9 ms·

What Unsustainable Growth Looks Like: Herbalife, Groupon, and More

240 points by matm 12y ago

stoev 12y ago
This reminds me of FBs ad business - they keep introducing new ad spaces, expanding their offering to more platforms, introducing logout ads, video ads, scrollable install ads, an ad platform, etc. With all of that they are just masking the fact that a large portion of their advertisers stop using them and that most of their products start losing popularity relatively quickly.
- jonnathanson 12y ago
  "...a large portion of their advertisers stop using them and that most of their products start losing popularity relatively quickly." Facebook recently posted a 72% year-over-year gain in Q1 revenue, is stealing share of the online ad market from Google at a slow but increasing rate, and is growing mobile ad revenue by 30% year-over-year.[1] It's not doing that just by introducing new ad space and new ad formats. It's not doing that by bleeding out existing advertisers. As much as we might not want to admit it, Facebook is becoming a pretty compelling advertising platform. This was not always the case. But the company's ad platform is maturing significantly. It's got a long ways to go, and it's not perfect by any means. But there's a lot of potential yet to be tapped, and by all accounts, the company is making progress in tapping it. News of Facebook's supposedly declining popularity is also premature and exaggerated. [1]http://online.wsj.com/news/articles/SB10001424052702303380004579519623221180410?mg=reno64-wsj http://online.wsj.com/news/articles/SB1000142405270230338000...
  - stoev 12y ago
    "It's not doing that just by introducing new ad space" Maybe, but just a bit over a year ago they used to have two ads on the right hand side of their desktop version. Now they have seven ads in the same space. They also used to have one mobile ad in their news feed. Now they are sideways scrollable (I think there are five in total). The fanpages' organic posts are reaching fewer and fewer people in an attempt to make the owners pay for as many promoted posts as possible. A point I noticed in their last earnings report reminded me of the reasoning in the OP's post: one of the signals of decelerating growth is the loss of popularity of early products. Their desktop ad business accounts for less than half of their revenue nowadays, despite the fact that there is a lot more ad space available there.
    - mbesto 12y ago
      > OP's post: one of the signals of decelerating growth is the loss of popularity of early products. Just because a blog says something, doesn't automatically make it true.
  - josho 12y ago
    Be careful here. Facebook is growing ad revenue, but I haven't read anything yet that suggests users are interacting with the ads. After all, if the ads don't get clicks then eventually the advertisers will leave. Your article doesn't speak to the efficacy of Facebook ads, does anyone have recent analysis on if the maturing Facebook ad platform is any better for getting clicks than their early efforts?
    - Gustomaximus 12y ago
      Don't judge a ad platform by it's ability to get clicks. What's important is it's ability to drive business for companies. E.g. I'll happily pay $100 per click for if traffic has 50% conversion for a product that has a 1 year profit of $300. If conversion is 0.1% like some apps I'll still buy traffic but bid $0.20 for clicks. Even if the app has 10 times the clicks they will not earn as much as FB. Linking the right ads to the right people is the key for value/profit.
sfghaghhldg 12y ago
Yet, they seem to have lots of users and customers....
paul_f 12y ago
The article clearly makes the case that tracking churn is critical to analyzing the overall health of a business. And the reason why churn is so critical for cash-strapped startups is that new customers are so expensive. In many cases it is an order of magnitude more expensive to sell to new customers than existing customers.
IvyMike 12y ago
A little off-topic, but Rob Cockerham's investigation into Herbalife is one of the best pieces of citizen journalism I've seen. http://www.cockeyed.com/workfromhome/workfromhome.html http://www.cockeyed.com/workfromhome/workfromhome.html
- MartinCron 12y ago
  That was from 2002. Pretty heartbreaking to see that this has been going on for so long.
  - carrotleads 12y ago
    Well a new one was recently started promising to give ordinary folks aka Entrepreneurs, Facebook and Apple like "exits". Its imaginatively named "neurs.com" . After some research I had put my comments under this review of the neurs setup and how it seems to work. http://avoidonlinemarketingscams.com/what-is-neurs-is-it-the-next-big-money-maker-for-affiliates http://avoidonlinemarketingscams.com/what-is-neurs-is-it-the... Now I play in the same space as my USP is to connect warm leads to companies via incentives. Looking at their videos they claim to connect Entrepreneurs with providers( leads in my world). So I did my research and found they have atleast a few 100k's of pageviews in the past few months. I am trying to decode their marketing tactics to figure out the do's and don'ts. Would like to hear what others think about it.
- phpnode 12y ago
  that was great, but funny that literally every adsense ad on those articles was for herbalife products.
stu_k 12y ago
In the retail space investors look at same store sales[0] (or comps) to see if a company's growth is coming existing stores, or just from opening new ones. [0] http://en.wikipedia.org/wiki/Same_store_sales http://en.wikipedia.org/wiki/Same_store_sales
tapp 12y ago
"One of the most important characteristics of a successful business is that it's growing." I hope this doesn't come across as nitpicking, but the lead sentence of the article is incorrect. It should be: One of the most important characteristics of a successful STARTUP is that it's growing. Businesses which successfully serve their owners, employees, customers and larger surrounding community, can easily be steady-state. I realize HN is startup-focused, but I think in the interest of productive conversation it's important to make the distinction and use precise terms.
- raviparikh 12y ago
  I actually mentioned this initially but trimmed it to be more concise. You're right though, I added it back. Not every business is a growth business.
  - scottyg66 12y ago
    I actually thought EVERY business is a growth business. Isn't that usually the number 1 driver, even if you have a steady stream already?
    - johntb86 12y ago
      Driver of what? Maybe a dry-cleaner or cafe is happy with the size they are, because expanding would involve turning the business into a chain or something else the owner doesn't want.
    - adventured 12y ago
