South Africa continues to face severe poverty and high rates of inequality and thus communities seek ways to escape debt and poverty. With stokvels being one of the lawful savings or investment society members regularly contribute an agreed amount and receive a lump sum payment. But schemes like (MMM) have been going around calling themselves either a stokvel or telling people that their operation is like that of a stokvel. It was discovered that MMM was in fact a pyramid scheme which promises people returns. But the problem with those returns is that they’ve got them from the capital that other people put in. A pyramid scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments, sale, products or services. The people taking part are sometimes referred to as sales representatives, independent representatives, investors or distributors. As recruiting multiplies, recruiting new members quickly becomes impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.
Herbal life recently agreed to pay $200 million (R2.8 billion) and restructure its business after the Federal Trade Commission (FTC) found that it had duped people into thinking they could get rich from selling its products. The FTC charged the company after it found that Herbalife promoted itself as a multi-level marketing business opportunity through which participants may earn compensation by selling weight management, nutritional supplement, and personal care products and by recruiting new participants into the organisation. Herbalife members are able to sell the products and are encouraged to recruit other people to sell products as well. One of the things that some critics find fault with in this model is that while a very few “distributors” make it to the top of the pyramid and reap off a huge pay-off, the vast majority loses money.
“By becoming a Herbalife Independent Member you can boost your income while helping people meet their nutritional needs. Working either full or part time to fit your schedule, you can build your own business and sell proven, high-quality products which are not available in the shops. The exclusivity of our products will help you to build a base of long-term customers, who will turn to you for tailored support and advice. You do not need to be a nutrition expert to become a Herbalife Independent Member as you receive all the guidance you need. When you sign up, you will benefit from detailed instruction from your personal Herbalife coach who will be on hand to answer your questions and help you complete your training” ~ Herbalife website
If Herbalife is profitable, why was anyone concerned? Real problem with a pyramid scheme like Herbalife is said to be the company’s profits are generated by duping their distributors. A distributor’s compensation is driven not by how much product they sell to retail consumers, but on how successful they are in recruiting other distributors into the “business opportunity”. The vast majority of income generated by the company is from the products purchased by new distributors duped into buying their way into the business. So at the end of the day, is Herbalife a legitimate and effective business model for its distributors or an illegal pyramid scheme that targets and preys on them? According to the Federal Trade Commission, there is an easy way to tell. If distributor income is primarily based on sales to the public, the company may be legitimate. But if distributor income is primarily based on the number of people recruited and the sales to them, it’s a pyramid scheme.
Herbalife agreed to comply with the FTC and pay the amount required. They are also ordered to restructured their business model ensuring that distributor with recruits will get paid only if those recruits sell the inventory they buy. Currently a distributor earns income on recruits making purchases, regardless of whether they ever sell to a consumer. The change could push top distributors, who are the lifeblood of the company, to leave for another company.
I know that this an emotive topic for those who buy into it.
Article By Pamela Kunene
