Case Study: Pharmanex

Business Description: Pharmanex, which is headquartered in Provo, UT, is the nutritional products division of Nu Skin Enterprises, Inc., which is a publicly traded, multilevel marketing (MLM) company with operations in approximately 40 countries.

Theme: In 2004 and 2005, Pharmanex produced the largest sales gains in the company’s history. As the company looks forward, it is looking to keep the momentum going.

Background: Selling directly to consumers continues to be an enigmatic sales and distribution method within the nutrition space. MLM is not to be confused with “direct selling”—MLM is in fact one form of direct selling but there are significant differences between the two. Direct selling refers to a distribution method, whereas MLM refers more specifically to a type of compensation plan found in direct selling. Within the U.S., approximately 82% of direct selling organizations use a multilevel compensation plan. About 75% of the general population has at some point purchased products via direct selling. The top sellers within Pharmanex are called Executives; they represent about 3-4% of the distributor base. The majority of company’s distributors and about 50-60% of its sales volume comes from distributors that typically only purchase products for personal use—referred to as “consumers” within Pharmanex. Pharmanex produces the LifePak supplement series, which is its largest selling product line in its portfolio. Pharmanex recognized that a key obstacle to boosting its sales was finding a way to prove to consumers that its products were making a difference to their health. To that end, Pharmanex made major investments in a product called the BioPhotonic Scanner, which non-invasively measures the concentration of carotenoid antioxidants in the body's tissue. The product also helps demonstrate the effectiveness of the company’s supplements. Currently, over 4000 BioPhotonic Scanners are in operation, over three million people have been scanned, and last year the scanners helped increase sales by 36%, or around $37 million in the U.S.

Situation Assessment: Pharmanex has a clearly defined method for introducing its products and growing customers. It focuses on first convincing them of the value of its multivitamin product line and then introducing them to other products. The scanner has proven to be a powerful sales tool that distributors can use to measure and validate the efficaciousness of its prevention products, such as LifePak. The system is used to challenge customers to get scanned and record their nutritional status. Then they can take LifePak for 30-60 days and get scanned again to see if there is improvement. So far, Pharmanex is the only nutritional company that can non-invasively demonstrate the impact of nutrition on body chemistry. The scanner’s capability has enabled the company to attract more customers to try LifePak, and subsequently grow its business. Additionally, Pharmanex recently began an “autoship” program, whereby products can be set up for automatic shipment at pre-scheduled intervals. In December 2004, the company filled approximately 370,000 product subscription orders, representing 31% of that month’s revenue.

Opportunities: In 2004, the company posted $137 million in sales in the U.S. Its goal is to be operating at $200 million in sales by this year. The company’s ability to reach this goal rests upon three key factors: (1) developing solid distributor leaders by continuing to attract and retain the highest caliber of people; (2) continuing to be innovative in product offerings and; (3) investing wisely to increase revenue and profitability. In 2006, Pharmanex expects to invest as much as $10 million by distributing 2000 new scanners. With only about 4000 scanners in circulation and about 1 million distributors, more units are needed to spawn continued growth.

Lessons Learned: (1) A root of the challenge within Pharmanex is finding, retaining and motivating a distributor base that has a wide variety of goals and aspirations. Its business is driven by increasing the number of distributors, which can be accomplished by either finding new distributors, or increasing the retention rate for existing distributors. (2) MLM outsiders typically evaluate market opportunities by first looking at the products that they sell, but this industry is really driven by ensuring that their people are positioned and enabled to sell, not just providing what they sell. The use of the scanner provides many benefits to the distributors, including a method to get more sales out of an existing product offering, whereas other companies continually chase new products as the primary vehicle for growth. (3) Customers who order in advance generally remain more loyal and active longer than customers who do not. As they continue to push more consumers onto autoship, they will improve retention and yield improved efficiencies by reducing order processing costs.