      Most older, local, small businesses in small to medium markets in the US will never be growth businesses. They're treading water businesses after the market is saturated (some can be very profitable of course). Being technical about it, a business may keep up with inflation by raising prices, and show nominal growth. Look at the revenue of a liquor store, insurance business, or tv / radio station, in a healthy but smaller settled market. No market growth, little to no business growth, but the businesses aren't likely to disappear either. This is a very common scenario, there are millions of US businesses in this situation.
mbesto 12y ago
I love talking about business models (I run a bootcamp in SF helping people to visualize them), so I figured I'd chime in here... >Eventually they’re going to run out of countries to enter, and that will be the end of Herbalife if they don’t figure out a more long-term, sustainable business model. This statement is pure speculation. Why hasn't any of the same analysis been done on Groupon? I'm not sure why the article conflated the two stories of Groupon and Herbalife, when their data sets and underlying assumptions are clearly very different. > You should be able to demonstrate sustained growth in a single market segment, whether it's a geographic region, a certain type of customer, or something else. Isn't this why diversification exists? Why companies like GE, P&G, and now Google, have a massive portfolios of companies, as opposed to one single product that drives all growth? I'm having a hard time understanding what the takeaway is here...
powera 12y ago
I think it's worth noting this article in any discussion about Herbalife: http://www.nytimes.com/2014/03/10/business/staking-1-billion-that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html?_r=0 http://www.nytimes.com/2014/03/10/business/staking-1-billion... (summary: lots of people have lots of money invested in whether Herbalife is a pyramid scheme or not, and are lobbying hard on that.)
- digitalengineer 12y ago
  Exactly. I'm no Herbalife fan but this reads like a 'let's write down the stock' article.
codeboost 12y ago
Bill Ackman was wrong about Herbalife. According to wikipedia, he lost between $400 million to $500 million by shorting Herbalife last year. What that means is that other investors disagree with his (and this article's) analysis of Herbalife.
- tokenadult 12y ago
  Ackman seems to think his investment strategy will work out just fine, based on more recent reporting: http://www.cnbc.com/id/101606593 http://www.cnbc.com/id/101606593 http://abcnews.go.com/Blotter/herbalife-ackman-respond-nightline-undercover-report/story?id=23457777 http://abcnews.go.com/Blotter/herbalife-ackman-respond-night... (I am a Wikipedian, and in general I don't trust Wikipedia for current news AT ALL, and especially not for current news that touches on health-related businesses.)
- maxprogram 12y ago
  Unrealized losses over a short time period have nothing to do with being "right" or "wrong" about a stock investment. Fluctuations of investor expectations (i.e. stock price movements) have especially nothing to do with this article's analysis. It presents data and comes to a pretty reasonable conclusion from it. Whether you wan't to call it a "pyramid scheme" or not is semantics, the conclusion speaks for itself. Short-term investors can make money betting in the opposite direction of long-term investors who will also eventually make money. Herbalife can be a pyramid scheme and short-term investors can make money as the stock price rises -- the 2 aren't mutually exclusive.
- gfodor 12y ago
  Herbalife just killed their dividend. This story is still being written. Ackman is a douche but he might end up getting the last laugh.
- mrschwabe 12y ago
  No. Bill Ackman was right. Herbalife is a terrible business. For reasons outlined in the OP link, it has seen growth - but is ultimately doomed. Specifically: when there are no new markets to enter; when every dupe has been duped. Though, unfortunately, before it crashes entirely - those handful at the top will have their next big sham ready to seed & perpetuate into the world; and a significant number of the dupes who were duped before will be duped again. And hence, the endless, relentless cycle of MLM. Despicable.
jacquesm 12y ago
One way to get unsustainable growth is by spending more on marketing than you are making back on your customer over their lifetime. Given a large enough investment this could easily get you from series 'A' to the next round with spectacular figures showing really nice graphs. It can be quite a bit of work to figure out where the flaws are, and founders are not always aware of issues like these.
ape4 12y ago
GroupOn should die. I can think of nothing I would want less than a daily mail with some "deal". To say nothing of the businesses that offer the deal losing money.
- dragonwriter 12y ago
  Groupon is a service for connecting potentially interested users with meatspace promo code offers. While details of the mechanism of its operation -- mostly things that are easy to change -- might be suboptimal, I don't see why its inherently a bad thing for either businesses or consumers.
- 3am 12y ago
  It's marketing. Nobody is holding a gun to the business owners' heads. And there is a _very_ simple way to not get those emails. I've found a lot of interesting things (restaurants, various shops) that I wouldn't have found otherwise through GroupOn and peers. To each their own.
- pchristensen 12y ago
  I've noticed a strong correlation between vitriolic negativity and use of the spelling "GroupOn".
  - dominotw 12y ago
    Always.
- dominotw 12y ago
  Heard of 'unsubscribe'?
- rythie 12y ago
  GroupOn is trying to solve a two-sided problem. 1. Businesses need more customers 2. Customers want cheaper stuff I'm just not sure that linking the two solves either problem. You've got cheapskates taking up deals and never coming back.
gwern 12y ago
> Note: the graphs included in this article were sourced from Pershing Square Capital Management’s initial presentation on Herbalife, available here. Bit of a submarine there, eh? Anyway, this doesn't make a case against Herbalife. In fact, it suggests that their data is saying the opposite. Look at the part where they talk about popping: > Along with Japan and Israel, this same pattern shows up in Spain, France, Germany and several other countries that Herbalife has entered. Now look at their chart of # of countries against revenue. Herbalife is apparently up to almost 80 countries. Even back in the '90s, they were in 20-50 countries. Let's be generous and say that 'several other' is 5 (I don't have the patience to go through Ackman's propaganda), and note that this will be an exhaustive list since it's being assembled by people with literally hundreds of millions of dollars of incentive to make the picture look as ugly as possible; that's 10 countries that 'popped'. Out of 80. If the other 70 have not popped, that does not seem like Herbalife will have problems in the future. (There's also the problem that if each country can only be soaked for a short period before 'popping', revenue should not be regularly going up! It should be flattish as Herbalife desperately opens up ever more countries to replace disappearing revenue from the popping countries.)
