Author Topic: Family Friend Falling Hard for MLM (Herbalife) -- But Is It Actually Profitable?  (Read 3107 times)

ReadySetMillionaire

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Last year a family friend moved to a big city and started going to a "Nutrition Club." Her social media basically became all about this club, about Herbalife, she was going to every single event up in Detroit; etc. And it bears repeating -- her social media is just out of control about this company. It is just very...cultish. I don't know any other word for it.

Well, I've now come to learn that she (a nurse) and her husband (salesman) are selling their home that they just bought last year, quitting both of their professional jobs, moving back home, and opening a "nutrition club" of their own. I'm absolutely gobsmacked at this point.

I looked into Herbalife's numbers (https://ir.herbalife.com/static-files/2ff07056-59bf-4db9-bb7e-cde4bca50b06) and the Top 10% -- or somewhere close to best case scenario-- GROSSES around $3,500/month. That profit margin on that has to be comically low (I think) if you are running a store, as you are paying for 50% of the actual products, rent, insurance, other supplies, etc. The top 1% earn $14,000/month, but again, the profit on this cannot be that much (maybe $4-5k if you are running a nutrition club)?

Am I missing something? I don't see how two people making probably $125k a year both quit their day jobs for this. Is it possible that these folks are the exception, or are they destined for the statistical failure that I believe they will become?
« Last Edit: May 20, 2019, 10:58:57 AM by ReadySetMillionaire »

partgypsy

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Last year a family friend moved to a big city and started going to a "Nutrition Club." Her social media basically became all about this club, about Herbalife, she was going to every single event up in Detroit; etc. And it bears repeating -- her social media is just out of control about this company. It is just very...cultish. I don't know any other word for it.

Well, I've now come to learn that she (a nurse) and her husband (salesman) are selling their home that they just bought last year, quitting both of their professional jobs, moving back home, and opening a "nutrition club" of their own. I'm absolutely gobsmacked at this point.

I looked into Herbalife's numbers (https://ir.herbalife.com/static-files/2ff07056-59bf-4db9-bb7e-cde4bca50b06) and the Top 10% -- or somewhere close to best case scenario-- GROSSES around $3,500/month. That profit margin on that has to be comically low (I think) if you are running a store, as you are paying for 50% of the actual products, rent, insurance, other supplies, etc. The top 1% earn $14,000/month, but again, the profit on this cannot be that much (maybe $4-5k if you are running a nutrition club)?

Am I missing something? I don't see how two people making probably $125k a year both quit their day jobs for this. Is it possible that these folks are the exception, or are they destined for the statistical failure that I believe they will become?

Unlikely that they will be the exception (as is 1% or less) especially as they are entering the pyramid scheme late.
Most likely they will lose money, both from trainings they have to do as well as purchasing product they cannot move.
Here are some other figures
https://www.finance-guy.net/streetonomic/herbalife-review

https://www.forbes.com/sites/panosmourdoukoutas/2014/07/22/how-many-distributors-get-rich-from-herbalife/#6854b1b02e27
« Last Edit: May 20, 2019, 12:35:39 PM by partgypsy »

Lady SA

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Check out the documentary on Netflix "Betting on Zero" - it is about Herbalife in particular. Pretty shady company if you ask me.

I think your friends are making a mistake, but there's not much you can do about it. Try sending them materials/information on the company and their actual potential profits and how that compares to their old jobs? Advise them to keep at least part-time jobs on the side to help keep actual income coming in?


bacchi

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Start practicing the phrase, "No, you can't borrow any money."

Catbert

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lhamo

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The good news is that in the fields they are in, it will be pretty easy to go back to paid employment when this "business venture" fails.  Hopefully they will just burn through savings and then have the sense to call it quits. 

FireHiker

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Ugh, I have posted in the other MLM thread. I have a friend who has fallen HARD for Arbonne, and I am sick to death of it. I think even if it is profitable in the short term it isn't sustainable, and the majority of people who get suckered into an MLM either lose a ton of money or break even if they're lucky.

seattlecyclone

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I think this Jon Oliver video is an excellent thing for your friend, or anyone else getting suckered into MLMs, to watch.

ysette9

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I think this Jon Oliver video is an excellent thing for your friend, or anyone else getting suckered into MLMs, to watch.
Great show, as usual for John Oliver.

