2D Barcoding: Solution to Illicit Online Discounting?

Executives at Designs for Health, a Connecticut-based, practitioner only nutraceutical company, believe they have developed a viable solution for one of the channel’s most vexing problems: illicit online discounting.

The robust growth of premium-priced, clinician-exclusive brands over the last decade has been echoed by an equally robust rise in “pirate” retailers who acquire practitioner-exclusive products and market them direct-to-consumer at greatly discounted prices.

The unauthorized retailers obtain their stock by hiring practitioners willing to use their professional identities to order large volumes from major professional brands. The practitioners turn over the products to the resellers who then take the goods directly to the online “street.” (For a deeper look at this problem, see “Online Resellers Damage Practitioner Value Proposition,” Nutraceuticals World, July 2013.)

Leaders of pro-grade companies say illicit resellers damage the core value propositions at the heart of the practitioner-brand business model: practitioner exclusivity, and premium pricing for premium products.

The problem is widely recognized, and executives who participated in the recent Practitioner Channel Marketing Forum noted that their companies are putting considerable energy and person-hours toward defending their brand equity and their practitioner customer base by tracking down unauthorized resellers and attempting to cut their access to the desired products.

For the most part, though, this has been a game of whack-a-mole: resellers go underground for a while, and then resurface with the same ploy under a different name and a new address.

Every Unit is Traceable
In an effort to create a more meaningful and enduring fix, Designs for Health (DFH) created a 2D barcoding program that assigns a specific scan-able code to each individual product bottle, effectively making every unit traceable from the moment it leaves the company’s distribution facilities to the moment it arrives in a customer’s hands.

This system enables DFH to know how—and through whom—the company’s products are ending up in the hands of illicit discounters. Granular tracking at this level is not possible with standard barcoding based on SKUs alone.

Jonathan Lizotte, CEO of Designs for Health, said his company now has a full-time employee dedicated to scouring the online world for resellers pitching DFH products at a discount, then buying products in order to trace each bottle’s nefarious journey there and back again.

This, he said, allows DFH to pinpoint practitioners who are buying the products on behalf of the discounters.

With traditional barcoding, many different bottles have the same code, so there’s no way to know that a specific case of products went from a specific practitioner to a known discounter. When each bottle has its own code, the links become completely obvious.
“When we catch these folks, we stop selling to them. The account is frozen forever,” Mr. Lizotte told Nutraceuticals World.

Agreements Up Front
DFH requires all practitioners who want to purchase its products to sign on to the company’s “RxDFHend” policy, which requires that:

• The purchaser is a qualified healthcare professional;
• DFH products will not be displayed or sold on open shelves in retail stores;
• The products will only be sold to patients of the purchasing practitioner or consumed for personal use by that practitioner;
• Products may not be re-sold online except through authorized online partners;
• Products may not be marketed on suggestions of discounted prices.

The RxDFHend agreement stipulates that, “DFH products and prices, including references to discounts of DFH products, are not to be displayed in any Internet advertising, including but not limited to, websites, banner advertisements, pop-up advertisements, and sponsored searches.”

“RxDFHend is an agreement up front where we define this program and state that we will uphold our end of the bargain, and the buyer understands they are not allowed to discount. It all starts there.”

The company reserves the right to discontinue sales to anyone violating the terms. Unfortunately, DFH has had do just that on many occasions, according to Mr. Lizotte.

‘A Huge Problem’
“It’s a huge problem,” he said, sharing a recent case involving a chiropractic buyers group. “They came to us; wanted us to distribute our products to chiropractors. They were doing incredible volume. But all of the products were ending up on Amazon. They were lying to us all along—their entire plan was to be an Amazon reseller. We stopped selling to them. They owed us a lot of money.”

The company has identified hundreds of online discounters, and regularly hears from clinicians who are solicited to buy DFH products and forward them on to discounters.

DFH actually introduced 2D barcoding a few years ago, and quietly tracked the movement of products. Mr. Lizotte said his team quickly learned that resellers were hip to their game when they noticed that some of the re-purchased bottles were coming back with altered labels.

“The resellers were cutting off the 2D barcodes! So now we do the barcodes in two different places on the bottle, which will make it even more difficult for them. One barcode will be obvious on the label, but there is another one in a much less obvious, less alterable place.”

Mr. Lizotte said the ongoing effort to stop illicit online discounters costs his company thousands per month.

“We have a full time person looking at this all day long. The system … the hardware, the ongoing labor, the money we spend buying back products, the software … it has been very costly. But it’s necessary to safeguard the practitioner price point and to know where our products end up,” he told Nutraceuticals World.

“We’re adamant about this,” he added. “The company was founded by nutritionists and integrative doctors committed to natural therapies. They know what it’s like to deal with a patient that comes in saying, ‘Hey how come your price is so high? I found the same thing online for much less.’”

He stressed that he’s not fundamentally opposed to online resale by legitimate healthcare practitioners to their patients. He also recognizes that some clinicians have ethical qualms about profiting from the sale of health products, and opt to sell at cost. DFH simply asks such practitioners not to advertise that this is what they are doing.

The issue, he said, is with people who make a business out of advertising the premium practitioner products at discount prices.

Need for Concerted Effort
Currently, there is nothing illegal about online discounting; there are no state or federal statutes that protect practitioner brand suggested retail prices or even practitioner exclusivity in terms of access to pro-line products.

Mr. Lizotte said he has heard that some companies have tried legal maneuvers to protect their brand integrity, but none have been successful. Companies concerned about maintaining practitioner exclusivity and premium pricing have little legal recourse, and—for now anyway—must fight this battle at the purchaser level.

He believes there might be some ground for legal action when it comes to resellers defacing a label. “We’ve had multiple instances where we purchase our product back and the barcode was cut off the label. We are waiting for some legal feedback on that.”

It took time for DFH to win buy-in for the 2D barcoding from authorized online distributors. But Mr. Lizotte said two of the largest distributors of pro-grade products—Natural Partners and Emerson Ecologics—are now on board and ready to get serious about eliminating reseller access to the pro brands. This is important because distributors like Emerson and Natural Partners represent a significant portion of total practitioner supplement sales.

He added that another pro brand, Xymogen, has also started using 2D barcodes.

“I would love it if the rest of the industry did this. If anybody has any questions, I’m happy to provide information on how to do it. We don’t want it to be just us.”

While there has yet to be a coordinated effort within the pro channel to combat online discounting, Mr. Lizotte said companies are starting to talk with each other. “The folks we have that are battling this day-in, day-out do have contact with other professional companies, and they do exchange info. The sharing of information on offenders is taking place.”

He expects that online discounting will be a significant problem for some time, but it is one that companies can at least mitigate. “I don’t think there is a perfect strategy, but some companies are doing more than others. This 2D barcoding works. There will be greater advantage if more companies are doing it and sharing info on who the offenders are. If we work together as an industry we can put a severe dent in this problem. That’s what I hope will happen.”   

Editor’s Note: To learn more about the 2D barcode tracking program contact Mr. Lizotte at: jonathan@designsforhealth.com.

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Erik Goldman is co-founder and editor of Holistic Primary Care: News for Health & Healing, a quarterly medical publication reaching about 60,000 physicians and other healthcare professionals nationwide. He is also co-producer, with Greg Stephens of Windrose Partners, of the Health Practitioner Marketing Forum, an executive level summit focused on challenges and opportunities in the health practitioner channel. The 2014 Forum was recently held in Long Beach, CA, and plans are in development for 2015; details will be announced soon. Visit www.HPMForum.com for more information.