With yesterday’s shutdown of Fortune Hi Tech Marketing, consumers have been asking if Herbalife is a similar operation. Last year Herbalife’s business model was called into question by David Einhorn, and then the company was accused of being a pyramid scheme by Bill Ackman.
Naturally, Herbalife denied being a pyramid scheme. Management has repeatedly said that Herbalife is all about selling products, and that the products are indeed selling, so it couldn’t possibly be a pyramid scheme. But according to this (start at 2:00 mark), no one really knows how much product is being sold to actual consumers. To be clear: Herbalife does not track retail sales.
I previously compared Herbalife and BurnLounge, a company shut down by FTC because it was a pyramid scheme. (BurnLounge is currently appealing, but that is a story for another day.) Today we compare Herbalife and FHTM:
- Management – It is common for managers and executives to work for multiple companies within the industry. Just like other industries, knowledge of the industry and its customers is important. Simon Davies was the Director of Internal Audit at Herbalife, and spent the last six years at FHTM as CFO and then Chief Analytics Officer.
- Levels of Distributors – Herbalife has nine levels between Distributor and President’s Team (and then additional levels exist for President’s Team distributors), while FHTM has seven levels between Manager (first level, and equivalent to the HLF Distributor level) and Presidential Ambassador. It is common in MLM to have seven to ten “levels” of representatives, with increasing commission and bonuses at each level, and increasing requirements in order to qualify for the commissions and bonuses.
- Recruiting Hierarchy – For a visual of how the recruiting and compensation work, check out this graphic for Fortune Hi Tech Marketing and this one for Herbalife.
- Compensation Plan – Both Fortune Hi Tech Marketing and Herbalife International have complicated compensation plans. Multi-level marketing companies are notorious for having complicated compensation plans with all sorts of levels, different percentages, multiple bonuses and overrides, and more.
- Income of Distributors – Compare income disclosure statements. The vast majority of FHTM distributors who received payment (93%+) got commission checks of less than $200 per month. And this figure excludes all FHTM distributors who received $0. Herbalife only gives statistics about “leaders” in its income disclosure statement, conveniently ignoring the vast majority of distributors who are not leaders. You can read here for more information on Herbalife distributor earnings.
- Distributor Earnings Claims – Multi-level marketing companies are full of representatives who make misleading earnings claims. They often don’t give you the full story behind the numbers. They might be telling you what their highest one month income was. They might take their highest monthly income and multiply it by 12 to make it yearly income (even though their actual yearly income was much lower). They might add up the earnings of multiple people on their team. They might give you an accurate gross income figure, but conveniently forget to tell you about all the expenses that significantly reduced that income. Check out this article regarding Herbalife earnings claims. And FHTM has plenty of earnings claims out there too.
- Pyramid Scheme Accusations – Both Herbalife and FHTM have repeatedly been accused of being pyramid schemes prettied up as multi-level marketing “opportunities.” In a Belgium court, Herbalife has been declared a pyramid scheme. In the United States, state and federal regulators are now accusing Fortune Hi Tech Marketing of being a pyramid scheme.
I leave you to decide whether or not Herbalife and Fortune Hi Tech Marketing are similar. Remember that the FTC said the following about FHTM:
According to the complaint, recruits were told they could earn high commissions by selling products to people outside the operation, but instead only minimal compensation was paid for sales to non-participants, and few products were ever sold to anyone other than participants. The scheme provided much larger rewards for recruiting people than for selling products, and more than 85 percent of the money consumers made was for recruitment.
I contend that this paragraph describes nearly all MLMs. While most multilevel marketing companies have products that appear to be legitimate and appear to be possible to retail for a profit, the reality is that the products are simply the bait to get people into the recruiting scheme, and almost no one makes a profit from retailing products.