Friday, January 1, 2016

Herbalife versus Vemma: Pyramid Scheme Analysis; Part 2 of 6


Please read part 1 of 6 before reading part 2 below.

 

The Herbalife Compensation Plan & Limited Incentives for Retail Sales



21.  Herbalife gives potential purchasers who simply want to “enjoy the products” the option to purchase products at a 25% discount to suggested retail price (SRP).  Up until a rule change in 2014, Herbalife products were readily available on independent distributor websites for ~40% discount to adjusted SRP (Who Wants to be a Millionaire? pg. 106).  This rule change has not altered the primary reason new recruits join Herbalife (i.e. to pursue the business opportunity), because the products are still available on eBay and other online marketplaces for prices lower than the discounted wholesale prices that Herbalife’s most junior distributors are paying for products (Who Wants to be a Millionaire? pgs. 107-108).  If the retail demand is genuine then arbitrage would cause prices to be nearly equivalent.

Source: page 19 of Pershing Square presentation Side-by-Side: A Comparison of Vemma and Herbalife



22.  Paragraph 22 of Dr. Bosley’s declaration discusses the purchase of Vemma's $499.95 Affiliate Pack which I believe to be comparable to Herbalife distributors inventory loading to achieve Supervisor status.  In just one of many examples Chairman’s Club member Alan Lorenz urges you to “get to supervisor by the end of the month, get your people to supervisor” in this video.   



Source: Page 18 of Pershing Square's presentation Side-by-Side: A Comparison of Vemma and Herbalife


23. & 24.  Paragraphs 23 and 24 of Dr. Bosley's declaration discusses Vemma’s auto-delivery program which I believe is comparable to Herbalife distributors inventory loading to maintain supervisor status.  Inventory loading isn’t just garages full of products as this video demonstrates.  John Tartol states “The more product you take, the more money you make.”


Source: Page 20 of Pershing Square's presentation Side-by-Side: A Comparison of Vemma and Herbalife


25.  Herbalife's Compensation Plan has six ways to “get paid.”  These include retail profit, wholesale commissions, royalty overrides, monthly production bonus, vacations/promotions, and the annual Mark Hughes bonus as summarized by Pershing Square in slide 81 of their presentation “Who Wants to be a Millionaire?”  I will describe each of these forms of compensation below.


Source: Page 81 of Pershing Square's presentation Who Wants to be a Millionaire?


26 thru 37.  As seen in slide 81, nearly all forms of financial compensation from Herbalife require a distributor to be at the Supervisor level or higher.  As described in paragraph 21, even retail profit is largely unavailable to junior distributors because they receive a 25% to 42% discount while senior distributors receive a 50% discount to SRP.  In pursuit of the recruiting rewards, senior distributors to dump product far below SRP and leave little to no retail profit margin for junior distributors.


The key determinant of most distributor’s income is the accumulation of volume points by ordering product from Herbalife (without regard to retail demand) and recruiting others to do the same.


Sales leader must generate ~$2600 of Personal Volume per year to maintain their downlines and Sales Leader status (Who Wants to be Millionaire pgs. 72, 166)


To qualify for maximum commissions and bonuses, Sales Leaders must generate ~$1,600 to ~$3,200 or Personal Volume each month (Who Wants to be Millionaire pgs. 72, 166).


Herbalife claims that 73% of all retail sales dollars go right back to the distributors.  However, this calculation is made from a fictitious Suggested Retail Price that is unrelated to market demand.


In Herbalife v. Ford, District Judge Gary A. Feess stated “Herbalife’s entire business model appears to incentivize primarily the payment of compensation that is ‘facially unrelated to the sale of the product to the ultimate users’ because it is paid based on the suggested retail price of the amount ordered from [Herbalife], rather than based on actual sales to consumers.”

Continue to Part 3 of 6

2 comments:

  1. One of the weaknesses of many judicial writings are use of the terms "ultimate users" and "consumers." Pro-MLM sycophants insist these terms also apply to purchases by the distributors for their own use, thereby muddying the waters regarding the key issue about selling products to legitimate external customers.

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  2. Per the Vemma decision, “[R]ewards for recruitment unrelated to sales to ultimate users - is the sine qua non of a pyramid scheme…”, and [A]n ultimate user ... is limited to one who would have purchased a product even if not for the income opportunity”.


    The Declaration of Stacie A. Bosley, Ph.D. states in paragraph 20 “...program participants may only be considered ‘ultimate users’ if the participants purchase the products for personal consumption based on consumer demand, not primarily for the purpose of participating fully in the rewards under the compensation plan for the business opportunity....it is not necessary for compensation to be completely unrelated to sales to ultimate users. Stated another way, the existence of some sales to ultimate users for purposes of consumption does not prevent a plan from being an illegal pyramid scheme.”


    In Herbalife v. Ford, District Judge Gary A. Feess stated “Herbalife’s entire business model appears to incentivize primarily the payment of compensation that is ‘facially unrelated to the sale of the product to the ultimate users’ because it is paid based on the suggested retail price of the amount ordered from [Herbalife], rather than based on actual sales to consumers.”

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