Demystifying Melaleuca

Published online: Dec 22, 2014 Articles, East Idaho Business Steve Smede
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Melaleuca CEO Frank VanderSloot watches operations at the company’s Idaho Falls distribution center, where millions of products are boxed and shipped to customers around the country each month. (Steve Smede photo)

Idaho Falls is home to two important organizations that employ a lot of people in Southeast Idaho – the Idaho National Labs (INL) and Melaleuca. While both groups play vital economic roles in our community, they can be somewhat confusing to explain. 

After all, the INL deals with nuclear science, engineering and a host of government contractors. If you’re not an industry insider holding an advanced degree, you probably won’t understand its complexities without doing a lot of technical research. 

As far as Melaleuca goes, most locals know it sponsors a really big Fourth of July fireworks show and Melaleuca Field, the baseball stadium where the Idaho Falls Chukars play. Some have learned it manufactures health, home cleaning, pharmaceutical and personal care products. But beyond that, it gets fuzzy. 

 

Melaleuca 101

The reality is that Melaleuca manufactures roughly 400 personal care, home cleaning, health and cosmetic products, competing against giant manufacturers like Procter & Gamble, Colgate-Palmolive and Unilever. But Melaleuca has taken a different route to distribute its consumer packaged goods (CPG) to the masses. 

Rather than sell its wares in retail stores like Wal-Mart, Walgreens or Smiths, Melaleuca relies on word-of-mouth marketing from its customers and ships products directly to their homes. This alternative strategy enables Melaleuca to compete against the behemoth product manufacturers that spend billions in advertising each year. 

It also allows Melaleuca to dodge the pricey turf wars over shelf space in the retailers’ stores. To persuade retailers to give them shelf space, CPG manufacturers are forced to present mind-blowing media budgets and advertising campaigns aimed at driving customers into those stores. Melaleuca has chosen not to play in that game.

Instead, Melaleuca’s business model compensates so-called “marketing executives,” a term it uses for business builders who refer customers and help them set up shopping accounts. To date, Melaleuca has paid $3.7 billion to marketing executives who have made referrals and helped others to do so.

 

 

Confusion on the Street

Yet Melaleuca’s unorthodox business model for getting its items into kitchens and bathrooms around the world has fostered some misunderstanding. Not conforming to the CPG industry’s traditions, it’s caused a few outside observers to scratch their heads and wonder, “What exactly is Melaleuca?” 

If you were to ask a dozen Idahoans about Melaleuca, you might hear it’s a wellness company, a vitamin supplier, an online retailer, a catalog company or a health products manufacturer. And they would all be right. One common misconception, however, is that Melaleuca is a multi-level marketing (MLM) company. And that would be incorrect. 

 

What is Multi-level Marketing?

To answer that question, one needs to understand what characterizes multi-level marketing – that industry made famous by companies like Amway, Herbalife, NuSkin and even Avon and Mary Kay Cosmetics. 

In an article on CNN Money, author Melanie Hicken writes, “Multilevel marketing companies employ a network of independent salespeople who sell products directly to people in their community. These salespeople earn income based on their personal sales, as well as the sales of people they recruit to work for the company.”

That definition echoes the FTC’s Bureau of Consumer Protection, which defines MLM as follows: “In multilevel or network marketing, individuals sell products to the public — often by word of mouth and direct sales. Typically, distributors earn commissions, not only for their own sales, but also for sales made by the people they recruit.” 

And one final definition from Investopedia defines it as “a strategy that some direct sales companies use to encourage their existing distributors to recruit new distributors by paying the existing distributors a percentage of their recruits’ sales.” 

Melaleuca’s model does not fit any of these descriptions about multi-level marketing.

 

 

 

 

So, How is Melaleuca Different? 

When differentiating Melaleuca from MLM definitions and companies, Melaleuca CEO Frank VanderSloot says Melaleuca simply does not have multiple levels of distribution. Melaleuca does not have “distributors” and its marketing executives are not salespeople. The role of the marketing executive is to refer customers to Melaleuca, help them set up shopping accounts and then train others to do so. 

Essentially, they don’t peddle products like MLM distributors. 

VanderSloot backs up this point by showing Melaleuca’s policies actually prohibit marketing executives from selling products directly to others. Because all customers order directly from Melaleuca, the point of sale happens directly between the customer and the company (and not from a salesperson or distributor). 

This point is a fundamental element in demonstrating how Melaleuca does not meet MLM definitions. 

