A Comparison of Medifast and Pre-Paid Legal

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UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

This week Barry Minkow and iBusiness Reporting did a comparison of the business models of Pre-Paid Legal Services Inc. (NYSE: PPD) and the Take Shape For Life division of  Medifast Inc. (NYSE:MED).  Pre-Paid Legal is being investigated by the SEC, and Barry wondered how the compensation plans of Pre-Paid and TSFL stacked up. The obvious question is whether Medifast could eventually face the same scrutiny as Pre-Paid Legal.

It seems that the SEC investigation of Pre-Paid Legal has focused on its stock buyback program (this is how executives and insiders get rich) and how the company is marketed. They also asked for data on membership statistics, so this could open the door to evaluating whether the practices of the company are like a Ponzi scheme.

Fraud Discovery Institute issued a press release detailing 5 points of similarity between Medifast/TSFL and Pre-Paid Legal, which said in part:

“Sixty-one percent of Medifast’s total revenue is derived from Take Shape for Life, the
company’s multi-level marketing division,” said Barry Minkow, co-founder of FDI. “And since both Pre-Paid Legal and Medifast must rely heavily on their multi-level marketing pie-in-the-sky compensation structure in order to lure in new recruits, it is critical for Wall Street investors and analysts to factor in what legal issues Medifast might be facing. And these similarities are striking.”

FDI’s latest report shows the examples of similarities between Pre-Paid Legal and Medifast:

  1. Both Medifast and Pre-Paid Legal report dismally low earnings for the vast majority of “coaches” and “associates.” From July to December 2009, 53% of Medifast’s “active” health coaches made an average of $97 per month, and this “average” is inflated, as it conveniently excludes all coaches who made less than $25 per month. In 2009, Pre-Paid legal reported that only 1.6% of vested sales associate personally sold more than ten memberships. With annual commissions of $16 or $25 per sale of a family plan for associates selling less than 25 memberships, this means that 98.4% of vested associates make less than $250 per year.
  2. Representatives of Medifast and Pre-Paid Legal are incentivized to recruit, rather than to sell the products. The representatives above the salesperson in both companies are collectively paid much more in commission on each sale than the associate who actually made the sale. It is nearly impossible to make a reasonable income simply selling the products or services of Medifast or Pre-Paid Legal, pushing the representatives to recruit new members in the hope of earning more.
  3. Both Medifast and Pre-Paid Legal have 10 levels of commission payouts. For an individual sale, the person making the sale will receive a small commission, while 9 other levels will receive commissions that, collectively, usually exceed the commission the actual salesperson received.
  4. What’s to hide? Neither Medifast nor Pre-Paid Legal disclose their “churn rates.” While both companies report the number of “active” coaches or associates at the end of the year (and Pre-Paid Legal also reports the number of associates recruited during the year), they deliberately fail to disclose the total number of representatives at the end of the year or the number of people who have quit during the year. Failing to disclose these key figures effectively conceals the failure rate of the recruits.
  5. What’s to hide, Part II? Neither Medifast nor Pre-Paid Legal discloses the real average income for their coaches or associates. Medifast appears to disclose average income, but excludes all coaches earning $25 or less in monthly commission from its calculations, effectively making the reported “average” a completely fictional number.

“Multi-level marketing is not direct selling and is nothing more than a money transfer game where the product or service is merely the excuse used to move the money from those at the bottom of the pyramid to the exclusive minority at the top of the pyramid,” Minkow said.

My favorite point of this whole press release is the part related to Medifast’s disclosure of “average” earnings, which aren’t average at all!!! The company claims that the average monthly earnings of the bottom 53% of coaches are $97 per month. But a careful reading of the fine print shows that this “average” applies only to what they deem “active” coaches. They deliberately exclude from their “average” calculation all the health coaches who make $0 to $25 per month. Obviously, if those coaches were included, the real average would be much lower than this phony average.

And I don’t accept the argument that since Medifast discloses in the fine print how they are calculating their “average” that it is not misleading. Many people won’t look at the fine print, and when they see the word “average,” they have the audacity to believe that the number really means it’s an average.

On Minkow’s iBusiness Reporting site, William Lobdell wrote an article about the recruiting tactics used by Medifast’s TSFL division. Recruiters are touting the “entrepreneur’s fantasy” that is Take Shape For Life, despite all evidence to the contrary.

Medifast discloses certain earnings figures for its health coaches (although as mentioned above, their idea of calculating an “average” means leaving out everyone who made $25 or less per month). In this income disclosure document, the company gives warnings against making income claims.

That doesn’t stop Take Shape for Life co-founders Dr. Wayne Andersen and Dan Bell from claiming in a recruiting webinar that coaches can put in as little as 30 or 60 minutes a day and earn $35,000 a year.

“This is not pie in the sky,” said Dan Bell, a global director for Take Shape for Life, at one point during the roughly hour-long webinar. “This is not hype … this is the truth.”

