For many people these days, “shopping” is synonymous with Amazon Prime. It’s hard to beat the discounted pricing and next-day or, in some cases, same-day delivery.
The platform’s sheer size, breadth and discounting power have made it the darling of millions of households, and the bane of brand managers, CFOs and traditional retailers in just about every industry.
Some people buy nearly everything they need via Amazon. That includes dietary supplements, and in many cases—much to the chagrin of practitioner-focused brands—products intended only for sale by health professionals.
Pro-only brands are based on a core set of propositions: 1) the products are made with the highest quality raw materials under exacting pharma-grade standards; 2) they contain higher levels of active ingredients and/or unique combinations not available in big box brands; 3) they are more consistent, reliable and effective than those available in retail; and 4) optimal outcomes occur when product use is guided by trained and licensed health professionals.
Combined, these premises justify the premium pricing of pro-only products, which are often 2-4 times more expensive than big box brands. Sale of these products, and guidance in their use, are major factors in the economic equations for many holistic and functional medicine practitioners.
Online retailing, with its fat discounts, obliteration of exclusivity and emphasis on easy access, threatens the very basis of the pro-brand proposition.
Consequently, many companies in the channel have gone to great lengths to combat direct-to-consumer (DTC) online resale. And as a whole, the channel has presented a remarkably unified front in condemning it. Until now.
In April, Designs for Health (DFH)—one of the top-10 brands in the space—announced a program authorizing the sale of DFH products directly to Amazon customers, with special discount codes tagged to their practitioners, enabling the practitioners to continue earning commissions on the sales.
Called “DFH Select,” the program will also provide practitioner referrals to Amazon shoppers who seek DFH products but do not currently have a referring practitioner.
If You Can’t Beat ‘Em…
“Amazon is the 300-pound gorilla, and we recognize that,” said Jonathan Lizotte, DFH’s founder and CEO. “It’s 2016, and Amazon is a reality we can’t ignore. People like the convenience. Ultimately, we still prefer that patients purchase our products in doctors’ offices or on our doctors’ websites. Amazon isn’t our first choice for these patients. But we know people are going there anyway.”
The launch of DFH Select at the Institute for Functional Medicine’s annual conference sent a shockwave through the channel, in large part because, up until now, Mr. Lizotte has been one of the most outspoken critics of online resale.
DFH was among the first companies to employ 2-D barcoding in an effort to trace the labyrinthine paths by which their pro-only formulas end up on sites like Amazon and eBay. The company has been vigorous in its efforts to shut down unauthorized resellers, and to block practitioners who order large volumes of product on their behalf.
Why the sudden change of tack? “The number one thing that changed our mind was realizing there was a way to do this and protect the practitioner’s interest at the same time. That’s paramount for us. We found a way to not only protect their interest, but to enhance it in a way that’s never been possible before. And the patient gains the freedom to buy these products wherever they want to buy them.”
Controlling the Corrosion
Mr. Lizotte, like many executives in the channel, agreed that uncontrolled and unauthorized online resale is corrosive to the foundation of the channel. It cuts practitioners out of the loop; makes it difficult for brands to control the handling of their products; exposes consumers to outdated, poorly stored, or in some cases counterfeit products; and diminishes practitioner incentive to dispense by undercutting the office-based prices.
He said there are really only three ways a pro-channel brand can respond to the Amazon threat: 1) attempt to restrict all sales to practitioner offices, practitioner websites or brand websites; 2) work with Amazon retail management companies like NetRush that police the Amazon platform and squelch players not abiding by brand pricing guidelines; or 3) figure out a way to be the dominant or ideally the exclusive Amazon dealer of one’s own formulas.
It was DFH’s past efforts to keep its products offline that led Mr. Lizotte and his team to the current strategy.
“Is it possible to keep your products off Amazon and the other discounters 99% of the time? Yes, absolutely. There are companies that have done that. But the reality is, that’s not what the patients want. That’s 20th century thinking. In 1995, that might have been a good strategy, but today it’s not.”
