Monday, September 27, 2010

How is USANA a Pyramid Scheme? Prospecting Associates Should Read This Before Joining.

How is USANA a Pyramid Scheme?

In short, I believe USANA Health Sciences, Inc. is a pyramid scheme because associates can recruit an endless chain of new associates into a downline and are paid commission from the required product purchases made by each of the associates in the downline. Retailing USANA's products are unachievable due to the associates's exorbitant cost for the products. USANA associates resort to recruiting more sales representatives as their primary focus instead of retailing the product for a profit margin. The product is overpriced in order to fund the top recruiters in the pyramid scheme. As a result, 99% of USANA distributors never make a profit and lose a lot of their time and money.

   Required Product Purchases

The following is a statement from USANA's SEC filings regarding the requirement for associates to purchase product:
"To be eligible to earn commissions, an Associate must purchase a certain amount of product each month ("Qualifying Purchases"), which they may resell to consumers or use personally. Associates do not earn commissions on these Qualifying Purchases. Associates only earn commissions on the purchase of products by Associates in their down-line organization and Preferred Customers." - USANA's 10-K SEC Filing

First of all, the SEC Filing states that a certain amount product must be purchased each month, which is false. A certain amount of product must be purchased every 4 weeks, which happens 13 times a year instead of 12. USANA calls the amount of products associates are required to purchase as the "Personal Sales Volume" (PSV). It is very interesting that USANA chose the term "Personal Sales Volume" when in fact it is a "Personal Purchase Volume". The upline associates receive commission from the associate that makes these required purchases even in the product is never retailed to a customer. However, if the associate chooses to retail the product, that associate is not paid commission on the sale. Because the product is over priced, retailing for a profit margin is practically unheard of. What is actually happening here is that every associate is required to purchase about $110 worth of inventory every four weeks (13 times a year) and those inventory purchases pay commission to the associates who joined earlier.

What was left out of the SEC filing are the consequences of failing to purchase a certain amount of product every 4 weeks.
"If, at any time, an Associate’s PSV falls below the minimum requirement to remain active, the Associate will no longer be eligible for commission checks or bonuses or to advance in rank. The Associate will also lose any Carryover Volume, and he or she will not carry over any volume until re-activating the BC(s). The Carryover Volume will start again at zero." - USANA's Ask Andy

This rule threatens associates to continue purchasing inventory. A real business would not have such ridiculous hoops to jump through. Put it this way, if an associate were to sign up 10,000 preferred customers who purchase product on a regular basis, this associate will not be paid a single penny for their work unless the associate purchases $110 worth of inventory every 28 days. Why should a USANA associate be forced to purchase their own product if they don't need to? USANA would collapse if they did not force their distributors to purchase product every four weeks.

   Recruiting Associates Instead of Retailing Product

Associates can make far more money by selling the dream of becoming rich rather than selling USANA's vitamins or skincare products. In fact, as long as you sell the dream, the product sells itself!

Costs USANA associates $14.95 and retails for $17.94.
Each bottle Contains 56 tablets and each tablet contains 2 mg of melatonin.
So USANA's melatonin product costs associates 13.3 cents per milligram.

Most melatonin products retail for less than 3 cents per milligram - See for yourself!

All of USANA's products are overpriced like the above example!

However, when taking all of USANA's perks into consideration, USANA associates can potentially receive $20 in commission every 28 days from each associate in their downline simply from the required product purchases! Of course, what gets left out of their promotional material are the vast amounts of rules that prevent most all associates from making a dime. This is why is pays to recruit instead of retailing USANA's products.

   Endless Recruiting is How it Works

Most distributors do not remain in the pyramid scheme and drop out after only a few months. This is because reality sets in and they soon discover that nobody wants to purchase overpriced vitamins or skincare product. Not only that, but most of their family members, friends, and co-workers do not support their venture after being asked to join their downline. Because of this, there is a very high dropout rate for new associates in USANA's business opportunity. In fact, an estimated 81.5% of new associates drop out within their first year!

USANA knows that most associates drop out soon after they join and has developed a means to extract most of the money from the associate before they drop out. They do this two different ways. 1) in order for new associates to initially activate their business center and be eligible to collect commission, the associate must personally purchase about $220 worth of product. 2) Alternatively, a new associate can purchase one of four special enrollment packages ranging from $300 to $1250, which contains product and recruiting material.

   What Does The FTC Say About MLM and Pyramid Schemes?

In 2004, the Federal Trade Commission wrote a letter in response to a question the Direct Selling Association's president Neil H. Offen asked. The letter is titled "Staff Advisory Opinion - Pyramid Scheme Analysis". Mr. Offen requested a staff advisory opinion regarding the FTC's analysis of pyramid schemes.The response does not bode well for Multilevel Marketing companies like USANA. I recommend reading the memo for yourself.

