CASE 19 Multilevel Marketing under Fire: Herbalife Defends Its Model INTRODUCTIO
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CASE 19 Multilevel Marketing under Fire: Herbalife Defends Its Model INTRODUCTION Herbalife International is the third largest direct selling, multilevel marketing company in the world. Its product line consists of weight management and nutrition products. These metors, are not sold in retail stores; rather, consumers interact with independent con- who are often everyday people like themselves, to order the products uarters are located in Los Angeles, California, and they in many countries the world. Herbalife is a publicly traded company that isboth loved and hated throughout and consumers. This case first discusses the history of the company from its founding to its present status, followed by a description of the types of products Herbalife offers Then we will get into a discussion of multilevel marketing and the role ofindependent contractors in the direct selling model. Next will be an analysis of pyramid schemes and why they are often confused with the multilevel marketing model. We then examine Herbalife to determine whether it is a pyramid scheme. We will illuminate the role of hedge fund investor William Ackman, who has promi nently accused Herbalife of being an elaborate pyramid scheme, in the backdrop of Herb alife's business model and describe his contentions with the company as well as some of the criticisms levied against him. The case shows that while Ackman's accusations may to the most widely known, Herbalife has had to face similar allegations (mostly referring pyramid schemes) throughout the course of its existence. The case then briefly overviews Herbalifes social responsibility program, and ends with overall conclusions finally HISTORY and personal care Herbalife is a company that focuses on nutrition, weight management, Hughes products with contractors selling in more than countries Mark ounded the company in 1980 out a desire to create a safe alternative to other of Melloy, Carin Main, Emily MkGowan, aad laac Enmanuel or 02015 Sawayda provided editorial assintance by Michelle Ferrell lenn ineffective handling of an under the direction Ferrell and Linda illustrate eflective or were obtained through Prepared for classroom discussion rather than to All sources used for this case either u ethical or decision by legal available material
Explanation / Answer
1) Why has Herbalife's multilevel compensation model been accused of being a pyramid scheme?
Multilevel compensation model is a model where,
The products are sold by the contractor who takes a contract of direct selling of the products. He takes the contract because, he might like the products and wants to become an ambassador for the products by marketing the product, or he would want to stay loyal to the brand or he might also want to use the products for his personal consumption and enjoy the discounted benefits that are associated in becoming a direct seller. A direct seller normally sells the products by meeting people and having a face-to-face discussion of the products. This is called a single level marketing. The main reason for this single level marketing is to reap benefits of commission on his personal consumption.
If the contractor goes one step forward and recruits the people and make them direct sellers then it is multi level marketing. It means, all the people who are recruited under this contractor sell products and the sale benefit of all these direct sellers under the contractor goes to the contractor who recruits them and obviously to the sellers. It means, a contractor who is dealing with a multi level marketing earns by selling products himself plus he gets the earning of all the people who are working under/recruited by the contractor. Say, a contractor who is doing a multi level marketing has 6 people under him, who are recruited by him. Let's say the total sale earnings of the 6 direct sellers is $1500. Contractor has a personal sale of $500. So, the earnings of the individual sellers is their individual sale. But for the contractor, it is $2000. That is the total individual sales of the sellers plus his sale. This is considered legal.
It is said to be illegal or a fraudulent scheme if, the main aim of the contractors is to recruit people by giving them false claims. It is also called as pyramid scheme. In this scheme, certain amount of money is being taken from the people who desire to become a contractor. This money goes directly to the top people of the pyramid. The main emphasis in the pyramid scheme is not selling the products. Because, the products are either over priced or of poor quality. So, the quickest way to earn is to recruit as many number of people. And get commissions by recruiting and bringing every single person to the loop. It is called fraudulent because, the bottom part of the people are deprived, and cheated with false claims and the top people of the pyramid enjoy the benefit of sale and recruitment.
Multi level compensation scheme is accused to be a pyramid model because, both run on similar lines of recruiting the people. In multi level compensation, the people are recruited for selling the products but in the pyramid, the people are recruited to earn money for the top people of the pyramid.
2) Differences between a legitimate business model and pyramid scheme.
1) A legitimate business model is making business ethically, that is by selling the products. Where as a pyramid scheme is making business unethically by cheating people of earning quick money.
2) A legitimate business model does business by selling the products which are of high quality. A pyramid model does business by taking money from the people for bringing them into the loop/pyramid. The products in the pyramid model may be of poor quality
3) A legitimate business model does not give false claims. But a pyramid model gives false claims and cheats people.
4) A legitimate business model is very transparent and does not involve more than 3 levels. Say for example, a manufacturer, a whole seller or distributor, and a retailer or reseller. Where as a pyramid model has multiple levels. The levels could be in hundreds and thousands also.
5) Legitimate business model is an ethical and most approved model by the government. A pyramid model is unethical and has not been approved by the government.
3) How has Herbalife demonstrated social responsibility?
1)Herbalife foundation volunteers in giving charities to different child organizations and to the poor children who's health is at risk
2) Herbalife provides support to nutritional initiative programs and disaster reliefs.
3) The company has partnered with GHSI to improve the nutritional intake of the children in India.
4) Herbalife sponsors several professional athletes, teams and the sports events
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