- maxprogram 12y ago
  I've found a good rule of thumb in business is that you can only be successful in the long run if your value proposition is a win-win-win for you, your suppliers, and your customers. When a majority of your customers are being unknowingly screwed over as you reap a huge amount of unnecessary producer surplus, it's a losing proposition in the end. Companies like Herbalife can just do it on a scale where it takes a long time to fizzle out.
  - hessenwolf 12y ago
    MR CHIMP; the standard list of equity valuation tools. Management Quality: If you read the really long presentation linked to in the article, they seem competent, but sketchy. Retained Earnings: I have no idea. Competition: Direct selling shitty looking health shakes? The seem to be reasonably well established. History: It's been applying the same trick all along. Not much to go on here. Input Costs: Well under control. Good. Market Differences: They seem to be quite good at entering into different markets, so this goes well for them. It might be interesting if they could diversify their product lines. Product Quality: Problem here, as I don't see what distinguishes them other than sales talent. Quick PEST analysis: Polictical: Problem. It's could be described as a pyramid scheme. Economic: Economy seems to be picking up, and it does not strike me as a good that swings too much with the economy. However, they could have problems recruiting sales staff in a better economy. Social: Health food is a trend that I think will continue. Technological: Not really an issue.
berkay 12y ago
I do appreciate the analysis and the message of the post that the total sales can mask problems, however neither of the examples are failures. Herbalife may expand to other products instead of additional companies. Amway, probably the most successful implementer of Herbalife's multi level marketing scheme, is over 50 years old and worth $11+ billion. Even the fictitious waffle shop can adjust by selling other products. In short, creating a large distribution chain and reaching to many customers is tremendously valuable. The company can leverage that base and move to a sustainable model. If you're as successful as Groupon, you'll have plenty of runway to try different things. Even the ficticious waffel
jobu 12y ago
The author's analogy to fried waffles reminded me of a real-world example from 10 years ago: Krispy Kreme Doughnuts (http://www.nytimes.com/2004/11/23/business/23doughnut.html http://www.nytimes.com/2004/11/23/business/23doughnut.html) In the early 2000s I was living in Minnesota during the much-hyped arrival of Krispy Kreme. There were long lines at new stores and lots of doughnuts in the office every day. The hype prompted new franchises and an overabundance of doughnut shops, but unfortunately the demand dropped as the novelty wore off, and they ended up closing several stores and production facilities in the area. Obviously Krispy Kreme weathered its over-expansion and is doing well today. I think the question for Groupon and Herbalife is if they have a business plan (and the financial reserves) to make the shift from exponential growth to more measured success.
- malvosenior 12y ago
  Off topic, but also see gourmet popcorn in the 80s.
- Einstalbert 12y ago
  There is actually a local chain in Southern California called Bruxie that sells waffles after failing to impress high-end restaurants with their product. It is very popular and placed strategically around hip places, e.g. colleges. I was tied heavily with its inception and I know just how unsustainable the owner wants it to be. At this point, he only makes money by opening stores. He fully intends to Krispie Kreme his way through the state or country, if he can, and then let it collapse. It happened to KK, it happened to ToGos, it'll happen again.
  - kevinwang 12y ago
    Interesting... I always thought Bruxie was a pretty popular chain. Why do you think the growth is unsustainable? Are the amount of customers decreasing at each existing chain?
- dredmorbius 12y ago
  Food-chain fads are pretty common. Some persist (McDonalds), some muddle along (TCBY), some collapse spectacularly, such as Boston Market (though I find it's still going). The similarities with tech startups exist, including overambitious growth plans.
nslocum 12y ago
Turntable suffered a similar fate. Fred Wilson recently stated as much. It had high user turnover masked by a an even faster growing user base. At least until the potential user base dried up. http://avc.com/2014/04/the-business-insider-interview/ http://avc.com/2014/04/the-business-insider-interview/
programminggeek 12y ago
Another great example: Blackberry. They did the emerging markets growth strategy and it worked to help juice their numbers for a few years until Android and iOS totally destroyed all but their core customer base. The real danger in this strategy is not that it grows an unsustainable business, just that the sustainable portion is much smaller than the peak and if you forecast up and to the right growth forever, it eventually doesn't happen and you have budget shortfalls and layoffs. Hyper growth is exciting and gets you headlines, but sustainable, steady growth is probably a happier long term situation for moth businesses.
- ams6110 12y ago
  I don't know if Blackberry is quite the same. They were more than a fad or a novelty. Blackberry was the first mobile device that really solved problems for business users: seamless integration with office email and documents (caveat, I have never owned one, but that's my observation).
  - ssharp 12y ago
