-line if the product is returned in this 90 day window. This may seem fair, but if you think about where the up-line's motivation would lie in this scenario, you realize there will be immense pressure placed on the new recruit to not return the product.

The point is that this "forced sale" essentially replaces a commission based solely on recruitment. The people who spend the most money on the product are new recruits. Therefore, the existing sales force (up-line) is incentivized to recruit more people, rather than developing a customer base of end users/retail consumers. The fact that distributors are not paid a true headhunting fee is just semantics.

There is no smoking gun here. You have to look at the how the system is designed to work. There is no way they will pay a commission just for the recruitment of a new distributor. However if each new distributor sees that the only way to make money is to recruit more distributors, then the end result is the same. HLF may be deceitful, but they are not stupid. They are con artists. The victims don't know they have been duped until it is all over, and even then they have been told they just didn't put in the time necessary to "develop their business". Well, I call BS. The lottery analogy is appropriate, because the odds are similar. I just don't know too many people that would buy a $4,000 lottery ticket that takes 6 months worth of selling effort to scratch off.

Disclosure: The author is short HLF.