All-too-often, he said, people get recommendations from their doctors and then go online to see if they can find the products. “We know this is happening because we track peoples’ searches for our products, and those of our competitors.”
If they can’t find what their doctors recommend, they simply buy something else based on what the reseller suggests. Or they may purchase the doctor-recommended product but end up with outdated, poorly managed or returned stock—which, in the case of things like probiotics or omega-3 fatty acids, can make a big difference in efficacy.
Further, a purchase made outside a practitioner’s office or website means the practitioner loses the commission revenue.
Mr. Lizotte said his company wants to ensure that if people are seeking DFH products on Amazon, that they’re able to buy them from DFH, and that DFH-enrolled practitioners are part of the picture.
DFH Select is a membership program. Practitioners pay $30 per month to participate. In return, the company provides them with a customizable web portal for their practices, as well as with practice-specific promotional codes for their patients to use when they purchase DFH products via Amazon.
DFH Select provides practitioners with a 50% commission on sales, and free shipping on these orders.
In essence, the company is trying to give patients optimal flexibility; they can now buy DFH products in the office, via the practitioner’s own website, or via Amazon. In all three environments, the practitioner stays connected.
Assuming Amazon shoppers will use the special codes, Mr. Lizotte believes DFH Select will strengthen rather than erode the practitioner-patient relationship.
Membership in DFH Select also ensures that participating practitioners are included in the company’s referral network to which it will steer online seekers who do not currently have a holistic practitioner.
Favorable Practitioner Response
Marketing Director Paul Vitiello said response to DFH Select at IFM was strong and positive. Based on a single e-mail announcement, the company has amassed a list of nearly 1,000 practitioners who want to join once the program is fully operational. Currently, the company has about 100 practices testing the system in beta mode.
Though DFH is clearly breaking ranks with other companies in the space, the move onto Amazon may not be as much of a directional shift as it initially seems.
Mr. Lizotte said DFH remains determined to squash unauthorized online discounters, and will continue to play the endless game of whack-a-mole with DTC resellers. The company has put some teeth into its “RxDFHend” practitioner wholesaler agreement. It now requires DocuSign electronic signatures, making it a binding contract, and it details the fact that breach of the agreement carries potential financial damages.
But he contended that if DFH can ensure that practitioners stay connected to the process, there is no point in denying consumers the convenience of obtaining DFH products via the Amazon’s no-fuss, hyper-convenient fast-track.
Competitors Remain Doubtful
Executives at other practitioner-focused companies remain doubtful that Amazon is an appropriate place for pro-line products.
Aaron Bartz, president of Ortho Molecular Products, believes that practitioner-focused brands belong in practitioners’ offices, plain and simple, and not on mass-market online retail. He holds that any redirection of these products into the Amazon space will inevitably dilute the practitioner-patient relationship and erode the value of a practitioner brand.
Mr. Bartz emphasized that his company, which is also among the top 10 pro brands, is in no rush to follow DFH into the murky waters of Amazon.
Neither is Brian Blackburn, CEO of Xymogen. He’s been opposed to online resale since the late 1990s, and has yet to be convinced that it can be done properly.
“Once you start allowing Amazon to carry the products you lose control of your distribution. These are not shoes, or household appliances. These are products affecting peoples’ health. With Amazon, there’s no control of the supply chain or storage,” Mr. Blackburn said.
“From the perspective of quality of formulas, the Internet sales can be a major issue, especially for probiotics, which need to be refrigerated,” he continued. “Amazon doesn’t guarantee temperature control. Overheated products, expired products, possibly counterfeit products … there’s no control of supply chain, no accountability. These are all realities that could pose a health risk for patients buying formulas that are not what they’re supposed to be.”
Xymogen has made substantial investments of money, time and personnel to keep its products off Amazon. “We’ve bought over $1 million of our own products online. We get back expired products, labels removed, QR codes removed. They cut out the codes. They tamper with the labels.”
Using a sophisticated tracking system, the company can identify the practitioners who initially purchased Xymogen products and block future sales.