    You're right. Blackberry wasn't really a fad of novelty. I remember them starting to get really popular around 2004. They were the only device that made mobile email really simple by not overloading the phone with other stuff and putting the focus of the phone connectivity on email. My first smartphone was a Palm Treo and it didn't take me very long to switch to a Blackberry. It's hard to imagine if your only experience with smart phones is with iOS and Android devices, but from 2004 until the iPhone in 2007 (and really, the iPhone 3G in 2008), Blackberry was the industry standard for smart phones. Even after the iPhone was released, it still took a few years before people generally accepted touchscreen keyboards. If you look at the early responses to the iPhone, you'll see that was one area where competitors tried to attack -- Palm with their Pre that had both touch screen and a slide out keyboard, and the very ill-advised Blackberry Storm that had a touchscreen you could press in. And actually, there are still loyal holdover users from Blackberry's prime days who still swear by the Blackberry for it's ability to handle mobile email. They all realize Blackberry's are inferior to iOS and Android devices but the Blackberry's are still what they know and still fit well for what they want to do.
callmeed 12y ago
Interesting to see a YC company pick on other YC people (LikeALittle and Andrew Mason), and I don't mean that in a bad way.
rjf1990 12y ago
For startups, growth is important. Yet everyone downplays the true indicator of a company's value: cash flow. It makes sense, given that VCs are often betting on big buyouts. This is the "castle in the air" theory. At some point, I think the pendulum will shift into investing in companies, that while they may not have cashflow here and now, at least have the potential to generate cash.
speeder 12y ago
Yet the numbers are impressive. My startup is struggling to have profit (we have revenue, but no profits yet, although we have growth of revenue), and many, many, many times we felt tempted to pull that sort of stunt (pyramids, freemium abuse, shady ads, etc...)
arbuge 12y ago
The Herbalife graphs seem to indicate that in the countries they enter there definitely is an initial temporary pop but business doesn't go down all the way to zero after that - it seems to settle down at a residual steady state. That could be sustainable if the 2 graphs provided (Israel, Japan) are representative of all the countries they enter. After they enter all available markets, their revenue will settle down to the sum total of all those steady states.
tudorconstantin 12y ago
I would love to own a company that reaches 6 billions in revenue in an "unsustainable" manner, as long as that doesn't cost me more than the profits it produced
blueskin_ 12y ago
Not heard of Herbalife before, but there are several other pyramid scheme companies in the UK. For example, Kleeneze (https://en.wikipedia.org/wiki/Kleeneze https://en.wikipedia.org/wiki/Kleeneze).
netcan 12y ago
I think Groupon is a slightly different case to Herbalife. Herbalife had/has a pretty substantial pyramid scheme component to it. Groupon, IMO was a trend. Trends have a ballistic trajectory. The reports of hard selling and unhappy customers confuse the issue, but I think the heart of the problem was that Groupon was popular for a while and now it's less popular. Our default business systems don't know how to deal with that kind of a thing. A company with a 2 year half life. All our financial systems and our valuation of companies are built around companies that are lang lived, practically immortal (in the sense that impacts net present value). But, not everything is like that. A film or a computer game is often produced by a firm that forms and the disbands to create a single thing. It has all the things a normal company has: employees (including some highly paid stars), investors, assets, liabilities, etc. It only exists for a short time. Crocs was like that too. A product that made a splash, sold a lot of brightly colored shoes at a great margin and then contracted. I think the problem with Groupon wasn't Groupon. The problem was the whole system trying to treat it like Strabucks when it was more like Star Wars. Star Wars wasn't a failure because it stopped making money.. ..wait. Bad example. Exceptions prove the rule. Financially, a company is the NPV of all its future cash flows. In practice, the system assumes those cash flows will continue steadily forever, growing if the company is healthy. If they try to swallow a company that will exist for just 4, they choke. I think we need to be on the lookout for things like this. The world is getting fast paced. Maybe we need to be able to deal with 4 year companies.
jaybong 12y ago
NPR's Planet Money had a great story on this: http://www.npr.org/blogs/money/2013/01/18/169719749/episode-431-a-billion-dollar-bet-against-weight-loss-shakes http://www.npr.org/blogs/money/2013/01/18/169719749/episode-... Agree though that there is a difference between a pyramid scheme (Herbalife imo) and a fad (Groupon) though they have similar growth trajectories. There are lots of startups that could arguably be considered fads e.g. snapchat, it's yet to be seen whether or not it's a novelty or solving a basic human interaction problem as Facebook did.
hownottowrite 12y ago
Not judging Herbalife, but some data sources are less reliable than others. (Pershing Square = Bill Ackerman = billion+ short on Hebalife) http://www.nytimes.com/2014/03/10/business/staking-1-billion-that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html http://www.nytimes.com/2014/03/10/business/staking-1-billion...
- 6cxs2hd6 12y ago
  Yeah this was recently in the news in Massachusetts. It appears he persuaded a Mass. Senator to ask for investigations, in order to hurt the stock price and support Ackerman's short gamble: > In Washington, Mr. Ackman’s efforts bore fruit on Jan. 23, when Mr. Markey’s office, which Mr. Ackman had lobbied himself and which had been provided with detailed information about Herbalife by Mr. Ackman’s team, sent letters to the S.E.C. and F.T.C., calling for investigations of the company. A little more than a half-hour after the stock began trading that day its value fell by 14 percent. You could say that Ackerman sincerely believes the company is bad and is pursuing this for the greater good. The $1 billion is just putting his money where his mouth is. And his mouth just happens to be near a Senator's ear....
  - hownottowrite 12y ago
    Yes, he sure seems like a stand-up guy: http://www.cnbc.com/id/100953220 http://www.cnbc.com/id/100953220 "Ackman was the primary engineer and architect of recruiting Ron Johnson to the company, and he and Ron Johnson pulled off this strategy that has fractured the company and ruined the lives of thousands of J.C. Penney employees and fractured shareholder value," Howard Schultz, CEO and Founder of Starbucks and JCP Board Member
enginerd 12y ago
I see a significance in that Herbalife, Groupon, and LikeAlittle seem to be selling sales vs. other businesses using salesmanship as a medium. It's a fine line, but a distinct one nonetheless. Does anyone have examples of similar businesses to the aforementioned? Curious how much of a trend this actually is.

