Herbalife is a publicly traded corporation that purports to be a consumer goods manufacturer with $4.43 billion in sales last year. That’s more than Nintendo, or Church & Dwight, which manufactures Arm & Hammer products, OxiClean, and other well known brands. But when was the last time you laid eyes on an Herbalife product?
Odds are, not very recently. That’s because Herbalife makes its money not by selling products to customers, but by selling careers to wannabe salespeople in a classic multilevel marketing business model. It sells products not to people who want to use them, but to people who want to sell them.
William Keep, former dean of the business school and now interim provost at the College of New Jersey, is a persistent critic of multilevel marketing companies like Herbalife, and pyramid schemes in general, arguing that they add nothing valuable to the economy and exploit members. But despite the efforts of Keep and others, multilevel marketing is still big business.
“They always seem to come back around,” Keep says. “They’re like the zombie business model. They never seem to die off.”
Not that regulators are trying particularly hard to put a stop to them. In 2018 the Federal Trade Commission ended a multiyear investigation into Herbalife, fining the company $600 million and imposing some regulatory requirements on it. But the agency stopped short of calling it a pyramid scheme, although Keep notes “they did not NOT call them a pyramid scheme.”
Keep has made himself an expert on MLM and pyramid schemes over the years. He notes that about eight percent of the entire adult population has been involved in a multilevel marketing company at some point. And yet, the entire industry accounts for a fraction of 1 percent of retail sales. “If the entire industry went away tomorrow, the larger economy would never know,” he says. “Yet it seems like there are a lot of people involved in it.”
Keep will discuss the multilevel marketing industry at the Princeton Mercer Regional Chamber of Commerce on Wednesday, April 17, from 7:30 to 9:30 a.m. at the Nassau Club. Tickets are $40, $25 for members. For more information, visit www.princetonmercerchamber.org.
Keep has been following the Herbalife saga for years and is featured in “Betting on Zero,” a documentary about investor Bill Ackman’s attempt to short-sell Herbalife on grounds that it was a pyramid scheme. Keep also has written multiple articles about Herbalife for Seeking Alpha, an investment website. Ackman abandoned his attack in 2017, and Herbalife stock has more than doubled since then.
If anything, multilevel marketing companies are having a cultural moment. President Trump once ran a failed multilevel marketing company called the Trump Network, and his secretary of education, Betsy Devos, is the heiress to the Amway fortune. (Keep says Amway itself has found new markets overseas, and is currently in the process of building itself up in China.)
“It’s a very weird environment that we’re in,” Keep says. When DeVos was appointed education secretary, Keep couldn’t help but note the similarities between the source of her family fortune and her current mission of dismantling public education to promote charter schools. In an article for The Hill, Keep wrote that both endeavors were prone to making claims about their effectiveness that were not supported by the evidence.
Other recent noteworthy cases include NXIVM, an MLM that was also a sex trafficking operation and cult, which is a rare exception in that it was actually broken up by law enforcement.
“Seemingly whenever the FTC wants to, it can find a company to prosecute,” Keep says. “Claims of self-regulation, or that the industry has been cleaned up by prior FTC action, don’t seem to hold up.”
Keep says one reason MLM companies are difficult to prosecute is that a pyramid scheme charge is an existential threat to a company, so it will spend anything, hiring the best possible legal defense, to thwart the charge.
Keep grew up in Jackson, Michigan, where his father was a potato chip salesman for Frito Lay. After earning a BA and Ph.D. at Michigan State University, he first got interested in pyramid schemes when he was a young business professor at the University of Kentucky.
A lawyer approached him looking for an expert witness in a case against a pyramid scheme called Gold Unlimited that was focused on gold coins. Although Keep didn’t know anything about pyramid schemes at the time, he was very familiar with what a retail business was. And he was comfortable testifying that Gold Unlimited was not a retail business. The Gold Unlimited case is still referenced frequently in pyramid scheme prosecutions.
From the University of Kentucky, Keep moved to Carleton University and Quinnipiac University, before accepting a position at the College of New Jersey in 2009. His concerns about MLMs continued.
Multilevel marketing businesses are driven by recruitment. The more salespeople a person recruits, the more money he makes. This contributes to the “pyramid” shaped earnings structure of the businesses, in which a few people at the top make a great deal of money, while the rest do not. Some companies have been forced by regulation to disclose these statistics to consumers, but even when disclosed, they can be misleading, Keep says. For example, if two percent of a company’s members make a profit, that does not mean that anyone joining has a two percent chance of making money. The people at the top tend to stay there, Keep says, calling the trend “earner persistence.”
“The probability of success is incalculable, and much lower than two percent,” Keep says.
It also provides a massive incentive to bring in more people and leads to aggressive recruiting tactics, which could account for the high number of people who have been involved in one at some point. Keep says he has family members who have gotten involved in MLM schemes.
Keep has done research showing the roots of modern pyramid schemes going back at least to 1900. The earlier ones involved members buying books of four coupons for $1 and selling each coupon for 25 cents. If they sold an entire book, they got a pair of shoes. Several other schemes involved women’s silk stockings, which were essential yet fragile consumer products before the invention of nylon.
But as always, the real profit lay not in the sale of goods, but in the recruitment of new members. “The business model cannot sustain itself without constantly bringing in people who have to constantly bring in people, and that’s the overwhelming activity of the business,” Keep says. “This endless chaining activity motivated states to pass ‘endless chaining scheme’ laws.”
But those laws are now under threat. Several states have already repealed them, and Keep says one recent trend is a push on the part of MLM companies to loosen federal regulations. One of the key definitions of a pyramid scheme is “endless recruitment.” The MLM industry is pushing legislation that would remove this definition, which would make matters worse.
“It will be a lot worse,” Keep says. “It’s bad now, because our enforcement is grossly underfunded, and the politicians have been working against enforcement, but it will be worse.”