Practitioner-only supplement brands are engaged in a difficult fight with a complex and powerful adversary: Amazon.
Online retailing has rocked business-as-usual in nearly every business sector, including the supplements industry. Amazon.com—with its sheer size, breadth, and discounting power—is doing most of the rocking.
For many people these days, “shopping” is synonymous with shopping on Amazon. They love the discount pricing and overnight delivery. Some people buy nearly everything they need via Amazon. That includes supplements, even the brands intended only for sale by health professionals.
This phenomenon is causing consternation both for brand managers and for holistic practitioners, many of whom depend on revenue from dispensing of pro-only brands for the fiscal viability of their practices.
According to Holistic Primary Care’s recent 2016 practitioner survey, 18% of all clinicians who dispense supplements in their clinics consider the revenue essential for survival. For an additional 29% it is very important.
The whole concept of a “practitioner-only” dietary supplement is founded on a core set of propositions: 1) the products are made with the highest quality raw materials under pharma-grade standards; 2) they contain higher levels of active ingredients and/or unique combinations not available in consumer retail brands; 3) they are more consistent, reliable, and effective than those available in retail; and 4) optimal outcomes occur when the products are used under guidance by trained and licensed health professionals.
Online retailing, with its big discounts, elimination of practitioner exclusivity, and emphasis on easy access, threatens these core principles.
Block & Tackle
If the practitioner brands are only wholesaling their products to licensed professionals, how do the goods end up on Amazon at discount prices?
Its simple: would-be retailers induce practitioners to place large orders using their license numbers, typically in exchange for a financial reward. The retailers pick up the goods and proceed to market them via Amazon or other online outlets at less than the brand’s agreed-upon practitioner prices, but at mark-ups high enough to ensure fat profits.
Over the years, many leading pro-only brands have gone to great lengths to fight online retailers. Some do it by creating 2D barcodes on their labels, or even inside the bottles, buying back their own products via the online sellers, and discontinuing their sales agreements with practitioners who leak these products to resellers.
Brian Blackburn, CEO of Xymogen, says he has been opposed to online sales of pro brands since the late ‘90s.
“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.”
Blackburn believes many kinds of temperature-labile products, including probiotics and fish oils are easily mishandled by online resellers. “Amazon doesn’t guarantee temperature control. Overheated products, expired products, possibly counterfeit products….there’s 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.”
He says Xymogen has invested a lot of money, time, and personnel to keep their 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.”
This constant vigilance is costly, exhausting, and according Blackburn and other executives, it amounts to an endless game of “whack-a-mole.”
Still, the practitioner-focused brands have been remarkably unified in their commitment to block—or at least—deter online resale, and defend practitioner pricing and revenue.
In April, Designs for Health—one of the top-ten brands in the space—announced a program authorizing the sale of its products directly to Amazon customers. The program creates special discount codes tagged to DFH-dispensing practitioners, enabling the practitioners to continue earning commissions when their patients purchase the products on Amazon.
If You Can’t Beat ‘Em…
The program is called, “DFH Select,” and the company believes it’s a reasonable compromise between patients’ desires for convenience and practitioners’ clinical and fiscal needs.
Jonathan Lizotte, DFH’s founder, agrees with other executives who see uncontrolled and unauthorized online resale as corrosive to the practitioner-brand value proposition. It cuts practitioners out of the loop; makes it difficult for brands to control their products; exposes consumers to outdated, poorly stored, or in some cases counterfeit products; and undercuts the office-based pricing guidelines.
It was DFH’s years of past effort to keep their products offline that led Lizotte and his team to their current strategy, which amounts to establishing DFH as the dominant or ideally the exclusive Amazon dealer of its own formulas.
“Is it possible to keep your products of 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 says, 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 recommended product but end up with outdated, poorly managed, or returned goods.
And of course, a purchase from an unauthorized reseller means the practitioner loses the commission revenue.
Controlling the Corrosion
Lizotte says his company wants to ensure that if people seek 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 a customizable web portal for their practices, as well as practice-specific promo codes for patients to use when they purchase DFH products via Amazon.
It also 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 any of these scenarios, the practitioners stay connected.
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.
“Amazon is the 300 pound gorilla, and we recognize that,” says Lizotte, “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.”
Favorable Practitioner Response
The launch of DFH Select at the Institute for Functional Medicine’s annual conference came as something of a shock, largely because up until now, DFH has been one of the most active companies against online resellers.
Marketing Director Paul Vitiello says practitioner response to DFH Select at IFM was strong and positive. Based on a single email 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.
While it seems DFH has broken ranks with other companies in the space, the move onto Amazon may not be as much of a directional shift as it seems.
Lizotte says his company remains committed to quelling unauthorized online discounters. The company has put teeth into its “RxDFHend” practitioner wholesaler agreement. It now requires DocuSign electronic signatures, making this a binding contract, the breach of which carries potential financial penalties.
DFH is not the only company tightening up its practitioner contracts. Xymogen has also taken legal action against serial violators.
“Inducing someone to violate a binding agreement is a crime,” says Blackburn. In legalese, the term is “tortious interference.”
That, in essence, is what unauthorized resellers are doing when they encourage practitioners to buy pro-only products that will knowingly be resold direct-to-consumer.
Many practitioners do not realize that when they sign wholesale agreements with companies like Xymogen, DFH, and Ortho Molecular Products they are, in fact committing to a binding contract.
Blackburn says that once warned and politely informed of this fact, most practitioners comply and quickly stop ordering for the resellers.
The large-volume resellers however, often need more than just a gentle warning.
Citing the Lanham Act, which protects companies against trademark dilution, and alleging tortious interference, Xymogen went after Total Health Discount Vitamins, a large online reseller that was marketing Xymogen products.
Unlike Lizotte, Blackburn sees no reason to put his products on Amazon.
He says his 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.
“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 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.
Aaron Bartz, President of Ortho Molecular Products, is also of the mind that pro-grade products do not belong in consumer-focused 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.
Bartz stressed that his that company, which is also among the top ten pro brands, is in no rush to follow DFH into wild, unpredictable rapids of Amazon.
In many ways, the contention over online sale of pro-grade products is analogous to the challenge faced by the music industry in the late 1990s, when digital file-sharing became fast, convenient and widespread.
Initially, record labels fought to preserve tail-spinning CD sales by fighting online file-sharing. It’s hard to remember, but there was a time when major record companies simply refused to license their music to the then-new iTunes store.
They soon realized that if they wanted their music heard by millions of iPod users---the most voracious of music fans—they needed to make peace with the new reality. Today, there are few labels or artists who are not making their music available on iTunes.
It’s not a perfect analogy because out-of-date or poor quality songs aren’t likely to trigger an adverse reaction. But it does underscore the fact that across industries, the internet tends to obliterate the tight control that brands work very hard to maintain.
It will be interesting to see whether DFH’s experiment with Amazon will be successful, and if other practitioner-only brands will ultimately make peace with the online retail revolution.