240 points by matm 12y ago

stoev 12y ago

This reminds me of FBs ad business - they keep introducing new ad spaces, expanding their offering to more platforms, introducing logout ads, video ads, scrollable install ads, an ad platform, etc. With all of that they are just masking the fact that a large portion of their advertisers stop using them and that most of their products start losing popularity relatively quickly.

jonnathanson 12y ago
"...a large portion of their advertisers stop using them and that most of their products start losing popularity relatively quickly." Facebook recently posted a 72% year-over-year gain in Q1 revenue, is stealing share of the online ad market from Google at a slow but increasing rate, and is growing mobile ad revenue by 30% year-over-year.[1] It's not doing that just by introducing new ad space and new ad formats. It's not doing that by bleeding out existing advertisers. As much as we might not want to admit it, Facebook is becoming a pretty compelling advertising platform. This was not always the case. But the company's ad platform is maturing significantly. It's got a long ways to go, and it's not perfect by any means. But there's a lot of potential yet to be tapped, and by all accounts, the company is making progress in tapping it. News of Facebook's supposedly declining popularity is also premature and exaggerated. [1]http://online.wsj.com/news/articles/SB10001424052702303380004579519623221180410?mg=reno64-wsj http://online.wsj.com/news/articles/SB1000142405270230338000...
- stoev 12y ago
  "It's not doing that just by introducing new ad space" Maybe, but just a bit over a year ago they used to have two ads on the right hand side of their desktop version. Now they have seven ads in the same space. They also used to have one mobile ad in their news feed. Now they are sideways scrollable (I think there are five in total). The fanpages' organic posts are reaching fewer and fewer people in an attempt to make the owners pay for as many promoted posts as possible. A point I noticed in their last earnings report reminded me of the reasoning in the OP's post: one of the signals of decelerating growth is the loss of popularity of early products. Their desktop ad business accounts for less than half of their revenue nowadays, despite the fact that there is a lot more ad space available there.
  - mbesto 12y ago
    > OP's post: one of the signals of decelerating growth is the loss of popularity of early products. Just because a blog says something, doesn't automatically make it true.
- josho 12y ago
  Be careful here. Facebook is growing ad revenue, but I haven't read anything yet that suggests users are interacting with the ads. After all, if the ads don't get clicks then eventually the advertisers will leave. Your article doesn't speak to the efficacy of Facebook ads, does anyone have recent analysis on if the maturing Facebook ad platform is any better for getting clicks than their early efforts?
  - Gustomaximus 12y ago
    Don't judge a ad platform by it's ability to get clicks. What's important is it's ability to drive business for companies. E.g. I'll happily pay $100 per click for if traffic has 50% conversion for a product that has a 1 year profit of $300. If conversion is 0.1% like some apps I'll still buy traffic but bid $0.20 for clicks. Even if the app has 10 times the clicks they will not earn as much as FB. Linking the right ads to the right people is the key for value/profit.

sfghaghhldg 12y ago

Yet, they seem to have lots of users and customers....

paul_f 12y ago

The article clearly makes the case that tracking churn is critical to analyzing the overall health of a business. And the reason why churn is so critical for cash-strapped startups is that new customers are so expensive. In many cases it is an order of magnitude more expensive to sell to new customers than existing customers.

IvyMike 12y ago

A little off-topic, but Rob Cockerham's investigation into Herbalife is one of the best pieces of citizen journalism I've seen. http://www.cockeyed.com/workfromhome/workfromhome.html http://www.cockeyed.com/workfromhome/workfromhome.html

MartinCron 12y ago
That was from 2002. Pretty heartbreaking to see that this has been going on for so long.
- carrotleads 12y ago
  Well a new one was recently started promising to give ordinary folks aka Entrepreneurs, Facebook and Apple like "exits". Its imaginatively named "neurs.com" . After some research I had put my comments under this review of the neurs setup and how it seems to work. http://avoidonlinemarketingscams.com/what-is-neurs-is-it-the-next-big-money-maker-for-affiliates http://avoidonlinemarketingscams.com/what-is-neurs-is-it-the... Now I play in the same space as my USP is to connect warm leads to companies via incentives. Looking at their videos they claim to connect Entrepreneurs with providers( leads in my world). So I did my research and found they have atleast a few 100k's of pageviews in the past few months. I am trying to decode their marketing tactics to figure out the do's and don'ts. Would like to hear what others think about it.
phpnode 12y ago
that was great, but funny that literally every adsense ad on those articles was for herbalife products.

stu_k 12y ago

In the retail space investors look at same store sales[0] (or comps) to see if a company's growth is coming existing stores, or just from opening new ones. [0] http://en.wikipedia.org/wiki/Same_store_sales http://en.wikipedia.org/wiki/Same_store_sales

tapp 12y ago

"One of the most important characteristics of a successful business is that it's growing." I hope this doesn't come across as nitpicking, but the lead sentence of the article is incorrect. It should be: One of the most important characteristics of a successful STARTUP is that it's growing. Businesses which successfully serve their owners, employees, customers and larger surrounding community, can easily be steady-state. I realize HN is startup-focused, but I think in the interest of productive conversation it's important to make the distinction and use precise terms.

