The Problem With Herbalife's Business Model

Mar 12 2014, 8:31pm CDT | by

Herbalife has attracted a great deal of interest in Wall Street in the last year on the long and the short side of the market. Now, the company is the target of a Civil Investigative Demand (CID) from the Federal Trade Commission (FTC), according to a statement issued by the company:

“Herbalife welcomes the inquiry given the tremendous amount of misinformation in the marketplace, and will cooperate fully with the FTC.  We are confident that Herbalife is in compliance with all applicable laws and regulations.  Herbalife is a financially strong and successful company, having created meaningful value for shareholders, significant opportunities for distributors and positively impacted the lives and health of its consumers for over 34 years. ”

Investors on the short side of the market have every reason to celebrate, as the stock dropped following the company statement. Investors on the long side of the market have every reason to be concerned, though the company has warned about possible risks, including “the outcome of inquiries from regulatory authorities.”

At stake is Herbalife’s business model—a multilevel marketing organization whereby individual customer-distributors enlist other customer-distributors to work for them, in a pyramid style organization.

One of the things that some critics find at fault with this model is that very few people make it to the top of the pyramid reaping off a huge pay-off, while the vast majority is losing money. But isn’t the case with most business ventures?

The problem, I believe, isn’t with the very nature of a multi-level marketing network, but as to whether those who join it understand that nature: The difference between participating in the network as customers, end up buying products at inflated price (to pay for the commissions of the people who join the network earlier); and as entrepreneurs, developing a business that markets the network products, both directly and indirectly.

Hopefully the FTC investigation will come up with a ruling to clarify this confusion.

Source: Forbes Business

 
 

Don't miss ...

 

<a href="/latest_stories/all/all/30" rel="author">Forbes</a>
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.

 

blog comments powered by Disqus

Latest stories

One infant dies in Pakistan hospital
Islamabad, Nov 23 (IANS) One more infant died due to lack of oxygen in an incubator and negligence of the hospital administration in Pakistan, bringing the number of such deaths to 19 in the past five days.
 
 
American whiskey faces challenge in whisky-gulping India
Washington, Nov 23 (IANS) For the most part Indians love things American, but when it comes to their tipple, the world's largest whisky drinkers usually go for Scotch or their very own home-made brands.
 
 
Tiny shrimps hold clue to alien life
Washington, Nov 23 (IANS) A tiny shrimp residing at one of the world's deepest undersea hydrothermal vents holds clues about what life could be like on other planets, NASA scientists report.
 
 
What causes discomfort among users of contact lenses
Melbourne, Nov 23 (IANS) If you are not comfortable wearing contact lenses, it could be due to degradation of the lipid layer in the eyes' natural tear film, says a study.
 
 
 

Latest from the Network

A8 Chip of iPhone 6 and iPhone 6 Plus Can Handle 4K Videos
The outstanding features of the A8 chip are continuing to be revealed, as the processor is found to have the capability of playing 4K videos on the new iPhone 6 and iPhone 6 Plus.According to Mac Rumors, the fact has...
Read more on Apple Balla
 
One infant dies in Pakistan hospital
Islamabad, Nov 23 (IANS) One more infant died due to lack of oxygen in an incubator and negligence of the hospital administration in Pakistan, bringing the number of such deaths to 19 in the past five days. The death...
Read more on Business Balla
 
American whiskey faces challenge in whisky-gulping India
Washington, Nov 23 (IANS) For the most part Indians love things American, but when it comes to their tipple, the world's largest whisky drinkers usually go for Scotch or their very own home-made brands. Indians...
Read more on Business Balla
 
Tiny shrimps hold clue to alien life
Washington, Nov 23 (IANS) A tiny shrimp residing at one of the world's deepest undersea hydrothermal vents holds clues about what life could be like on other planets, NASA scientists report. These tiny shrimps in the...
Read more on Business Balla
 
Katy Perry hits back at Australian media
Los Angeles, Nov 23 (IANS) Singer Katy Perry has called the paparazzi in Australia "perverted" and "disgusting" for following her along the beach and for asking her to pose during her visit to the country for her...
Read more on Celebrity Balla
 
Tiger Woods gets new swing coach
Miami, Nov 23 (IANS) Former World No.1 golfer Tiger Woods said that he has named Chris Como as new swing coach. Como is the fourth swing coach for Woods since the American turned professional in 1996, reports Xinhua...
Read more on Sport Balla
 
All's not well between Kourtney Kardashian, Scott Disick
Los Angeles, Nov 23 (IANS) Pregnant reality TV star Kourtney Kardashian has hinted at a relationship strife with partner Scott Disick by posting a cryptic message-based image on a social media platform. The 35-year-...
Read more on Celebrity Balla
 
$1 Samsung Galaxy S5 Best Buy Black Friday Deal is on Sale Now
Best Buy has released a new set of deals on Sunday 11/23 including a deal advertised in the Best Buy Black Friday 2014 Ad. The $1 Samsung Galaxy S5 Black Friday deal is now on sale at bestbuy.com.The regular price of...
Read more on Apple Balla
 
What causes discomfort among users of contact lenses
Melbourne, Nov 23 (IANS) If you are not comfortable wearing contact lenses, it could be due to degradation of the lipid layer in the eyes' natural tear film, says a study. Patients with discomfort showed degradation...
Read more on Business Balla
 
Rosetta's comet landing captured in 3D
London, Nov 23 (IANS) A stunning 3D image generated from data collected by Rosetta Lander Imaging System (ROLIS) aboard the European Space Agency's Philae lander shows what it would look like to fly over the surface of...
Read more on Business Balla