I grew up in a small, extreme church and the language used by the MLM promoters tickles my memories of what I heard in a million sermons and other rah-rah church events. It feels creepy and slightly dirty to me now, like appealing purposefully to emotion and bypassing logic, because you canít appeal to logic as there is none.

OzzieandHarriet

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I think this Jon Oliver video is an excellent thing for your friend, or anyone else getting suckered into MLMs, to watch.

Notice that this was aired the day before the catastrophe otherwise known as the US election of 2016. Probably didnít get as much attention as it deserved.

FIPurpose

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I think this Jon Oliver video is an excellent thing for your friend, or anyone else getting suckered into MLMs, to watch.
Great show, as usual for John Oliver.

I grew up in a small, extreme church and the language used by the MLM promoters tickles my memories of what I heard in a million sermons and other rah-rah church events. It feels creepy and slightly dirty to me now, like appealing purposefully to emotion and bypassing logic, because you canít appeal to logic as there is none.

Yep the places that attract the most mlm's are young women that attend churches. Many I knew had promising careers in teaching, nursing, etc., but as soon as they started having kids, they were lured in by the potential to make money while working from home. I saw a study that said 50% make no money and 25% lose money. But I'm sure if you get your friends to start selling and your friends get their friends to start selling then your chances of succeeding go up to like 50%.

ReadySetMillionaire

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I've seen Betting on Zero and that John Oliver video. In fact, I actually watched Bill Ackman's three hour presentation on why Herbalife was a fraud when he was shorting the stock back in 2014 or so. Interestingly, Ackman has since withdrawn that short position, and Herbalife settled with FTC, so who knows what's going on now -- which is why I'm confused.

Also, I guess I'm just shocked at this situation because it's *both* husband and wife. I can see a SAHP who gets lured into some MLM thing; I have just never seen a couple *both* go completely all in like this, foregoing stable and professional careers.

I should add that both of them were pretty darn overweight -- husband was over 375 and wife was over 300 (per their instagrams). I think Herbalife is now targeting these people to get them into a "community" of support and all that jazz, i.e., it's almost impossible not to lose weight when you are that overweight initially, so they lure them in with these shakes, have motivational meetings, they lose 20-30 pounds, and then they are all in.

I'm 99% not going to say anything, but part of me wants to get to know them so that when they break their commercial lease, I can represent them.

Raymond Reddington

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MLM's: Run. Far away.

reeshau

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I've seen Betting on Zero and that John Oliver video. In fact, I actually watched Bill Ackman's three hour presentation on why Herbalife was a fraud when he was shorting the stock back in 2014 or so. Interestingly, Ackman has since withdrawn that short position, and Herbalife settled with FTC, so who knows what's going on now -- which is why I'm confused.

The FTC won't intervene just because it's a *bad* business.  The market will eventually take care of that.  (although, MLM's, and the MLM idea, are unbelievably persistent.  I guess there *is* a sucker born every minute.)  They would only act if there was outright fraud: i.e. if they literally sold nothing, or if they did not disclose fees, costs, etc.

nighthalk

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I actually did the math on this out of curiosity while listening to the dream podcast.

Assumptions:
  • using population data from https://www.populationpyramid.net/world/2019/
  • people who join MLMs have disposable income, ages 25-50 are potentially participating, and for simplicity we can just declare people who hit age 30 are newly eligible
  • only 1% of those who are eligible, fall into the sucker trap for more than 1 month (how accurate this 1% is, is for some other debate)
  • no major catastrophes that wipe out a noticeable % of the population or greatly affect birth rate
  • 25-49 to total population ratio remains a constant 35.1%

yearnew  to age 30-34 (m)# suckers (m)world pop (m)world active suckers (m)recruitment ratesuckers/daysuckers/min
2019598.5095.9857678.17526.9504.4%3277.262.28
2024599.0235.9908067.00828.3154.2%3280.072.28
2029578.6505.7878430.71229.5923.9%3168.522.20
2034587.1285.8718772.86030.7933.8%3214.942.23
2039613.2356.1329095.21331.9243.8%3357.892.33
2044642.8186.4289396.48632.9823.9%3519.882.44
2049655.6126.5569673.05733.9523.9%3589.942.49
(m) is for millions

A sucker really is born every minute (actually more than 2!); from here we can actually calculate the sustained recruitment payout for a saturated market.... if I had those numbers to work with.