raviparikh 12y ago
I actually mentioned this initially but trimmed it to be more concise. You're right though, I added it back. Not every business is a growth business.
- scottyg66 12y ago
  I actually thought EVERY business is a growth business. Isn't that usually the number 1 driver, even if you have a steady stream already?
  - johntb86 12y ago
    Driver of what? Maybe a dry-cleaner or cafe is happy with the size they are, because expanding would involve turning the business into a chain or something else the owner doesn't want.
  - adventured 12y ago
    Most older, local, small businesses in small to medium markets in the US will never be growth businesses. They're treading water businesses after the market is saturated (some can be very profitable of course). Being technical about it, a business may keep up with inflation by raising prices, and show nominal growth. Look at the revenue of a liquor store, insurance business, or tv / radio station, in a healthy but smaller settled market. No market growth, little to no business growth, but the businesses aren't likely to disappear either. This is a very common scenario, there are millions of US businesses in this situation.

mbesto 12y ago

I love talking about business models (I run a bootcamp in SF helping people to visualize them), so I figured I'd chime in here... >Eventually they’re going to run out of countries to enter, and that will be the end of Herbalife if they don’t figure out a more long-term, sustainable business model. This statement is pure speculation. Why hasn't any of the same analysis been done on Groupon? I'm not sure why the article conflated the two stories of Groupon and Herbalife, when their data sets and underlying assumptions are clearly very different. > You should be able to demonstrate sustained growth in a single market segment, whether it's a geographic region, a certain type of customer, or something else. Isn't this why diversification exists? Why companies like GE, P&G, and now Google, have a massive portfolios of companies, as opposed to one single product that drives all growth? I'm having a hard time understanding what the takeaway is here...

powera 12y ago

I think it's worth noting this article in any discussion about Herbalife: http://www.nytimes.com/2014/03/10/business/staking-1-billion-that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html?_r=0 http://www.nytimes.com/2014/03/10/business/staking-1-billion... (summary: lots of people have lots of money invested in whether Herbalife is a pyramid scheme or not, and are lobbying hard on that.)

digitalengineer 12y ago
Exactly. I'm no Herbalife fan but this reads like a 'let's write down the stock' article.

codeboost 12y ago

Bill Ackman was wrong about Herbalife. According to wikipedia, he lost between $400 million to $500 million by shorting Herbalife last year. What that means is that other investors disagree with his (and this article's) analysis of Herbalife.

tokenadult 12y ago
Ackman seems to think his investment strategy will work out just fine, based on more recent reporting: http://www.cnbc.com/id/101606593 http://www.cnbc.com/id/101606593 http://abcnews.go.com/Blotter/herbalife-ackman-respond-nightline-undercover-report/story?id=23457777 http://abcnews.go.com/Blotter/herbalife-ackman-respond-night... (I am a Wikipedian, and in general I don't trust Wikipedia for current news AT ALL, and especially not for current news that touches on health-related businesses.)
maxprogram 12y ago
Unrealized losses over a short time period have nothing to do with being "right" or "wrong" about a stock investment. Fluctuations of investor expectations (i.e. stock price movements) have especially nothing to do with this article's analysis. It presents data and comes to a pretty reasonable conclusion from it. Whether you wan't to call it a "pyramid scheme" or not is semantics, the conclusion speaks for itself. Short-term investors can make money betting in the opposite direction of long-term investors who will also eventually make money. Herbalife can be a pyramid scheme and short-term investors can make money as the stock price rises -- the 2 aren't mutually exclusive.
gfodor 12y ago
Herbalife just killed their dividend. This story is still being written. Ackman is a douche but he might end up getting the last laugh.
mrschwabe 12y ago
No. Bill Ackman was right. Herbalife is a terrible business. For reasons outlined in the OP link, it has seen growth - but is ultimately doomed. Specifically: when there are no new markets to enter; when every dupe has been duped. Though, unfortunately, before it crashes entirely - those handful at the top will have their next big sham ready to seed & perpetuate into the world; and a significant number of the dupes who were duped before will be duped again. And hence, the endless, relentless cycle of MLM. Despicable.

jacquesm 12y ago

One way to get unsustainable growth is by spending more on marketing than you are making back on your customer over their lifetime. Given a large enough investment this could easily get you from series 'A' to the next round with spectacular figures showing really nice graphs. It can be quite a bit of work to figure out where the flaws are, and founders are not always aware of issues like these.

ape4 12y ago

GroupOn should die. I can think of nothing I would want less than a daily mail with some "deal". To say nothing of the businesses that offer the deal losing money.

dragonwriter 12y ago
Groupon is a service for connecting potentially interested users with meatspace promo code offers. While details of the mechanism of its operation -- mostly things that are easy to change -- might be suboptimal, I don't see why its inherently a bad thing for either businesses or consumers.
3am 12y ago
It's marketing. Nobody is holding a gun to the business owners' heads. And there is a _very_ simple way to not get those emails. I've found a lot of interesting things (restaurants, various shops) that I wouldn't have found otherwise through GroupOn and peers. To each their own.
pchristensen 12y ago
I've noticed a strong correlation between vitriolic negativity and use of the spelling "GroupOn".
- dominotw 12y ago
  Always.
dominotw 12y ago
Heard of 'unsubscribe'?
rythie 12y ago
GroupOn is trying to solve a two-sided problem. 1. Businesses need more customers 2. Customers want cheaper stuff I'm just not sure that linking the two solves either problem. You've got cheapskates taking up deals and never coming back.

gwern 12y ago

> Note: the graphs included in this article were sourced from Pershing Square Capital Management’s initial presentation on Herbalife, available here. Bit of a submarine there, eh? Anyway, this doesn't make a case against Herbalife. In fact, it suggests that their data is saying the opposite. Look at the part where they talk about popping: > Along with Japan and Israel, this same pattern shows up in Spain, France, Germany and several other countries that Herbalife has entered. Now look at their chart of # of countries against revenue. Herbalife is apparently up to almost 80 countries. Even back in the '90s, they were in 20-50 countries. Let's be generous and say that 'several other' is 5 (I don't have the patience to go through Ackman's propaganda), and note that this will be an exhaustive list since it's being assembled by people with literally hundreds of millions of dollars of incentive to make the picture look as ugly as possible; that's 10 countries that 'popped'. Out of 80. If the other 70 have not popped, that does not seem like Herbalife will have problems in the future. (There's also the problem that if each country can only be soaked for a short period before 'popping', revenue should not be regularly going up! It should be flattish as Herbalife desperately opens up ever more countries to replace disappearing revenue from the popping countries.)