Xymogen has also taken legal action against serial violators. Citing the Lanham Act, which protects companies against trademark dilution, as well as “tortious interference,” a legal term prohibiting wrongful third-party interference with a contractual or business relationship, Xymogen went after Total Health Discount Vitamins, a large online reseller that was marketing Xymogen products.
“Inducing someone to violate a binding agreement is a crime,” said Mr. Blackburn. That, in essence, is what unauthorized resellers are doing when they encourage practitioners to buy large volumes of pro-only products that will knowingly be resold direct-to-consumer.
Many practitioners do not realize that their wholesale agreements with companies like Xymogen, DFH and Ortho Molecular Products are, in fact, binding contracts. Once warned, most practitioners comply and quickly desist in ordering for the resellers. The large-volume resellers, however, often need more than just a gentle warning.
Mr. Blackburn said that, by and large, Xymogen has been successful in keeping its products off Amazon. As part of its “e-Pedigree Verified (ePV)” program, the company publishes a monthly report detailing the total number of Xymogen products found on Amazon, eBay and other online platforms, compared with other major competitors in the space.
For example, in the Jan. 8 report, the company claimed there were no Xymogen products to be found on Amazon, compared with 566 from Thorne Research, 980 from DFH, 379 from Ortho Molecular and 836 from Integrative Therapeutics.
Mr. Blackburn said this strict “No Internet Resale” policy is meant to assure practitioners that if they make the commitment to dispense Xymogen, their patients will not be able to get the products at lower prices elsewhere.
Unlike DFH’s Mr. Lizotte, Mr. Blackburn sees no reason to put his products on Amazon.
“We have an e-store that practitioners can show patients how to use, so they don’t have to come in for a visit just to get refills. It’s just as convenient as Amazon, but we control the products from start to finish. The product will be fresh, within 30-60 days of manufacture, unlike the stuff on Amazon.”
The e-store requires patients to enter a unique practitioner ID code in order to place orders, ensuring that the sale stays within the practitioner context.
Mr. Blackburn said Xymogen’s conspicuous absence on Amazon is not hurting the company. “Our sales are hitting record levels, and our practitioners tell us that the patients are saying, “I can’t find this stuff anywhere.” This gives the docs opportunity to explain that it’s pro-only, to protect quality and safety, and it creates a way for practitioners to differentiate their practices.”
In many ways, the contention over online sales of pro-grade products is a classic struggle between premium exclusivity and convenient access. The Internet drives business toward the cheapest pricing and the widest accessibility. That’s the exact antithesis of what practitioner channel companies have tried to create. The controversy is likely to rage on for years to come.
DFH’s move is based on a trend the company sees as inevitable. It’s somewhat analogous to the challenge faced by the music industry in the late 1990s, when digital file-sharing became fast and convenient.
Initially, record labels tried to preserve dwindling CD sales by fighting online music distribution. It may seem unbelievable now, but there was a time when major labels simply refused to license their music to the then-new iTunes store.
They soon realized that if they wanted their artists heard by the burgeoning legions of iPod users—the most enthusiastic of music fans—they needed to relent. Today, there are few labels or artists who are not making their music available on iTunes.
It’s not a perfect analogy because there’s no such thing as an out-of-date or rancid song, and even if there is, it’s unlikely to trigger an adverse reaction. But it does underscore the fact that across industries, the Internet has a tendency to obliterate the tight control that brands work very hard to maintain.
It will be interesting to see whether DFH’s Amazon excursion proves successful, and if other pro brands follow its lead and ultimately make their own peace with the 300-pound gorilla.
Holistic Primary Care
Erik Goldman is co-founder and editor of Holistic Primary Care: News for Health & Healing, a quarterly medical publication reaching about 60,000 physicians and other healthcare professionals nationwide. He is also co-producer, of the Practitioner Channel Forum, the only executive conference focused exclusively on opportunities and challenges in the practitioner segment of the dietary supplement industry. For more information: www.TPCForum.com