{"id":818,"date":"2015-12-03T17:36:19","date_gmt":"2015-12-03T22:36:19","guid":{"rendered":"https:\/\/digital.hbs.edu\/platform-rctom\/submission\/herbalife-the-upside-down-funnel\/"},"modified":"2015-12-03T17:42:40","modified_gmt":"2015-12-03T22:42:40","slug":"herbalife-the-upside-down-funnel","status":"publish","type":"hck-submission","link":"https:\/\/d3.harvard.edu\/platform-rctom\/submission\/herbalife-the-upside-down-funnel\/","title":{"rendered":"Herbalife \u2013 The Upside Down Funnel"},"content":{"rendered":"

Overview<\/strong><\/p>\n

Herbalife is a global nutrition company that sells weight management, targeted nutrition, energy, sports & fitness, and other nutrition products.\u00a0 Unlike a traditional consumer product company, Herbalife distributes its products through a global network of four million \u201cmembers\u201d. (1) In effect, it is a direct sales multi-level marketing program (MLM) in which members are compensated both for the sales that they generate and the sales that the people they recruit generate.\u00a0 Herbalife\u2019s business model, which is supposedly focused on sales of products to retail customers, is misaligned with its operating model, which drives sales within the Herbalife network and rewards members significantly more for recruiting new members than for retail sales.<\/p>\n

Business Model<\/strong><\/p>\n

Herbalife\u2019s business model is simple: develop nutrition products and sell as many of them as possible to retail consumers.\u00a0 The company sells over 150 products which through variation total more than 5,000 SKUs. (1)<\/p>\n

Secondarily, Herbalife\u2019s goal is to create a sustainable income for its direct sales members (and therefore itself).<\/p>\n

Operating Model<\/strong><\/p>\n

Herbalife members purchase product from the company at a 25-50% discount to retail price for either personal consumption or sale to retail customers.\u00a0 If they sell the product directly to a retail customer at full price, then their profit is equal to their 25-50% discount. (2) Additionally, members are encouraged to recruit new members to sell on their behalf.\u00a0 They are incentivized to do this because they can earn commissions on their recruits\u2019 sales.\u00a0 For example, if someone I recruit makes a sale, not only do they get that retail profit, but Herbalife will give me a cut of the money that my recruit paid them for the product. (2)<\/p>\n

While initially this operating model would seem to be in alignment with Herbalife\u2019s business model because it drives sales, those sales aren\u2019t to retail customers. \u00a0As outlined in Pershing Square\u2019s 2013 \u201cRobin Hood in Reverse\u201d presentation, in response to an inquiry about what percent of the company\u2019s overall sales are to retail customers, Herbalife responded:<\/p>\n

\u201cWe don\u2019t track this number and do not believe it is relevant to the business.\u201d (3)<\/p>\n

One would think that if Herbalife\u2019s members\/distributors aren\u2019t selling to retail customers then they wouldn\u2019t be incentivized to stay in the program.\u00a0 In fact, Herbalife members earn more than 10 times as much from Recruiting Rewards as they do by selling products to retail customers. (4)<\/p>\n

So if Herbalife\u2019s operating model isn\u2019t set up to drive sales to retail customers, then surely it must create sustainable income for its members through commissions on sales to other members?<\/p>\n

The economic reality is that 89% of members receive $0 in gross commissions. (4)<\/p>\n

Conclusion<\/strong><\/p>\n

Herbalife is parading around as a retail nutrition company when in fact it is a recruitment firm.\u00a0 Its business success is not predicated on selling its products to end consumers, but rather, continually recruiting new members to maintain or grow its captive base of consumers.\u00a0 The company\u2019s members are more incentivized to recruit than to sell and while recruiting by its very nature might increase sales, it is unsustainable.\u00a0 Otherwise, Herbalife\u2019s member network would eclipse the total world population.<\/p>\n

Sources<\/strong><\/p>\n

(1) Herbalife 10-K http:\/\/edgar.sec.gov\/Archives\/edgar\/data\/1180262\/000119312515065723\/d827286d10k.htm#tx827286_13<\/a><\/p>\n

(2) Who Wants to be a Millionaire – http:\/\/www.factsaboutherbalife.com\/media\/2013\/01\/Who-wants-to-be-a-Millionaire.pdf<\/a><\/p>\n

(3) Robin Hood in Reverse – http:\/\/www.factsaboutherbalife.com\/robin-hood-in-reverse\/<\/a><\/p>\n

(4) Vemma Comparison – http:\/\/www.factsaboutherbalife.com\/media\/2015\/09\/Vemma-Comparison-v11.pdf<\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

Overview Herbalife is a global nutrition company that sells weight management, targeted nutrition, energy, sports & fitness, and other nutrition products.\u00a0 Unlike a traditional consumer product company, Herbalife distributes its products through a global network of four million \u201cmembers\u201d. 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