maxprogram 12y ago
I've found a good rule of thumb in business is that you can only be successful in the long run if your value proposition is a win-win-win for you, your suppliers, and your customers. When a majority of your customers are being unknowingly screwed over as you reap a huge amount of unnecessary producer surplus, it's a losing proposition in the end. Companies like Herbalife can just do it on a scale where it takes a long time to fizzle out.
- hessenwolf 12y ago
  MR CHIMP; the standard list of equity valuation tools. Management Quality: If you read the really long presentation linked to in the article, they seem competent, but sketchy. Retained Earnings: I have no idea. Competition: Direct selling shitty looking health shakes? The seem to be reasonably well established. History: It's been applying the same trick all along. Not much to go on here. Input Costs: Well under control. Good. Market Differences: They seem to be quite good at entering into different markets, so this goes well for them. It might be interesting if they could diversify their product lines. Product Quality: Problem here, as I don't see what distinguishes them other than sales talent. Quick PEST analysis: Polictical: Problem. It's could be described as a pyramid scheme. Economic: Economy seems to be picking up, and it does not strike me as a good that swings too much with the economy. However, they could have problems recruiting sales staff in a better economy. Social: Health food is a trend that I think will continue. Technological: Not really an issue.

berkay 12y ago

I do appreciate the analysis and the message of the post that the total sales can mask problems, however neither of the examples are failures. Herbalife may expand to other products instead of additional companies. Amway, probably the most successful implementer of Herbalife's multi level marketing scheme, is over 50 years old and worth $11+ billion. Even the fictitious waffle shop can adjust by selling other products. In short, creating a large distribution chain and reaching to many customers is tremendously valuable. The company can leverage that base and move to a sustainable model. If you're as successful as Groupon, you'll have plenty of runway to try different things. Even the ficticious waffel

jobu 12y ago

The author's analogy to fried waffles reminded me of a real-world example from 10 years ago: Krispy Kreme Doughnuts (http://www.nytimes.com/2004/11/23/business/23doughnut.html http://www.nytimes.com/2004/11/23/business/23doughnut.html) In the early 2000s I was living in Minnesota during the much-hyped arrival of Krispy Kreme. There were long lines at new stores and lots of doughnuts in the office every day. The hype prompted new franchises and an overabundance of doughnut shops, but unfortunately the demand dropped as the novelty wore off, and they ended up closing several stores and production facilities in the area. Obviously Krispy Kreme weathered its over-expansion and is doing well today. I think the question for Groupon and Herbalife is if they have a business plan (and the financial reserves) to make the shift from exponential growth to more measured success.

malvosenior 12y ago
Off topic, but also see gourmet popcorn in the 80s.
Einstalbert 12y ago
There is actually a local chain in Southern California called Bruxie that sells waffles after failing to impress high-end restaurants with their product. It is very popular and placed strategically around hip places, e.g. colleges. I was tied heavily with its inception and I know just how unsustainable the owner wants it to be. At this point, he only makes money by opening stores. He fully intends to Krispie Kreme his way through the state or country, if he can, and then let it collapse. It happened to KK, it happened to ToGos, it'll happen again.
- kevinwang 12y ago
  Interesting... I always thought Bruxie was a pretty popular chain. Why do you think the growth is unsustainable? Are the amount of customers decreasing at each existing chain?
dredmorbius 12y ago
Food-chain fads are pretty common. Some persist (McDonalds), some muddle along (TCBY), some collapse spectacularly, such as Boston Market (though I find it's still going). The similarities with tech startups exist, including overambitious growth plans.

nslocum 12y ago

Turntable suffered a similar fate. Fred Wilson recently stated as much. It had high user turnover masked by a an even faster growing user base. At least until the potential user base dried up. http://avc.com/2014/04/the-business-insider-interview/ http://avc.com/2014/04/the-business-insider-interview/

programminggeek 12y ago

Another great example: Blackberry. They did the emerging markets growth strategy and it worked to help juice their numbers for a few years until Android and iOS totally destroyed all but their core customer base. The real danger in this strategy is not that it grows an unsustainable business, just that the sustainable portion is much smaller than the peak and if you forecast up and to the right growth forever, it eventually doesn't happen and you have budget shortfalls and layoffs. Hyper growth is exciting and gets you headlines, but sustainable, steady growth is probably a happier long term situation for moth businesses.

ams6110 12y ago
I don't know if Blackberry is quite the same. They were more than a fad or a novelty. Blackberry was the first mobile device that really solved problems for business users: seamless integration with office email and documents (caveat, I have never owned one, but that's my observation).
- ssharp 12y ago
  You're right. Blackberry wasn't really a fad of novelty. I remember them starting to get really popular around 2004. They were the only device that made mobile email really simple by not overloading the phone with other stuff and putting the focus of the phone connectivity on email. My first smartphone was a Palm Treo and it didn't take me very long to switch to a Blackberry. It's hard to imagine if your only experience with smart phones is with iOS and Android devices, but from 2004 until the iPhone in 2007 (and really, the iPhone 3G in 2008), Blackberry was the industry standard for smart phones. Even after the iPhone was released, it still took a few years before people generally accepted touchscreen keyboards. If you look at the early responses to the iPhone, you'll see that was one area where competitors tried to attack -- Palm with their Pre that had both touch screen and a slide out keyboard, and the very ill-advised Blackberry Storm that had a touchscreen you could press in. And actually, there are still loyal holdover users from Blackberry's prime days who still swear by the Blackberry for it's ability to handle mobile email. They all realize Blackberry's are inferior to iOS and Android devices but the Blackberry's are still what they know and still fit well for what they want to do.

