CASE 19
Multilevel Marketing Under Fire: Herbalife
Defends Its Business Model
CASE NOTES FOR INSTRUCTORS
This case introduces students to the business model of multilevel marketing. It also familiarizes them with
to selling a product, whether the product is sold by the independent distributor or by a person that the
independent distributor has recruited.
Pyramid schemes, on the other hand, are fraudulent schemes in which profits are not based on a legitimate
investment or sale of goods. People are compensated simply for recruiting others. New recruits pay a fee
to join the scheme, which they are often fooled into thinking is legitimate. The scheme depends solely on
Internal consumption is also called into question. Ackman and other critics point to the fact that
independent distributors make up many of Herbalife’s customers. They argue that this signifies a pyramid
scheme because it is “forcing” those who want to do business with the company to purchase their
products. In reality, purchasing products upfront is not necessary, and because independent distributors
receive discounts for the products they purchase, many purchase not so much as a business opportunity
QUESTIONS AND DISCUSSION
1. Why has Herbalife’s multilevel compensation model been confused with a pyramid scheme?
Herbalife’s multilevel compensation model has been confused with a pyramid scheme because it
offers commissions on the sales of an independent distributor’s recruits. Pyramid schemes are
based almost entirely on recruitment; legitimate products of value are not sold. Rather, new
2. Describe the differences between a legitimate business model and a pyramid scheme.
The major difference of multilevel marketing is that a product of value is being sold. Independent
3. How has Herbalife demonstrated social responsibility?
Herbalife has undertaken a number of social responsibility initiatives. It has a strong Business
Code of Conduct and Ethics that mandates obedience to laws and provides boundaries for gifts
.