The network marketing sector has come under renewed scrutiny with the news that Vemma Nutrition, a multilevel marketing comany that markets beverages based in part on mangosteen juice, has been sanctioned by an Italian regulatory body for being a pyramid scheme. The company has appealed the decision and made changes to its compensation model in response.
The Italian Competition and Markets Authority, roughly analogus to the US Federal Trade Commission, recently ruled that Vemma’s business model constituted an illegal pyramid scheme and fined the comapny €100,000 (approximately $140,000 US) and ordered it to cease operating in Italy. The company is still open for business there while the ruling is being appealed.
- Only a tiny fraction of associates earned signficant sales commissions
- Most products were sold to Vemma sales associates with only about 16% of sales made to third parties
- Only 24% had a VAT number (a tax registration) that would enable them to sell products to third parties.
Vemma, which targets a younger demographic, announced some changes to its business model including modifying the rules about how much product distributors must buy each month. These so-called ‘autoship’ orders account for a significant proportion of overall volume, with some of the packages costing $500 and more.
Vemma had made some similar changes to its business model in the US, reportedly motivated by the high profile difficulties of Herbalife, one of its direct selling nutritonal product competitors. Vemma was not alone in reacting this way; in mid 2013 USANA moved to simplify its compensation structure making it easier for distributors to earn commission checks, and said the number of distributors earning first-time commission checks had risen by 30% as a result.
Vemma’s changes were cited by TINA as being mere window dressing. The watchdog group quoted Vemma CEO Benson K Boreyko as saying, “Vemma’s Compensation Plan won’t change; we’ll just describe it differently in updated terms to better explain how we do business.”
This is a similar line that Herbalife has taken. In recent years that company has said that critics of its direct selling model were simply misinformed about the nature of the direct selling business.
Vemma’s main product is a beverage called Verve, which is a blend of vitamins, minerals, mangosteen juice and aloe juice. The product has received a positive review on the Dr Oz Show, though Vemma marketing materials strongly warn affiliates from claiming that Oz has endorsed the product.
This isn’t the first time a European regulatory body has taken issue with the way US-based network marketing firms do business. A court in Belgium ruled that Herbalife’s business practices in that country constituted an illegal pyramid scheme. The company managed in that case to have the ruling overturned on appeal in late 2013.
It remains to be seen how Vemma’s difficulties and the legal troubles that Herbalife is enduring, with its ongoing FBI and FTC investigations, will affect the overall sector. But it’s unlikely that criticisms of the business model will simply die away. Those within the fold will continue to see it as an opportunity to build a business with very little up front investment, while those on the outside will continue to view it as a way for a company to exploit its distributors’ greed, desperation or lack of sophistication.