The recruitment rate of only ~4% of recruiters get even one new sucker per year is quite dismal however. We have to be careful with this number, they may spin it and say "our agents clearly recruit at least 2 people a year, therefore the market isn't saturated". Best to specify that this is the TOTAL workforce, including those who are not on active payroll because they stopped. (As you notice, I didn't model the exit rate except by being aged out). If they argue that the exiting workforce shouldn't be counted, then they should publish the turnover rate and losses for them.

The bigger the company is, the more they shoot themselves in the foot with any guarantees to recruit someone. It's analogous to "if you became the next zuckerburg you too could be worth billions, now sign this contract to work for him so he can keep most of your earnings, and you will learn from the best in the industry, with top notch performance you will obviously rise to CIO CFO or even become the new CEO". Once people look at it like this, its easy to extrapolate it as gambling, dozens or hundreds make it big, millions end up in the hole. Those who win are good at finding marks, and finding subservient recruits who can find more marks. Those who lose, just win the equivalent of the entrepreneurial darwin award.

FYI if anyone from the FTC is reading this, these arguments are free for use.

cooking

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Sometime in the very early 90's a nephew of mine (hereinafter nephew #1) got suckered into Amway, Betsy De Vos's family racket.  He didn't quit his job, but his stay at home wife ended up spending a lot of her time doing it, and nephew #1 spent a lot of nights and weekends on it.  Money, time, travel, etc.  Have you ever noticed that when you ask people involved in MLM how their "business" is going, they seem to internalize the blame for not making much money?  As in, "Well I really have to start putting in the time/effort they recommend so I can do better".  The cult that MLMs are probably drums this into their heads.  He would always talk about how well his friend who was at a higher level than he was making.  They kept at it for a few years, and I don't know how much money or time they ended up earning or losing, but it didn't seem to put them ahead of the game.  Meantime, a lot of people around them ended up buying enough Amway crap to keep them from pestering about it.  I heard from family that when his friend at the higher level finally threw in the towel, nephew #1 saw the writing on the wall and gave it up too.  I also heard that Amway itself had some kind of problem, after which it went in a new direction.  Maybe that's when my nephew quit, but I never discussed it directly with him.

At about the same time, another nephew (nephew #2) got involved with something that I think was called "Market America".  Perhaps b/c he got involved relatively early in the life of the organization, he seemed to be doing really well.  He was an engineer with an MBA earning good money.  He and his wife, who also had a good job, both quit their jobs.  Family word was that they were making $5000 wk.(early 90's money).  Oddly enough, he was kind of a cautious guy who traveled to Washington DC to speak to the founder of the company in order to reassure himself it was the real deal.  He would always correct anyone who called his company MLM, saying it did not follow that model.  In truth, I would always zone out when he started to explain exactly why it was different from the usual MLM.  Something about only 2 people below each person, a lot of mumbo jumbo to me.  But they claimed it wasn't vulnerable to the usual weaknesses of MLM.  He talked his brother (nephew #3) into joining up, and just as in nephew #1's case, nephew #3's stay at home wife devoted a lot of her time to it, while nephew #3 kept his job.  Nephew #2 even tried to talk his cousin, nephew #1, into leaving Amway to join Market America.  Nephew #1 said he was too deep into Amway to switch, but would have if he'd known sooner how great Market America was.

Nephew #3 was in closer touch with me b/c he lives near me.  He kept at Market America for about 7 yrs., maybe b/c he saw his brother doing so well for a while.  In the end, I don't think he was able to salvage much from the whole effort.  I deduce he gave up after his brother did.  And again the answer to the "how's the business going?" was always the same as indicated above.  Business is not doing well b/c I'm not trying hard enough.

Nephew #2 really did seem to do well for a few years, often traveling to Australia to train or recruit or something.  (Maybe that's a sign that they were running out of U.S. suckers).  He lives far from me so we lost touch, but I heard through family that he had given it up, I don't know when.  There must have been some kind of collapse at that point, b/c I can't see why else he would have quit.  He had given up acquiring rental RE when he started Market America, saying that the residuals he got through that were better than rents.  Let's hope he saved his money when it was coming in!


