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LifeVantage's shift to network marketing saved company, CEO says

By Hank Schultz in Utah , 19-Nov-2012
Last updated on 20-Nov-2012 at 05:57 GMT

LifeVantage, the manufacturer of the herbal supplement Protandim, was on the financial ropes when it took the leap into network marketing.  The turnaround since then has been nothing short of remarkable, said Doug Robinson, president and CEO.

“Our best year (in retail) leading up to that decision might have been $3 million or $4 million in top line revenue,” Robinson told NutraIngredients-USA. The company had been consistently losing money.

“In early 2009 there was a suggestion made, some might go so far as to say a last-ditch suggestion, to pull ourselves off the shelf and go into network marketing,” he said.

“In some respects it might have been a list ditch effort almost to the point where I could imagine the conversation was ‘What do we have to lose?’ ” (Robinson’s time on the board and as CEO came after the event.)

“To put things into perspective, in fiscal 2011 (the first full fiscal year of network marketing) our top line was just under$ 40 million, but more importantly, our bottom line was $4 million operating gain,” he said.

Protandim is a patented blend of extracts of milk thistle, bacopa, ashwagandha, green tea and turmeric.  The initial phase of scientific research into the product and the communication of its benefits focused on the blend’s antioxidant properties.

“We felt we had a dietary supplement, all natural very safe, that was clinically proven to reduce oxidative stress in the body, maybe as much as 40%. That was the story then, and it was a good story,” Robinson said.

But it was a difficult sell at the retail level, he said.  The product didn’t fit readily into retail supplement categories as they existed then, and tended to get lost with the thousands of other products on the shelves.  And, with just one product, the company didn’t benefit from broader brand awareness as some companies might with multiple lines.

Product’s story was jumbled

But the killer, Robinson said, was that store clerks didn’t understand the product.  Members of LifeVantage’s board did their own secret shopper trips into stores to see what answers they were given when they quizzed store staff about what Protandim was good for, and they got a range of answers, including “sleep aid.”

And that story has evolved, Robinson said.  More and more research has been done on the product, not all of it sponsored by LifeVantage, which is based in Sandy, Utah.

“Right now we estimate that there are twelve to twenty studies going on at major universities that we did not sponsor,” said Darlen Walley, PhD, LifeVantage’s chief science officer.

More recent studies with the product have focused on  the product’s positive effect on NfR2 activation, a process that upregulates large numbers of genes (the company calls them “survival genes”) that control seemingly disparate processes such as immune and inflammatory responses.  It’s a deeper dive into Protandim’s mode of action than merely talking about soaking up free radicals, an even more complex story that was clearly beyond the capabilities or commitment of retail store clerks.

“We think it’s a huge commitment to educate our distributor workforce on the science, the validity, how efficacious it is, how safe it is and importantly what claims can be made about the product,” Robinson said.

“But now, instead of being one product on a shelf of five thousand, we have a face-to-face sales job.”

The Einhorn Effect

Network marketing, also known as multilevel marketing, has some negative connotations, Robinson admitted.  That stain of being associated in some people’s minds with terms such as ‘pyramid scheme’ or ‘house of cards’ came to the fore earlier this year when influential Wall Street analyst David Einhorn took MLM giant Herbalife’s management team to task in an earnings call.  Einhorn asked some pointed questions about the company’s compensation model for its distributors, trying to hone in on how much of the company's sales were to end users.

Shares of Herbalife had dropped by more than 8% even before the call was completed. Overall, the stock dropped from a high of more than $70 before Einhorn’s three questions to a low of about $44, and the price has not recovered significantly.

Consumers, or distributors?

The shadow cast by that event is something that all publicly traded network marketing companies have had to deal with, Robinson said.  There can be some legitimate concerns about companies whose compensation models for distributors can goad them into to stocking up on product to boost their commission level.

“Other analysts started looking at other network marketing companies.  And what they found that some of what his criticisms were about might be true about some of these other companies,” Robinson said.

“The knock in network marketing is that you really don’t have that many end consumers.  What you have is your distributors and those are the people buying your products.  But they are hoarding it sometimes.  If you go the garages of a distributor for companies like that you are going to see boxes floor to ceiling.  So the product isn’t getting out to be actually consumed, it’s being ‘consumed’ by these distributors,” he said.

“Our company is just about the opposite. For every ten people who come to the company, eight of them are coming to consume our products, purely.  The other two are coming to act as distributors.  In a typical environment it might be more 60% distributors, 40% end users or consumers,” he said.

Growing responsibly

The company’s focus now is on operational improvements and responsible growth, Robinson said.  In fiscal 2012, the company’s top line revenue grew to $126 million, and revenue for the next fiscal year is projected at $250 million to $260 million.

“There is a long history of companies (in network marketing) that rise very fast and then cave very fast, then probably go out of business.  That is not us, and it won’t be us,” Robinson said.

“It think it’s the perfect scenario.  The product is that good.  I think we have barely scratched the surface with the science of this product.  So the more we learn about that product, and the scientific efficacy of the product comes to light and is known, and we have a maturing marketing channel, it’s Katie bar the door.  We are very excited about the future.”

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