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Is Herbalife a Pyramid Scheme?
Accusations why Herbalifes Multilevel Compensation Model is Pyramid Scheme
Three accusations led to the Herbalife multilevel compensation model being accused of being a pyramid scheme. One of them has been argued to be how most contractors lose money while investing in Herbalife inventory. The other accusation is that Herbalife tends to earn more from recruiting newcomers than from selling actual merchandise. Lastly, the few contractors on the top are mostly well paid, and they pocket most of the money.
The claims further suggest that Herbalife recruits contractors under pretenses with promises of making huge profits, and the recruitment of contractors is the source of real money in Herbalife but not from selling the inventory. The top earners are claimed to make their income through downline commissions from the sales made by their recruits. Herbalife is claimed to encourage a chain of recruitment for one to be a top earner.
Differences Between a Legitimate Business Model and a Pyramid Scheme
When the business has a legitimate business model, the revenue is directly associated with the final sale of the inventory to the final consumer. In contrast, in a pyramid scheme, revenue is realized by recruiting new sellers into the business. In a pyramid scheme, contractors at the top their sources of income are mainly from newcomers membership fees payment and the sale of the inventory to the recruits. In contrast, legitimate participants at the top of the business model do not earn from their recruits.
A business model is legitimate when a company does not force recruitment to make sales. It does not make it compulsory for direct sellers to have downline recruits to earn money but make it an available choice to contractors to increase their earnings. The model is a pyramid scheme where direct sellers have no motivation and support to sell products to the end-user but to recruit contractors to downline the chain to earn continually.
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