ReadySetMillionaire

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Cooking, that's what I think this will come down to. Maybe they've had some marginal success early on, but I can't imagine it being profitable in the long term.

reeshau

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Sometime in the very early 90's a nephew of mine (hereinafter nephew #1) got suckered into Amway, Betsy De Vos's family racket.

I have an uncle who worked for Amway--not selling for Amway, but in packaging design and logistics.  I have no argument against the issues with their sales methods, etc.  but they did move a lot of products.  There is a real organization behind it, with all the mechanisms of a large consumer products company.

Quote
He would always correct anyone who called his company MLM, saying it did not follow that model.  In truth, I would always zone out when he started to explain exactly why it was different from the usual MLM.  Something about only 2 people below each person, a lot of mumbo jumbo to me.

Any organization where success is defined more on the organization you recruit, rather than the product that you sell, is an MLM.

ReadySetMillionaire

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Sometime in the very early 90's a nephew of mine (hereinafter nephew #1) got suckered into Amway, Betsy De Vos's family racket.

I have an uncle who worked for Amway--not selling for Amway, but in packaging design and logistics.  I have no argument against the issues with their sales methods, etc.  but they did move a lot of products.  There is a real organization behind it, with all the mechanisms of a large consumer products company.

Quote
He would always correct anyone who called his company MLM, saying it did not follow that model.  In truth, I would always zone out when he started to explain exactly why it was different from the usual MLM.  Something about only 2 people below each person, a lot of mumbo jumbo to me.

Any organization where success is defined more on the organization you recruit, rather than the product that you sell, is an MLM.

This is what has me so intrigued by this. The FTC settlement with Herbalife stated as follows:

The order requires Herbalife to drop its current system of rewarding distributors primarily for recruiting a ďdownlineĒ of people who will buy the product at wholesale, without regard to whether there are customers out there who really want the merchandise. Under the new compensation structure, success in the Herbalife marketing program must depend on whether participants sell products, not on whether they can recruit additional distributors to buy products.

https://www.ftc.gov/news-events/blogs/business-blog/2016/07/its-no-longer-business-usual-herbalife-inside-look-200

So, does that mean that it's no longer operating as a pyramid scheme, or what? And because it's theoretically not, maybe this is actually profitable now?

Again, not to beat a dead horse, but I'm so lost here. Going back to this couple -- rent has to be $1,100/month (I'm one plaza away and know their price/square foot). They have no healthcare because they are independent distributors and she is pregnant -- that has to be $800/month. Utilities at this place (phone, internet, insurance, etc.) have to be another $400/month. They are going to be taxed on 15.3% of income (self-employment tax) and probably have another 15ish% income tax rate. On top of all this, they need to be buying product.

By my math they have to be bringing in $8-10,000/month just to bring home, maybe, $2,000 per month. And making that much would put them almost in the top 1% of all distributors, so statistics say this is not currently happening, nor is it likely in the future.

I'm just lost as to how two college educated people quit their day jobs and decided this was a profitable venture. Either they are completely doomed or maybe this is actually profitable for them, and I simply cannot tell.

Maenad

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Also, a lot of MLMs encourage "fake it til you make it" behavior. IOW, lie to people about how well you're doing.

partgypsy

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The fact that they sold their house is not a good sign. It sounds like they are in the go big, or go home mindset. Which means they will spend down their assets in order to make this "work". 

Sometimes couples go in for shared insanity; i.e. both reinforcing each other's insanity rather than one being the voice of reason and keeping the other in check.

Catbert

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The fact that they sold their house is not a good sign. It sounds like they are in the go big, or go home mindset. Which means they will spend down their assets in order to make this "work". 

Sometimes couples go in for shared insanity; i.e. both reinforcing each other's insanity rather than one being the voice of reason and keeping the other in check.

There is even a name for it:  Folie a deux.

ReadySetMillionaire

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The fact that they sold their house is not a good sign. It sounds like they are in the go big, or go home mindset. Which means they will spend down their assets in order to make this "work". 

Sometimes couples go in for shared insanity; i.e. both reinforcing each other's insanity rather than one being the voice of reason and keeping the other in check.
Yep. Sold their house, living in her mom's basement, and now I'm thinking they are probably still on mom's healthcare (she is probably right around 25, so not much longer for this). But you would never know it from their social media.

