Healthy Growth, Healthy Products at MelaleucaJan 25th, 2016 | By vgrieve | Category: Business news, Commentary
One east Idaho business reached a major milestone this September. That’s when Melaleuca, Inc. quietly celebrated its 30th birthday.
Considering the odds of creating a $1 billion business are nearly as long as spotting a unicorn, this anniversary is noteworthy. It shows Idaho’s entrepreneurs can succeed. Amid our picturesque mountains and rivers, Idaho business leaders can find plenty of opportunities.
At least, that has been the case for Melaleuca founder and CEO Frank VanderSloot, who says Idaho has been a great place to start a business. Having completed a $50 million global headquarters in Bonneville County earlier this year, VanderSloot showed it’s also a great place for major corporations to remain.
Competing in a crowded marketplace
Although Melaleuca has been a part of east Idaho for three decades, not everyone knows what it does. Melaleuca has developed over 450 different health and wellness products, which it manufacturers for customers in 18 countries. Its products range from vitamins and health supplements to non-toxic household cleaners. It also offers a full line of essential oils, skin care and cosmetics, and personal care products.
Melaleuca competes with popular products like Centrum, One-A-Day, Tide, Pine Sol, Cascade, Estee Lauder, Bath & Body Works, and Biolage. It goes head-to-head against the grocery, drug, and department store brands.
But how can Melaleuca compete against these mega-brands when it’s only a fraction of their size? The answer, according to Melaleuca’s Chief Marketing Officer Scott Hollander, is found in creating superior products that outperform those found in retail stores.
“Melaleuca has always placed a premium on research and development and high-quality, natural ingredients,” Hollander said. “As we create each of our products, we do so with the philosophy that if it doesn’t either outperform the market leader or provide benefits that the competition doesn’t, then we simply won’t sell it.”
Melaleuca also competes by changing where consumers buy its products. Instead of relying on mass merchandising channels like its competitors, Melaleuca has chosen to go a different direction. Melaleuca customers buy directly from the manufacturer.
This strategy allows Melaleuca to bypass the exorbitant cost of retail outlets, middle men and advertising. It also allows Melaleuca to invest those dollars into making higher quality products and compensating the individuals who refer new customers to the company.
Beating the Odds
Hollander recognizes that Melaleuca’s consumer-direct model requires it to innovate beyond the standards of its competitors. He understands Melaleuca’s products must overcome a high hurdle if they are to cause enough excitement and customer loyalty to be a topic of discussion among friends. After all, why would anyone talk about Melaleuca products if they weren’t far better than what’s sold in the grocery store?
Melaleuca has created a significant niche in the health products industry and has learned what it takes to flourish with its non-traditional business model. A glance at the company’s growth chart reveals it has become one of Idaho’s top five private companies started here.
Melaleuca reached $1.2 billion in annual sales last year, mostly from one million customers who repeatedly purchase from its online store and hardcopy catalog. The vast majority of Melaleuca products are purchased on the company’s web site. Its backbone for success is a bona fide 95 percent reorder rate, meaning that 95 percent of the customers who purchased in any given month will buy again the following month.
Melaleuca also had approximately 150,000 customers who referred new customers to the company last year. Each of them received a commission check, with some earning as little as $2.50 per month and others receiving a more substantial amount.
Melaleuca says it has paid $4.1 billion in referral commissions over the past several years.
Because the company relies on word-of-mouth referrals and compensates customers for them, some have mistakenly assumed that Melaleuca is a multi-level marketing (MLM) company. But industry leaders and new research shows that is not the case.
In the Idaho Falls Magazine article Demystifying Melaleuca, editor Steve Smead researched Melaleuca’s business model and asked six regulatory, business, and consumer protection experts if Melaleuca was an MLM.
“After taking a look at the company and doing a little homework,” Smead wrote, “these individuals essentially arrived at the same conclusion surrounding the MLM question: Melaleuca does not meet the MLM definition, and it should not be called a multi-level marketing company.”
Recently, the East Idaho Entrepreneurial Center (EIEC), a nonprofit research group that collaborates with two Idaho universities, agreed with Smead’s assessment. The EIEC conducted a 40-page analysis on Melaleuca’s business model to determine if the company is an MLM. The research study consisted of literature reviews, website analysis, and phone interviews with Melaleuca and five MLM companies: NuSkin, Herbalife, Amway, Monavie, and Xango. The researchers compared these companies by identifying several MLM attributes and created an index rating system to determine to what extent the companies followed MLM business practices.
“The results showed Melaleuca had the lowest index score, being two times lower than the average score of the five comparison companies,” according to EIEC executive director Corey Smith. “Based on this data, our research team concluded Melaleuca does not follow the practices or behaviors associated with MLM companies.”
The study also found Melaleuca’s model to be more comparable to companies such as retailers, real estate agencies, insurance agencies, auto dealerships, and home security companies. These companies use a form of multi-tiered, performance-based compensation plans that are more closely related to Melaleuca’s.
“Based on independent research and the study’s key findings, the East Idaho Entrepreneurial Center concluded that Melaleuca’s business structure does not resemble a multi-level marketing company,” Smith said.
Will Jenson is director of business research at the Research and Business Development Center, and an economics professor at BYU-Idaho and Idaho State University. Previously, he served as regional economist for the Idaho Department of Labor.