Published on April 24th, 20140
Vemma Deemed Pyramid Scheme in Italy
The investigation by Italy’s Competition and Markets Authority (AGCM), which sanctioned Vemma €100,000 (roughly $140,000), began in June 2013 after two consumers complained about the Arizona-based company’s marketing and sales practices. During the investigation, Vemma proposed changes to its Italian compensation structure. It also announced changes in its U.S. structure. But a TINA.org analysis has found that the changes to the U.S. compensation plan do not make the plan significantly different from the one Italian regulators found to be a pyramid scheme.
Vemma Nutrition Company CEO Benson K. Boreyko said the company is appealing the Italian decision. In an email to TINA.org Boreyko said:
First and foremost, we strongly disagree with their conclusions. Our business model does not breach the Italian consumers’ protection law and doesn’t bear resemblance to a pyramid scheme. We continue to operate our business in Italy and have appealed their decision. Our European legal team is very confident that the Antitrust Authority’s decision will be overturned.
During the proceedings Vemma was given a full opportunity to defend itself – participating in an October 2013 hearing and submitting a defense brief in December 2013. Its primary argument was:
the network is not a pyramid scheme in that it does not reward mere enrollment in the absence of product sales. … No compensation is paid for the enrollment of new associates, on the contrary, all compensation is linked to sales of products, in a spirit of paying higher compensation to associates who demonstrate the ability to sell, directly or indirectly, greater volumes of products.
Rejecting Vemma’s arguments, the AGCM said:
in a pyramid sales scheme the product . . . to be sold becomes secondary, simply providing the pretext and opportunity to enroll other consumers to participate in the pyramid by making . . . (purchases), thus artificially enabling the scheme to feed itself. For this reason, newly enrolled sales representatives, as soon as they join the pyramid scheme, will pursue the primary objective to find other representatives and have them pay for the right to join or remain within the pyramid; the latter in turn will seek others, and so on… Those who last joined the pyramid scheme will only be able to earn the promised amounts . . . if a high number of participants join and make sales, while there is a strong risk that the chain will break and that the new associates will never obtain any actual economic benefit.
Show me the data
In determining that Vemma is a pyramid scheme, the AGCM analyzed data from Vemma’s Italian operations for the period September 2012 to June 2013. While the AGCM didn’t divulge all the data because of confidentiality considerations, it revealed that it found:
- Only 27% of associates were eligible for bonuses by regularly ordering products from Vemma.
- Fewer than 100 individuals on average generated six-month sales commissions higher than €1,000 (about $1,300 in June 2013), while nearly all the other associates received quite low or even paltry compensation.
- A significant portion of the orders consisted of purchases made by associates themselves, presumably for their own consumption, which in the network are known as “autoship” sales.
- Approximately 20% of the total income generated from product sales was obtained from the sale of expensive Vemma packages called “Builder Packs” that cost €599 or €999 (about $700 to $1,300 in June 2013), and over 60% was generated from autoship sales.
- Only about 16% of the income was generated from the sale of products to third parties.
- Only 24% of associates had a VAT number, which would enable them to sell products to third parties.
Clearly sensing that its business structure could be determined fundamentally flawed, Vemma proposed on July 29, November 26 and December 23, 2013 radical changes in Italy to its compensation plan. Specifically, Vemma proposed 10 changes to appease the AGCM. Most notably, the company proposed:
- A “retail bonus’’ as one of the main tools for generating revenues. The bonus was to be equal to the difference between the wholesale price of Vemma products and the recommended retail price to end consumers. This bonus would not have required the creation of any sales network for the associate to receive it.
- Eliminating its “Platinum Club” bonus, which require consumers to buy the very expensive Builder Packs.
- Replacing two of its bonuses that require enrolling four to six individuals into the Vemma program with a single “Team Bonus” that would require enrolling two to four associates into the program.
- Ending the requirement that associates must enroll two associates into Vemma to qualify for a “Cycle Bonus.”
- Removing the requirement for a monthly autoship order for associates.
While the AGCM chose not to consider the proposed changes because it found them speculative, it did go on to say that these changes would address some of the more questionable aspects of Vemma’s compensation plan but would not alleviate all the problems with the plan.
Health claims fuel scheme
In addition to analyzing Vemma’s business structure, the AGCM also considered the legality of the health claims made by the company and its role in the pyramid scheme. While saying the health claims didn’t violate the law, the AGCM found that the claims played into the pyramid scheme. It said:
A synergistic role in enhancing the effectiveness of Vemma’s pyramid scheme is generally the misleading representation of the supplements, so as to make them more attractive by attributing to them properties they do not possess…
Twenty days after the AGCM’s decision was made public, Vemma issued a new compensation plan in the U.S., Puerto Rico, and Canada. This plan, which became effective April 1, did not contain the vast majority of the changes that Vemma proposed in Italy to the AGCM. The New York Post said Boreyko told the paper it was changing its business practices to get ahead of any possible fallout from the FTC’s investigation into Herbalife, a supplement company under scrutiny as a pyramid scheme.
