On the importance of reputation.
Avon ladies. Tupperware parties. Pyramid schemes. That's what most people think of when they hear "direct-marketing company of home and health care products." Frank VanderSloot has changed those perceptions. His Idaho-based company, Melaleuca, which manufactures and distributes natural products ranging from shampoo to vitamins to tile cleaner, has reinvented the direct-marketing model, beginning by dialing back the sales pressure. The company's five-year run on the Inc. 500 began in 1990, and last year Melaleuca had revenue of $546 million. Melaleuca's marketing executives, as the salespeople are called, earn anywhere from a few hundred dollars a year to, in a few rare cases, as much as $1.75 million annually.
Melaleuca began out of the ashes of a previous company. In 1985, I became CEO of Oil of Melaleuca, a multilevel marketing firm selling products based on melaleuca oil. This oil, distilled from the leaves of the melaleuca tree in Australia, has natural antiseptic, fungicidal, and analgesic properties. And it has a history: Australians used it in first-aid kits during World War II for minor skin conditions, abrasions, and insect bites. The idea was to take the oil and put it into cosmetics.
I hadn't done my due diligence on the company before I got there. The business was full of problems. Like most multilevel companies, commissions and revenue were based on the idea of getting people to set up a business selling the product to consumers. One guy tries to set the next guy up. That guy tries to set up the next guy. They make commissions by pushing large amounts of inventory.
I quickly learned the major problem with that business model: Not a lot of product gets to the end consumer. It looked like the company was bringing in a lot of money, but it was mostly revenue from starter kits sold to folks setting up their business.
We had all kinds of other problems as well. A lot of our distributors were making claims in regard to what melaleuca oil could do that were not substantiated with good science. Plus, the family that had started the company had invested in a ranch where it had been told 80% of all the melaleuca trees in the world stood. Not true. Maybe only 5% of the world's melaleuca trees were on this ranch.
I've learned that the bleakest of times is often the best opportunity. One of my first determinations as CEO was that we had to close the company. I went to the owners of the company, and I told them we could rebuild if we ditched the current business model and started over. I wanted to get as far away as possible from multilevel marketing. I also told them that I wanted to be a partner in the business. They said, "Okay, but you've got to invest what we invested." That was basically my life savings.
I learned a whole lot in the next five months. I learned that there are a lot of folks out there who want naturally oriented products that aren't based on wives' tales or folklore. They want scientifically documented products that really work. I also learned that there were a lot of people looking to make it on their own. It's really tough to start your own business. Forty years ago you could start a hamburger stand and sell a better hamburger, but you can't do it today. So my goal was to come up with a business model that not only would market good natural products, but would also help set people up in business without all the regulations.
We rolled out an entirely new business model and product line on September 1, 1985. We sold more than just melaleuca oil; we had other naturally oriented products, like a line of cleaning products. I told our distributors, "We're not going to be operating in that multilevel-marketing deal you guys were interested in. It's not going to be a get-rich-quick program." No one was going to be selling inventories to people, so there would be no incentive to load people with product.
We lost half of our distributors. Our first month's sales were $75,000. The first three or four years, we didn't grow very much, partially because we were still trying to communicate our business model to the masses. But after our fifth year, we made the Inc. 500.
In the beginning I used to write all the catalogs, all the sales literature, all the brochures. Now a lot of things have improved, starting with our literature. But it's essentially the same concept -- the distribution model has worked since the first day. When a customer goes online or calls in to place an order with us, the person who gave him that catalog will get a commission. No one is knocking on his door. He didn't come to a party where he was pressured into buying or selling something. And we save money because we don't do any advertising and we ship right from our factory to people's homes.
Let's say you've got an independent marketing person and he's out representing your products and having a whole lot of success. But you learn that he's doing it in a way that isn't quite ethical, or is exaggerating the viability of the product. Some companies may be tempted to say, "Well, wait, look how much business he's bringing us. We'll take the risk. Maybe we won't get in trouble. We don't want to tap him on the shoulder and say, 'You can't do this." We've never shied from that. If somebody does that it risks our entire business, our entire reputation. I don't care how much money you bring in, if you're doing it the wrong way, we're not going to let it happen.
I love Corporate America, but it's not necessarily fair. When I see people who are struggling financially, I want to help those folks out. My family didn't have much money growing up. We shopped at St. Vincent de Paul and Goodwill stores. We've tried to design a business model for those people who want to supplement their income because they would like to make some extra money or because they are in debt up to their eyeballs. Something like 190,000 people earn a check from Melaleuca each month. About 20,000 of them make their primary living through the company.
The best advice I can give is that bad news doesn't always equal bad results. If the original company, Oil of Melaleuca, had been even a marginal success then we wouldn't have been tempted to plow ahead. It's just because Oil of Melaleuca was such a disaster that Melaleuca has become a success. If something isn't working, don't be afraid to plow it under and start over.