HC2121 Case Study: Herbalife and Ethical Considerations

This case study examines Herbalife, a multi-level marketing company, focusing on its compensation structure and ethical issues. The study analyzes the reasons behind the FTC's actions against Herbalife, highlighting the differences between legitimate direct selling and pyramid schemes. It delves into Herbalife's compensation model, which was often associated with a pyramid scheme, and the FTC's guidelines for restructuring the company's marketing strategies. The report also explores the characteristics of a legitimate business model versus a pyramid scheme, providing insights into ethical business practices and social responsibility initiatives. The study further discusses the changes in Herbalife's direct selling process as per FTC guidelines, including how distributors are compensated and the importance of retail sales. The analysis concludes with a comparison of the legitimate business model and the pyramid scheme, emphasizing the factors that distinguish them, and the importance of adhering to ethical standards. This case study provides a comprehensive overview of Herbalife's business practices, ethical considerations, and the impact of regulatory actions.

Running Head: CASE STUDY ON HERBALIFE
Case Study on Herbalife
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1CASE STUDY ON HERBALIFE
Executive Summary
The following report contains a case study about the company named Herbalife, where the major
objective of the study is to understand and analyze the compensation structure followed by the
respective organization in the market. The study also brings a comparison about the legitimate
direct selling system and pyramid scheme that was followed within the organization. The report
also creates a clear study about the social responsibility initiatives that was made by the
organization in the competitive market.

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Table of Contents
Introduction......................................................................................................................................3
Conclusion.....................................................................................................................................16
References......................................................................................................................................17

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Introduction
The following report is based on a case study regarding the company named Herbalife
Nutrition, where the major focus of the study is to understand the reason behind the FTC actions
that was made against the operations of the organization in the market. Herbalife is considered as
one of the globalized multi-level marketing corporation, where the major function of the
organization is to adopt effective marketing strategy in the market and sell the supplements that
are required for the diet purpose, weight management, sports nutrition products and the products
that are related to personal care. The company was established in the year 1980 by Mark Hughes
and it employs over 8000 people around the world. To create effective competition in the market
as compared to other organizations the major strategy that was adopted by the organization was
by following a pyramid scheme along with the function of having a multi-level marketing system
in the organization.
The strategy behind the pyramid scheme was based on giving more emphasis on the
recruitment function rather than focusing on selling the products of the company in the market.
According to FTC (Federal Trade Commission) following a pyramid scheme was against the
marketing norms and conditions, due to which the FTC filed a complaint against Herbalife for
which they had to restructure the marketing strategies and compensation structure that was
followed by them to enhance better and effective survival in the future. The following report
conducts a brief study about the internal structure of the organization to understand the key areas
where the performance of the organization was illegal in the market and with deriving structured
solutions to the questions that are associated to the case study.

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Herbalife Compensation Structure and Pyramid Scheme
As compared to the case study it is understandable that the Herbalife compensation
structure has been completely related to the pyramid scheme in the market (Deepalakshmi 2015).
The organization was directly involved in the function of both multi-level marketing systems
where they followed the function of selling the products to the consumers along with adopting
the sales strategy that was related to the pyramid scheme. This is the function that was related to
the organizations sales strategy and recruitment process made by the distributers that was
considered to be a fraud action according to the marketing norms and conditions of the company.
Herbalife is the nutrition company that is directly involved in the function of direct selling where
it is stated that the products cannot be directly purchased from the nearby stores. The company
has own distributers for the product, where they sell the product directly to the customers and
earn reward through the particular function.

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Figure: Pyramid Scheme Structure.
Source: (Tran 2016).
As compared to the organizational strategies in the market the company was following an
unfair compensation structure which was against the marketing norms and condition in the
according to FTC (Federal State Commission). The compensation model of the organization was
on a certain basis that the distributers were paid according to the recruitment system made by
them which was by convincing the consumers to sell the product of Herbalife (Crittenden and
Albaum 2015). The organization created a clear understanding in the mind of customers about
the sales strategies of the Herbalife products making them believe that selling the product of the
company can be the most reliable and profitable business in the market.
According to the complaint that was raised by FTC on Herbalife, the compensation
structure that was related to the respective company was illegal in the market. As the
organizations was strictly following a pyramid scheme and they had huge network of members
that was around 3.7 million in 90 countries which was considered as the most effective
marketing system for the company to have higher distribution of their product . According to the
pyramid scheme followed by the organization the beneficial factor that availed for every
customers was that they can either purchase the product of Herbalife in bulk and can resell them
in the market. Under this function they were paid according to the multilevel marketing
compensation model, which states that the compensation structure was not only based on the
product they sell in the market but they also gained bonus through the recruitment function that
was done by them introducing new members to the sales strategies of the organization.

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Figure: Compensation Structure of Herbalife Distributors.
Source: (Tran 2016).
As a part of selling the product the major compensation structure for the distributors was
based on the more number of Herbalife products the customers purchase which can be generally
considered as the multi-level marketing system that was followed by the company. The extra
reward scheme allowed by the company for the distributors was based on the recruitment
processes that were performed by them to enhance effective marketing program for the
organization which was regarded as the system pyramid scheme system that was followed by the
respective organization on all aspects. It is understandable that the multi-level compensation
structure that was followed by the company was based on a pyramid scheme which was regarded
as the unfair marketing act according to the norms and conditions that was made by FTC.