In an April 1 press release, Boreyko said:
If your goal is to become a household brand, it only makes sense to make a few more necessary operational and compensation plan changes to complete the move. To be more like Amazon.com and less like Amway.
The company also signaled that changes were going to be rolled out in other countries in coming months as well.
Breaking down the plan
Our compensation plan is going to stay the same. It’s an amazing compensation plan. The way we do business is going to stay the same but the way we describe how we do business . . . [will change].
Like I said before, the way we pay is not going to change, our compensation is not going to change . . .
And in January the company again said:
Vemma’s Compensation Plan won’t change; we’ll just describe it differently in updated terms to better explain how we do business.
So while Vemma may have done some wordsmithing with regard to its U.S. plan, the fact remains that monetary success is still dependent upon enrolling new participants into the program. This isn’t to say that there weren’t certain tweaks made in an attempt to provide cover for pyramid allegations but an analysis of the “new” plan shows the futility of this endeavor.
Here are two major changes and what they mean:
- Auto-Delivery: Mandatory monthly auto-delivery was eliminated as a requirement for many Vemma bonuses and commissions, perhaps to dispel the appearance of inventory loading, a key component of pyramid schemes. However, mandatory monthly purchase requirements are still required, and auto-delivery is still explicitly required for some programs and bonuses. As a practical matter, all Vemma affiliates are still required to sign up for auto-delivery. As Boreyko said in a March video: “It is important that everybody understand that you need to have an auto-delivery on file… [T]hat auto-delivery – it’s important that you have it on file because it tells us the important information about what products that you are going to be able to earn for free and also make sure that you are qualified for affiliate bonuses.”
- Qualifying for Compensation: In order to make money with Vemma, you must obtain about $150 worth of product every month and personally enroll two individuals, who obtain a minimum of about $75 worth of product every month. According to the new plan, affiliates can earn half the value from customer purchases and put this toward their monthly purchase requirements. For example, an affiliate would need four customers buying about $75 worth of Vemma products each and every month in order to meet the necessary $150 monthly product purchase. But the data supplied by Vemma in its 2013 U.S. Disclosure Statement showed that on average no affiliate had four personally enrolled customers – rather the average was 2.34 customers per affiliate. As such, it doesn’t seem likely that many Vemma affiliates will be able to meet their monthly mandatory purchase requirements through personally enrolled customer purchases.
Other claimed changes such as ending sign-up fees and/or renewal fees are simply red herrings as Vemma never had sign-up or renewal fees under its old plan.
And here’s what hasn’t changed – in order to be fully eligible for all commissions, bonuses and free product, you still must:
- Obtain about $150 worth of product every single month.
- Purchase a $500 “Affiliate Pack,” which replaced the silver and gold builder packs. (At Vemma’s recent Las Vegas “All In” convention, Boreyko said that after reviewing what “haters and critics” were saying about the changes, he was rethinking this requirement and that starting June 1 he was going to give affiliates an alternative to purchasing the $500 pack. If an affiliate can sign up six customers who each purchase about $75 worth of Vemma products, they can be fully qualified for all bonuses without having to buy the pack.)
- Have an auto-delivery order on file.
- Personally enroll at least six individuals who have to acquire about $150 worth of product every single month. To maximize bonus possibilities with your six enrollees, you’d have to
- Enroll three individuals who buy a minimum of $150 worth of product in the same week; and
- Enroll three individuals who buy a $500 special Vemma pack and enroll with auto-delivery to buy a minimum of $150 worth of product in the same week.
- And if you want to earn about $30,000 a year, you’re going to need at least 100 people under you who are also willing to do all of the above. As for making top dollar (as in more than $2 million), TINA.org’s best estimate is that you’d need more than 100,000 people below you.
Truth be told, as a practical matter Vemma’s new compensation plan still suffers from many of the multiple faults that Italy’s AGCM found with the old pyramid plan.
Vemma Nutrition Company is a privately held multi-level marketing company that sells energy drinks, nutritional beverages and weight management products. Vemma, which calls itself an affiliate marketing company, is based in Tempe, Arizona. It was founded in 2004 by Benson K. Boreyko and his sisters. Vemma is an acronym for vitamins, essential minerals, mangosteen and aloe.
An inherently deceptive form of multi-level marketing where participants are told they’ll get paid for recruiting other participants, and not necessarily for selling products or services. Typically, participants must pay some sort of initial investment in order to join, and will then earn a commission for each participant they recruit. Unfortunately for the unsuspecting consumers, pyramid schemes are doomed to collapse because the number of potential participants is limited.
Inventory loading is the practice of requiring participants to purchase merchandise in order to receive commissions.