Cassie

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I only know one person that has made money with this type of scheme. I canít remember the name but itís basically taking your veggies and fruit in pill form.  She is a nurse that moved up from selling and now flies all over the country giving seminars.  Thatís her only job.  Everyone else eventually quit.

KathrinS

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Oh wow, that's really scary. I have a friend like that, who tried to get me into Arbonne. She's quite young, living with roommates, not especially wealthy. Nevertheless, she told me that she bought over £1500 worth of product, but that 'it'll all be worth it once she really gets started'. She will also be flying to Las Vegas (from Europe!) and paying to attend the Arbonne conference there. What turned me off the most was that on her promo sheet, one of the rewards for the top consultants was a Mercedes. Firstly, I don't want a Mercedes and secondly, I want to pay for someone else's Mercedes even less! I really hope she'll be able to get out before she wastes more money, but she seems quite set on it.


UndergroundDaytimeDad

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Also, a lot of MLMs encourage "fake it til you make it" behavior. IOW, lie to people about how well you're doing.
I watched the Vice documentary on Lularoe last night and one participant said they "were pressured to show off their success".  This included photos in front of nice houses and new cars.  It would have been much more effective if this lady had just found a nice house with cars parked out front and taken a few photos in front of it.  How many people can really call out that the house isn't hers? $1M saved! Easy.

ReadySetMillionaire

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So yesterday was her opening day for the nutrition club, and apparently she had 366 customers. I'm questioning my sanity.

At $7 per pop, that's over $2,500 revenue in a single day.

Like I said with my OP, maybe they are in that 1-2% that will make money off this.

Or, maybe this isn't sustainable. But 350+ customers blew my expectations out of the water.

FIPurpose

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So yesterday was her opening day for the nutrition club, and apparently she had 366 customers. I'm questioning my sanity.

At $7 per pop, that's over $2,500 revenue in a single day.

Like I said with my OP, maybe they are in that 1-2% that will make money off this.

Or, maybe this isn't sustainable. But 350+ customers blew my expectations out of the water.

Nah they probably spent 90% of their social credit to get a good first day. That 2500 in revenue will likely be their peak. After they run out of friends to bother the money they make will begin to look paltry compared to their old jobs. (Though watch them likely ignore their revenue on how many hours they worked, and additional taxes that they'll be paying.)

FIPurpose

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This is why starting a business never made sense to me. Why would an engineer who isn't FI give up a wage job earning 70-120k? Once you add in the benefits (7% self-employment tax, +8% paid vacation, +5% health benefits) and that's not even considering the benefits of a consistent check and lack of risk. and suddenly just to make up for my job, I would have to figure out something that pays me upward of 60-80/hr?

It's just a better use of time to buy stock for exponential growth and have consistent good pay. Let alone this isn't even a good business idea. This is a total mistake.

Maenad

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This is why starting a business never made sense to me. Why would an engineer who isn't FI give up a wage job earning 70-120k?

Honestly, because she's 25 and has spent the last couple of years doing the engineering equivalent of grunt work. She wants the higher-level high-influence position, and doesn't want to grind for the next decade to get there. Or she and her husband realized that engineering isn't what they want to do - I've known a number of engineers that moved into Project Management or Marketing, their talents and desires were a bad match for their earlier jobs.

There's a number of people with high numbers of social media followers who have started peddling MLMs - they can pretty easily get a large downline and sell a lot of product. At first, anyway. Turnover in MLMs is crazy high.

Finances_With_Purpose

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I think this Jon Oliver video is an excellent thing for your friend, or anyone else getting suckered into MLMs, to watch.
Great show, as usual for John Oliver.

I grew up in a small, extreme church and the language used by the MLM promoters tickles my memories of what I heard in a million sermons and other rah-rah church events. It feels creepy and slightly dirty to me now, like appealing purposefully to emotion and bypassing logic, because you canít appeal to logic as there is none.

This.  I hate cults, as they misrepresent God.  MLMs operate more like cults than like business ventures. 

You're spot on that you see the indicators: the psychological tricks they use are the same.  (As distinct from the things you'll hear at your local church, typically.)  They're selling fake dreams to people...and people will pay a lot for it. 

The business is a fake religion based upon certain beliefs about life success: it makes people fantastize about their financial dreams, and so on.  The John Oliver show is fantastic at exposing some of it.  I'd be curious to see the Netflix piece (Betting on Zero), but who knows if/when there'll be time for that...