Outlandish claims like this apparently work well for recruiting people into multi-level marketing companies. But TSFL is working hard to avoid the label of multi-level marketing, even though it’s clear the company is an MLM… they recruit people into multiple levels in the sales chain, and 10 levels of people can receive commission on one sale.

Why is Medifast running away from the multi-level marketing label. I think they should be proud of their business model. If it’s so successful and earns so many people so much money (clearly it doesn’t, based on the limited data the company releases), then Medifast and Take Shape For Life should proudly accept and market the MLM label.

3 thoughts on “A Comparison of Medifast and Pre-Paid Legal

  1. T. C. Cameron

    I have been a PPL Member/Associate for 8 months now – after other MLMs, i came into this business with the sole intent of finding 1) What the product is and 2) How to sell it **TO BUSINESSES**, where i felt the real honest money was. I an now on the verge of being able to pitch ‘group’, as PPL calls employee benefit presenters. If I experience some success in this with meaningful income, I will repost with an update.
    Let me be clear — I DESPISE MLM MARKETING. It is mostly mental masturbation for unaccomplished middle-aged people. I had brief encounters with Amway and Melaleuca (sp?), and the MLM aspect was so embarrasingly campy that it ruined the decent products that they offered. ***Amway/Medifast/Melaleuca/PPL are NOT pyramid schemes at the core of their marketing concepts**. However, a clever marketing technique to get product out into the market as fast as possible has given way to the get-rich-quick cycle of ‘show your friends and family, impress random people on the street who will never sell a single membership, repeat’ which IS a pyramid. I want PPL to reel their MLM crap back, and put more emphasis on learning what the product offers, and then professionally selling the membership as an employee benefit.
    ON the other hand I also hate seeing PPL’s service, which is actually a rather solid, innovative and useful tool, being buried in the stigma attatched to MLM marketing. Let me be clear – PPL’s Legal Life Events Plan, for example, offers people (among many other provisions), unlimited phone consultation with an **attorney**. That’s really cool! Whenever before have people been able to just call an attorney with a problem and get help on it?
    As to the final issue in the article, PPL does offer the potential to create strong income for dedicated individuals, without recruiting. True, Junior Associates (the first level) only make $25 with the sale of a membership, but the next level makes a little over 50, and the next about 103 and then (i think) 130, 150, up to 200 at the Executive Director level. To achieve those levels respectively, i think you need, 0-10, 10-25, 25-50, 50-100, 100-150 and 150-200 membership sales, ‘counters’. You can only fall back down levels is you’ve built a network and it disintegrates beneith you, but with sales you stay at your level. That is not insignificant income, even compared to Insurance Companies. This is another reason I wish Corporate would cut down the MLM garbage and train real sales reps!
    I hope ya’ll can take some of my insight to heart on this issue. I understand MLM have earned a very special sleazy rep in the business world, but please don’t throw out the baby with the bathwater until you look a little deeper into the products that they offer, particularly with PPL.

  2. Doo Dilly

    MFI STOCK REVIEW: PRE-PAID LEGAL SERVICES INC. (PPD)
    Quick Look

    Date: Apr 26, 2010
    Growth: D
    Competitive Moat: C
    Management: C-
    Financial Health: C
    Opinion: All kinds of shady issues. Avoid.

    http://www.magicdiligence.com/articles/prepaid-legal-PPD-2010-04

    “Total memberships continue to fall despite an increase in new memberships.

    Though the company was able to increase total new members that joined in 2009, higher membership cancellations lead to an overall decline in total number of memberships outstanding at the end of 2009.

    Total memberships at the end of 2009 declined 0.7% to 1,547,585 from 1,559,154 at the end of 2008, primarily off a 1.9% increase in membership cancellations to 579,664 from 568,975 in 2008. However, the decline in total memberships was partially offset by a 2.9% increase in new memberships to 568,095 from 552,327 in 2008.

    Consequently, total revenues and net income declined for 2009”

    http://seekingalpha.com/article/194853-is-pre-paid-legal-services-in-the-business-of-selling-services-or-trading-stock?source=yahoo

    It’s actually one of the worst MLM products offered on the market. Come back in 6 months and tell us how well you’re doing…

  3. T. C. Cameron

    Hmmm, that was pithy and interesting information. I really cannot find much to argue with there – i had no idea that we basically turned over 33% of our membership base each year, which alone is the ultimate disconcerting fact.
    I think the problem with PPL is they came to the game about 20 years too late; they did not reach critical mass (i.e. 10M steady members), where it’d be able to provide a competitive service, cover its costs and still have positive cash flow to respond to a changing market. Now with the rising use of E-Laywering, their service is going to be eroding underneath them, stunting the growth that they need to get to a stable position. Its possible that the Executives have realized this and are trying to manipulate the stock to make quick money before the company implodes.
    I know it’s pathetic that it took so little and such simple information to dissuade me, but i think in the face of information like that my involvement with PPL will probably be at an end. I thought this may have been a good product, but I’ve taken a too many leaps of faith and put up with enough smoke in mirrors to find just dissapointing news at the end of the tunnel. Time to get on with something else.

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