Consumer Engagement- Herbalife

Brand: A brand that faced both legal and ethical issues is the well-known brand Herbalife. Founded over 40 years ago, Herbalife is a self-proclaimed active and lifestyle nutrition brand offering weight loss and nutrition shakes, bars, and supplements. The brand has even expanded into skincare in the past decade. Aside from nutrition and skincare, the brand heavily focuses on creating independent distributors. Unfortunately, this is where the ethical and legal implications arise. By encouraging consumers to “build your own business while helping others transform into the best version of themselves,” Herbalife crossed into dangerous territory (Inspiring…2024). The company began to make wild claims regarding its massive “Circle of Success” events in which independent distributors had to pay to participate such as “If you go to all of the events, you qualify for everything- you will get rich,” and “These crucial events provide you with the skills you need to take it to the next level.”  While some distributors became wealthy through selling Herbalife products, the majority of people made little to no money or actually lost money on this so-called investment opportunity. In fact, it began to seem like Herbalife’s business model was centered around recruiting more distributors than actually selling the products (FOX…2018). This led to a Consumer Protection investigation, proving their claims to “get rich quick” false and placing their incentivization structure under legal scrutiny by the FTC. It was found to be a pyramid scheme, promptly sued for $200 million, and court-ordered to restructure its business model and payment structure (Shaw, 2022). 

Consumer Perceptions: These issues affected customer perceptions of the brand by exposing the company for what it was- a multi-level marketing pyramid scheme. The FTC found that half of Herbalife Sales Leaders were averaging less than $5 per month from product sales, and the majority of distributors who sold products as a retail business made no money or lost money. Although Herbalife was aware of its blatant FTC violation, the company continued to push back harder on its salesforce- insisting that if they just bought more products, recruited more people, and worked just a little harder, all their financial dreams would come true (Fair, 2022). Once deemed a pyramid scheme by the FTC, a bad taste was left in the mouths of many consumers. Sales dropped the year following the lawsuit by over $2 million, and articles, videos, and posts began popping up online exposing the company for corrupt business practices (Wunsch, 2023).  One website dedicated to spreading the truth about Herbalife called factsaboutherbalife.com claims that the changes made to the business model do nothing to address the fundamentals that make it a pyramid scheme and that the company deliberately refuses to track retail sales to account for sales outside of the distributor network. Most interestingly, the website states that 89% of Herbalife distributors earn nothing from the company (Herbalife…2019). Whether these claims are true or not, articles like this prove that customer perception of the brand was negatively affected after the 2016 lawsuit. Many people lost any sense of previously established trust in the company, and some even questioned the credibility of the products since Herbalife’s primary focus seemed to be recruiting new distributors. As of today, when you search “Herbalife p,” one of the first results to appear is “Herbalife pyramid scheme,” and according to gradschools.com, Herbalife ranks as #2 among the top 10 pyramid schemes (Top…2024).

Implications: Ultimately, the company had to pay back $200 million to compensate consumers and distributors they had purposely misled, and the FTC mailed out three rounds of checks totaling over $4.2 million to those who lost money running Herbalife businesses (Liu, 2023). Sales would continue to bobble up and down in the years following the lawsuit, but the company will never quite be able to shake the label of “pyramid scheme.” Once distributors came forward with stories of how they were duped out of hundreds or in some cases thousands of dollars, the brand’s reputation was essentially irredeemable. Not that redeeming its reputation was significantly important to the company… When offered the chance to make a redeeming statement regarding the 2016 lawsuit, the only thing Herbalife CEO Michael O. Johnson had to say was “The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully. Otherwise, we would not have agreed to the terms,” (Puzzanghera & Peterson, 2016). 

Hindsight: Herbalife could have followed the multi-level marketing business model when starting the business in 1980 as opposed to the similar yet illegal pyramid scheme business model. The difference between the two is that multi-level marketing is primarily focused on sales while pyramid schemes are primarily focused on recruitment (Tarver, 2023). To maintain any resemblance of credibility and trust between consumers and the brand, Herbalife should have also been upfront and honest when the lawsuit was brought forth in 2016. While their strategy of denying all claims made against them was an interesting choice, the brand would have suffered less if the company executives had taken accountability and made a genuine attempt to reconcile their wrongdoings. Instead, the brand name is forever tarnished, the revenue trend is unpredictable, and the trust between Herbalife executives and consumers is irreparable. 

Support: 

• Resource 1: This source is justification because it gives direct insight into the $200 million FTC settlement with Herbalife in 2016. It was published the year of the settlement on the Federal Trade Commission’s Business Blog page explaining the bogus claims made by the company, the causes of the lawsuit, the changes that must be made after the settlement, and the protections that will be put in order to protect future consumers from Herbalife’s predatory practices

  • https://www.ftc.gov/business-guidance/blog/2016/07/its-no-longer-business-usual-herbalife-inside-look-200-million-ftc-settlement

• Resource 2: This source is justification because it exposes Herbalife’s false claims that led to the company having to pay a $200 million settlement and change its entire business model to meet federal regulations. It also provides quotes from the company’s leaders that paint a vivid picture of how unapologetic they are about their corrupt practices and how they feel about the lawsuit in general.

  • https://www.latimes.com/business/la-fi-herbalife-settlement-20160715-snap-story.html

Fair, L. (2022). It’s no longer business as usual at herbalife: An inside look at the $200 million FTC settlement. Retrieved from https://www.ftc.gov/business-guidance/blog/2016/07/its-no-longer-business-usual-herbalife-inside-look-200-million-ftc-settlement

FOX 4 News Dallas-Fort Worth. (2018). Herbalife distributors claim in $1b suit events were a Sham. Retrieved from https://www.fox4news.com/news/herbalife-distributors-claim-in-1b-suit-events-were-a-sham

The Herbalife Pyramid Scheme. (2019). Retrieved from https://factsaboutherbalife.com/the-facts/the-herbalife-pyramid-scheme/

Inspiring better lives​. (2024). Retrieved from https://www.herbalife.com/en-us/about-herbalife/our-company

Liu, H., & Staff in the Office of Technology. (2023). Herbalife refunds. Retrieved from https://www.ftc.gov/enforcement/refunds/herbalife-refunds

Puzzanghera, J., & Peterson, M. (2016). Herbalife agrees to pay $200-million settlement and change its business practices. Retrieved from https://www.latimes.com/business/la-fi-herbalife-settlement-20160715-snap-story.html

Shaw, J. A. (2022). 11 times big brands violated Consumer Protection Laws – Zebersky payne Shaw Lewenz. Retrieved from https://zpllp.com/11-times-big-brands-violated-consumer-protection-laws/

Tarver, E. (2023). What is MLM? how Multilevel Marketing Works. Retrieved from https://www.investopedia.com/terms/m/multi-level-marketing.asp#:~:text=The%20key%20difference%20between%20MLM,salespeople%20and%20thus%20increasing%20commissions.

Top 10 famous pyramid schemes 2024 (and how to avoid them!). (2024). Retrieved from https://www.gradschools.com/get-informed/student-guide/top-10-pyramid-schemes

Wunsch, N.-G. (2023). Herbalife: Net sales worldwide 2022. Retrieved from https://www.statista.com/statistics/917669/herbalife-net-sales-worldwide/