callmeed 12y ago

Interesting to see a YC company pick on other YC people (LikeALittle and Andrew Mason), and I don't mean that in a bad way.

rjf1990 12y ago

For startups, growth is important. Yet everyone downplays the true indicator of a company's value: cash flow. It makes sense, given that VCs are often betting on big buyouts. This is the "castle in the air" theory. At some point, I think the pendulum will shift into investing in companies, that while they may not have cashflow here and now, at least have the potential to generate cash.

speeder 12y ago

Yet the numbers are impressive. My startup is struggling to have profit (we have revenue, but no profits yet, although we have growth of revenue), and many, many, many times we felt tempted to pull that sort of stunt (pyramids, freemium abuse, shady ads, etc...)

arbuge 12y ago

The Herbalife graphs seem to indicate that in the countries they enter there definitely is an initial temporary pop but business doesn't go down all the way to zero after that - it seems to settle down at a residual steady state. That could be sustainable if the 2 graphs provided (Israel, Japan) are representative of all the countries they enter. After they enter all available markets, their revenue will settle down to the sum total of all those steady states.

tudorconstantin 12y ago

I would love to own a company that reaches 6 billions in revenue in an "unsustainable" manner, as long as that doesn't cost me more than the profits it produced

blueskin_ 12y ago

Not heard of Herbalife before, but there are several other pyramid scheme companies in the UK. For example, Kleeneze (https://en.wikipedia.org/wiki/Kleeneze https://en.wikipedia.org/wiki/Kleeneze).

netcan 12y ago

I think Groupon is a slightly different case to Herbalife. Herbalife had/has a pretty substantial pyramid scheme component to it. Groupon, IMO was a trend. Trends have a ballistic trajectory. The reports of hard selling and unhappy customers confuse the issue, but I think the heart of the problem was that Groupon was popular for a while and now it's less popular. Our default business systems don't know how to deal with that kind of a thing. A company with a 2 year half life. All our financial systems and our valuation of companies are built around companies that are lang lived, practically immortal (in the sense that impacts net present value). But, not everything is like that. A film or a computer game is often produced by a firm that forms and the disbands to create a single thing. It has all the things a normal company has: employees (including some highly paid stars), investors, assets, liabilities, etc. It only exists for a short time. Crocs was like that too. A product that made a splash, sold a lot of brightly colored shoes at a great margin and then contracted. I think the problem with Groupon wasn't Groupon. The problem was the whole system trying to treat it like Strabucks when it was more like Star Wars. Star Wars wasn't a failure because it stopped making money.. ..wait. Bad example. Exceptions prove the rule. Financially, a company is the NPV of all its future cash flows. In practice, the system assumes those cash flows will continue steadily forever, growing if the company is healthy. If they try to swallow a company that will exist for just 4, they choke. I think we need to be on the lookout for things like this. The world is getting fast paced. Maybe we need to be able to deal with 4 year companies.

jaybong 12y ago

NPR's Planet Money had a great story on this: http://www.npr.org/blogs/money/2013/01/18/169719749/episode-431-a-billion-dollar-bet-against-weight-loss-shakes http://www.npr.org/blogs/money/2013/01/18/169719749/episode-... Agree though that there is a difference between a pyramid scheme (Herbalife imo) and a fad (Groupon) though they have similar growth trajectories. There are lots of startups that could arguably be considered fads e.g. snapchat, it's yet to be seen whether or not it's a novelty or solving a basic human interaction problem as Facebook did.

hownottowrite 12y ago

Not judging Herbalife, but some data sources are less reliable than others. (Pershing Square = Bill Ackerman = billion+ short on Hebalife) http://www.nytimes.com/2014/03/10/business/staking-1-billion-that-herbalife-will-fail-then-ackman-lobbying-to-bring-it-down.html http://www.nytimes.com/2014/03/10/business/staking-1-billion...

6cxs2hd6 12y ago
Yeah this was recently in the news in Massachusetts. It appears he persuaded a Mass. Senator to ask for investigations, in order to hurt the stock price and support Ackerman's short gamble: > In Washington, Mr. Ackman’s efforts bore fruit on Jan. 23, when Mr. Markey’s office, which Mr. Ackman had lobbied himself and which had been provided with detailed information about Herbalife by Mr. Ackman’s team, sent letters to the S.E.C. and F.T.C., calling for investigations of the company. A little more than a half-hour after the stock began trading that day its value fell by 14 percent. You could say that Ackerman sincerely believes the company is bad and is pursuing this for the greater good. The $1 billion is just putting his money where his mouth is. And his mouth just happens to be near a Senator's ear....
- hownottowrite 12y ago
  Yes, he sure seems like a stand-up guy: http://www.cnbc.com/id/100953220 http://www.cnbc.com/id/100953220 "Ackman was the primary engineer and architect of recruiting Ron Johnson to the company, and he and Ron Johnson pulled off this strategy that has fractured the company and ruined the lives of thousands of J.C. Penney employees and fractured shareholder value," Howard Schultz, CEO and Founder of Starbucks and JCP Board Member

enginerd 12y ago

I see a significance in that Herbalife, Groupon, and LikeAlittle seem to be selling sales vs. other businesses using salesmanship as a medium. It's a fine line, but a distinct one nonetheless. Does anyone have examples of similar businesses to the aforementioned? Curious how much of a trend this actually is.