"A multi-level compensation system funded primarily by such non-incidental revenues does not depend on continual recruitment of new participants, and therefore, does not guarantee financial failure for the majority of participants. In contrast, a multi-level compensation system funded primarily by payments made for the right to participate in the venture is an illegal pyramid scheme." (My Emphasis in Bold) - FTC Memo

USANA makes most of their net revenues from the money distributors pay in order to participate in the business opportunity. According to FTC's statement, it is very likely USANA is conducting an illegal pyramid scheme. 89% of USANA’s net revenue comes from distributors who purchase product and services from USANA.
"The Commission’s recent cases, however, demonstrate that the sale of goods and service; alone does not necessarily render a multi-level system legitimate. Modem pyramid schemes generally do not blatantly base commissions on the outright payment of fees, but instead try to disguise these payments to appear as if they are based on the sale of goods or services. The most common means employed to achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While the sale of goods and services nominally generates all commissions in a system primarily funded by such purchases, in fact, those commissions are funded by purchases made to obtain the right to participate in the scheme. Each individual who profits, therefore, does so primarily from the payments of others who are themselves making payments in order to obtain their own profit. As discussed above, such a plan is little more than a transfer scheme, dooming the vast majority of participants to financial failure." (My Emphasis in Bold) - FTC Memo

According to this quote, simply because USANA has a product to market does not mean render the company legitimate. It goes on to explain that Modern Pyramid Schemes require a certain level of monthly purchases to qualify for commission and these schemes call the required purchases a "sale of goods". The majority of USANA's commissions paid out comes primarily from the associate's required inventory purchases. If an MLM company makes the majority of their net revenues from the payments made by distributors to qualify for commissions, then the company is an Illegal Pyramid Scheme.


Based on the information I have provided above, I believe that USANA conducts an illegal pyramid scheme. 99% of USANA distributors lose money due to this scam. The FTC needs to investigate USANA and put an end to the fraud. USANA currently operates this pyramid scheme in Australia, New Zealand, Canada, the United Kingdom, the Netherlands, Hong Kong, Japan, Taiwan, Korea, Singapore, Mexico, Malaysia, Philippines, and the United States. I recommend any prospecting distributor from these countries to consider what I have written above and do your own research before making a decision whether to join or not.

Monday, September 20, 2010

USANA'a Hong Kong active associate numbers may begin declining because of BabyCare Ltd.

Now that USANA Health Sciences owns BabyCare Ltd in China, will USANA continue to recruit Chinese Nationals into their Hong Kong market?  Currently, China has outlawed Multilevel Marketing because they consider it to be a pyramid scheme. Only Single Level direct selling is allowed. Distributors are not allowed to recruit additional distributors.

It appears that USANA and their distributors have been recruiting people from mainland China into their Multilevel Marketing business opportunity through their Hong Kong market. As I pointed out in a previous blog posting regarding USANA's active associates per territory, USANA's Hong Kong territory reveal that 1 in every 135 Hong Kong citizens are active distributors in USANA's business. That's very suspicious when you consider that USANA's United States market has 1 in every 5436 American citizen as an active Usana distributor.

So if USANA's Hong Kong territory has been used to funnel profits to USANA through illegal means (recruiting people from mainland China), and now USANA owns BabyCare Ltd, will those mainland Chinese distributors who joined USANA illegally leave USANA and join BabyCare Ltd instead? I believe this may be the case. This would mean that USANA's Hong Kong active associate figures will begin to drop. Keep in mind, people living in Hong Kong would not be able to join BabyCare Ltd because Hong Kong is not part of mainland China. Now if USANA believes their Hong Kong active associate numbers are going to decline as a result of BabyCare Ltd, then USANA has a responsibility to inform their shareholders since it is a material matter.

Regardless, I firmly believe there is sufficient evidence for a SEC investigation of USANA's distributor recruiting in their Hong Kong territory. I believe this is a SEC issue because if illegal distributor activities within a foreign country such as China is confirmed, it may account for a very substantial amount of USANA's net revenues and gross profits. If this is truly the case, then shareholders may suffer massive loses in their investment in USANA's stock. Another consequence will be a damaging blow to the auditing firm PriceWaterHouseCoopers' reputation since they have been notified of this matter almost a year ago.

I would ask that anyone with additional information or evidence please email me. Your identity will not be revealed.

UPDATED September 21, 2010 at 7:47 PM:
If USANA's management HYPOTHETICALLY told an investment firm that they are expecting Hong Kong active associate numbers to be lower because of BabyCare Ltd, but did not make this statement publicly to all shareholders, does this violate SEC laws due to insider trading?