A worker cleans the logo on the Herbalife sign as finishing touches are put on the company's building in Torrance, Calif. Herbalife came out swinging Thursday, Jan. 10, 2013 against claims made by hedge fund manager William Ackman that the business amounts to a pyramid scheme.
Companies like Herbalife, Mary Kay, Avon and Amway have been around for decades. Proponents of direct sales and multi-level-marketing (MLM) companies claim they offer consumers a line of time-tested, quality products that are used and endorsed by distributors and marketed with the personal touch. For some sellers, direct sales and MLM’s can lead to financial independence - perhaps even wealth - and a chance to give a leg up to friends and family.
But for every legitimate business that uses this model, there are dozens of illegal “pyramid schemes” luring the hopeful, underemployed and desperate into a never-ending cycle of spend/recruit/spend. Recently Herbalife, the poster boy for MLM’s with a 32-year track record of success, came under attack for its marketing practices. Hedge fund manager Bill Ackman publicly labeled it a pyramid scheme, pointing out the many similarities with illegitimate businesses that make money selling dreams, not vitamins.
Pyramid schemes make their top levels rich by recruiting sellers and encouraging them to purchase vast amounts of product, attend expensive sales seminars and - of course - mine their social circles for new recruits. More often than not, the riches don’t materialize and distributors end up with garages full of product, broken marriages, ruined credit and lives.
Have you ever been approached by a relative with an “unbelievable opportunity?” Have you had a great experience working in direct sales? Do you see it as a way out of debt, or a way to dig an even deeper hole? How do you tell the difference between a legitimate business and a scam? Is multi-level-marketing a stepping stone to success, or a ladder to nowhere?
Joe Mariano, president, Direct Selling Association, a national trade association representing companies that sell directly to consumers
Stacie Bosley, assistant professor of economics, Hamline University School of Business in St. Paul, MN