Additionally, VanderSloot says that “typical MLM companies are designed to attract people to ‘invest’ in inventories of product with the promise of getting rich quickly by getting others to invest. In Melaleuca’s case, there is no investment and no getting others to invest.”

Instead of hoping for a quick win by getting customers to make large upfront investments, Melaleuca has sought to develop long-term customers. So far, it seems as if that strategy is working: Melaleuca has a 95 percent month-to-month reorder rate. And since there is no investment, no one has ever claimed they lost their investment.

 

Asking the Experts

Of course, it’s one thing to ask a man on the street if he believes Melaleuca is a MLM company, but it’s something else to talk with people who are in the know. Instead of relying on the company’s perspective or the layman’s view, I took the question to six business experts, legislators and others to learn what the experts say.

After taking a look at the company and doing a little homework, 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. 

In terms of how the company operates, a few of them also point out that Melaleuca more closely resembles a direct-marketing company rather than a direct sales company. They highlighted the company’s non-store marketing tactics and discussed that after prospects had been referred, Melaleuca communicates directly with them to sell its products. Purchases are made from the customer’s home and then delivered right to the doorstep. 

 

Business Experts Sound Off

Dale Dixon, President and CEO of the region’s Better Business Bureau, explains why the “BBB categorizes Melaleuca as a retailer” and not as a MLM. Dixon notes that “Melaleuca does not have multiple levels of distribution, which means its independent agents do not distribute inventory from one agent to the next.”

And Jeff Sayer, Idaho’s Department of Commerce Director, actually credits this factor as a major reason why this Idaho company has been successful. 

“When Frank VanderSloot originally formed Melaleuca, his commitment to consistently create quality products and shun the MLM model in favor of a direct marketing strategy has made all the difference and is the key driver behind this great Idaho success story.” 

Will Jenson, a former regional economist at the Idaho Dept. of Labor and an economics professor at two major Idaho universities, also reviewed Melaleuca’s business model. You’ll find that Idaho journalists dial his number when they need a source about Idaho businesses.

Jenson sees “little similarity between Melaleuca and businesses involved in multi-level marketing. It’s unfortunate that misinformation leads some to lump Melaleuca into a category of companies that participate in multi-level marketing. MLMs are characterized by features such as multiple levels of distribution, product reselling, and inventory loading, none of which are found in Melaleuca.” 

He added that “incentive-based sales approaches are common across nearly all industries, and a compensation model should not be what ultimately defines a company as a multi-level marketer.” 

“Performance based salaries and commissions are effective tools for businesses to ensure those who are willing to work get their reward, and using this compensation structure does not make a company a multi-level marketer.”

 

The Legislators’ Position

In addition to Dixon, Sayer and Jenson, three of Idaho’s elected officials responded to the question at hand. Their written statements showed consensus as they reached comparable conclusions with the other business leaders. 

Idaho Governor C.L. “Butch” Otter took a moment to put his cards on the table. He wrote, “Melaleuca is a direct marketing company with a customer referral business model that has enabled it to bypass traditional marketing channels without multiple levels of distribution that are typical of a MLM.” 

Although Idaho’s top elected officials don’t always agree, they did in this case. 

The Governor’s thoughts were supported by U.S. Representative Mike Simpson, who wrote, “I’m convinced that operational differences in its [Melaleuca’s] business model make it a direct marketing company, not a multi-level marketing company. Based on my experience with Melaleuca, it would be inaccurate to call it a multi-level marketer or a MLM. Melaleuca has earned its excellent reputation by delivering quality products, keeping its promises, protecting its customers and independent marketing executives, and offering a genuine home-based business opportunity with no risk to thousands of people.”

And Idaho Senator Jim Risch, who has closely reviewed the company’s practices, wrote, “Occasionally, people have wrongly referred to Melaleuca as a multilevel marketing company. It is clear that Melaleuca’s model is not multilevel marketing, and is indeed distinctively different.” 

“People do not lose money with Melaleuca,” wrote Sen. Risch. “I know because if they did, I would hear about it. Melaleuca is, by every measure, a direct marketer and online retailer of health and wellness products, not a multilevel marketing company.

Overall, Melaleuca’s track record in Idaho has been extremely positive, earning it a reputation as a clean company that takes good care of its customers.”

Sen. Risch added, “Melaleuca’s business operations have been reviewed by State Officials, the Better Business Bureau and legal experts on marketing practices and uniformly all declare that Melaleuca is not a multilevel marketing company.”