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FTC (Federal State Commission) on Herbalife
According to the norms and conditions made by FTC on Herbalife the organization was
asked to restructure the marketing strategies that were pertaining in the company. They had to
pay $200 million to the consumers for the losses that were caused to them for making them
involved in unfair marketing practices. There were certain changes made in the organizations
direct selling process where FTC introduced several rules and guidelines on the compensation
structure of the organization.
Compensation Structure OF Herbalife according to FTC
 As per the strategies made by FTC in the compensation structure of Herbalife, it was
stated that the participants who join the organization just to purchase the products at a
certain discount for the purpose of reselling them in the market. FTC guidelines states
that the discounted buyers may not be allowed to sell the products and are not eligible for
any kind of rewards from the organization.
 FTC states that the distributors must be paid according to the actual retail sales made by
them in the company. The reward will be given to the distributors only on the basis of
performing sales function of those products that are tracked and verified by the company.
 The distributor’s sales function must be based in the norms and conditions that are
pertaining in the market rather than focusing on the recruitment function. In case of any
negative action from the distributors end can lead to the reduction of reward system of
the distributors.
 For the purpose of leasing or purchasing the premises for the conduct of Nutrition clubs
the distributors are required to complete their one year as areal distributor of the product

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and must compulsory get through a training program that are conducted by the company
in the market.
Legitimate Business Model vs Pyramid Scheme
A legitimate business model with respective to the direct selling function is considered as
the most happening and lively marketing function that is currently pertaining in the market under
all terms(Appelhans, Najeeullah and Frankos 2013). This function generally involves the
effective and systematic process of selling the most competitive and high quality products in the
market through paying higher rewards to those who have the capability to perform the market
function in a most reliable and consistent manner.
According to the pyramid scheme, this involves sales function along with illegal
recruitment actions in the market (Teschke et al., 2015). As per the marketing strategy of the
organization the major objective is to sell the product and earn necessary profit and income out
of it rather than conducting the fraud recruitment process that can intensively affect the
organizations growth in the future. A company must have that capability to follow the guidelines
that are required for their operations such that this may not lower the brand image of the
organization. An organization following the system of pyramid scheme can be considered to be
fraud in their operations and are punishable under all terms for breaking the marketing norms
and conditions.
Some of the factors that are associated to the legitimate business model of direct selling are
mentioned as follows:
 According to the legitimate direct selling function the major focus of the organization is
to provide clear and truthful information about the products to the distributors which may

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involve the beneficial factors that a seller can gain through marketing the respective
product in the market.
 Under this respective function, for a seller who is into the market at the introduction stage
the organization charges a lump sum amount to enter the business by distributing sample
products, catalogs and order forms such that they can gain more effective ideas about the
selling prospective of the particular product in the market.
 The organization must have certain products that have high market demand and are liable
for high competition in the market, those products that have a huge customer requirement
and can enhance better sale.
 For the purpose of protecting the inventory loading function the sellers are be given a
buyback policy system in the market.
 The sellers of the respective organization are given adequate training regarding the
product performance in the current market and an adequate time is given to the sellers to
make decisions.
 As compared to the compensation part of the organization the sellers are paid a base
amount on the service rendered by them in the market. These are based in the sale made
by them and also the basis of sale of others who are recruited by the respective
distributor.
As compared to the respective organization that is into the legitimate business the major
objective of the organization is to enhance effective customer protection and guarantee. Many of
these operations that are made by the company are strictly based upon certain guidelines, rules
and regulation that are associated to the norms and conditions of FTC (Federal State
Commission). DSA have also pledged to maintain an effective code of ethics within the

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organization to maintain and enhance systematic standards between the sellers and the customers
such that there will be no any kind of discrepancies pertaining in the organization.
As compared to the pyramid scheme, this function generally has a negative impact in the
market and also affects the performance of the organization as whole. Some of the factors that
are associated with the function of pyramid scheme are mentioned as follows.
 The major issues that are related to the function of following a pyramid scheme by the
company are that they promise huge earning with small efforts which may force people to
get into the business.
 They promise people that they can earn huge and extensive income by recruiting new
people into the business.
 The product that are sold under certain circumstances can be of that generally have small
market value and are there are certain products that are of no demand in the real market.
 They sell bulk products to the people by making a clear understanding that these products
have a high market value and are liable to resell, which may help them to earn huge
income and profit out of it.
 The products that are distributed to the consumers are not returnable which can create a
huge loss of money to the consumers and the organization earns huge benefit out of it.
 The distributers are rewarded for creating new recruitment function that is completely
against the organizations norms and conditions in the market.

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Source: (Licata and Craxì 2014).
Figure: Pyramid Scheme losses.
From the above mentioned factors and differentiation created in the aspect of both legitimate
directs selling function and pyramid scheme system that are followed in the organization. It is
understandable that the legitimate model functions are as per the rules and regulations that are
associated with the FTC act norms and conditions, whereas following a pyramid scheme can
create a negative impact in the functioning of the respective organization in the future. Pyramid
scheme are declared as the fraudulent act that are against the conditions made by FTC where
adopting this marketing strategy can be punishable for the organization on all aspects. As per the
FTC guidelines it is stated that the companies must focus on enhancing effective and systematic
retail sale in the market rather than giving more emphasis on the unfair recruitment processes.