Tuesday, August 29, 2006

High Performance Sports Supplements: Value versus Low Cost

I consider myself very lucky. My good fortune is that I’ve been able to take my love of bodybuilding, health and performance nutrition, from “hobby” to career. This has allowed me to work for, and consult with, the most prominent performance nutrition companies in the world. Many of these companies have enjoyed a period in time as one of the industry Top Dogs, and most are still around today.

This experience has opened the door for me to interact with a significant number of enlightened individuals who want to talk shop. It is like an advanced marketing course just hearing the diverse points of view that come from a wide range of consumers — from beginners to enthusiasts — and the owners of almost every major company in the industry.

I started to write this blog to bring both unbiased and personal views on the bodybuilding and performance nutrition industry to those who want to see the business from both perspectives. Sometimes I may make comments that are not “popular” or seem to go against the grain, but I try to look at both sides of any subject. It is almost impossible to balance every topic, but I feel the main reason you read a particular writer is to get their particular point of view. That said; I hope the following rant, because some the issues discussed here may hit too close to home, offends no one.

About a year ago, I was part of an interview for the magazine Real Solutions with the Editor in Chief and owner, Steve Adele (he is also the CEO of iSatori supplements). When we got to the topic regarding the direction of the performance supplement market, invariably we began discussing, price vs. value. I won’t bore you with all the details, but my thesis then and now is that knockoffs, price wars, and cutthroat cost cutting techniques are BAD for consumers.

The reality is that competition is good, but chasing price has a much more devastating affect on the products and the companies that make them than consumers realize. Suffice to say I got many emails from consumers that said I was “a shill for the price gougers” and that competition is good because it keeps the manufacturers honest. Some of the low-cost brands in our industry also berated me for my statements (don’t know why they’d even admit being the low price brand?).

Now, as a consumer of, and consultant to, companies that make high-end performance nutrition products I want to give you a few examples of why playing a constant game of cost cutting is ultimately a flawed concept. As you read, keep in mind that each time you buy the “cheapest” product of the bunch you are actually making it less likely for you to achieve your health and fitness goals and stunting the progress of the entire industry.

Here’s why.

Let’s start with the common argument that says: “if prices go down, the market should increase because more people can now afford the products.” Okay, sure this works in many markets for a while, and even then this practice eventually hurts the entire core of the business. To illustrate, while working at arguably the biggest sports nutrition company on the planet, I had a discussion with the president about pricing strategy. This guy had formerly run a very large bicycle manufacturing business and wanted to use that industry as an analogy to performance supplements. What he did at his last company was market high-end bikes for independent bike dealers and then proceeded to create a line of bikes for discounters, like Wal-Mart, based on cost. To do this he had to use the brand equity he had built on the specialty bike side of his business and sell that “good” name to the discounters, but with a cheaper (and inferior) product.

The high-low price strategy in that industry worked for a while. For example, he made high-end bicycles that retail for around $4000 that were available only through independent bike shops, while simultaneously making low-end bikes that were sold at the local discount retailer for about 125 bucks. In the beginning, the numbers looked great, he stuffed the independents with a ton of inventory for the new “models” and got huge orders from the discounters for the low-end line. What eventually happened was that the independents were stuck with a brand that lost its cache with the core biking community, so sales fell off a cliff. The company was then forced to play the price war game with the discounters. This lead to zero product innovation on the high-end side and more inferior parts and construction on the low-end side, and in the end, the brand was sold off at a huge loss — 73% less than what the parent company originally bought it for. So, the core consumers who liked the original brand lost out, and likely some consumers who thought they may want to use biking as a form of exercise probably got pissed off and lost interest in the activity when they bought one of the cheaper, poor-performing bicycles.

In this scenario, FEWER consumers actually stay in the market, which is exactly the opposite of what any industry wants.

When you’re talking performance supplements the death comes even sooner.

You see, if we were speaking of high-end bicycles that cost 4 thousand dollars, you could argue that making a decent bike that is sold at the local discount retailer for $125, makes “bikes in general” available to more people. That’s because a bike that is even 35 times less costly than another bike, could still “pass” for a bike. On the most basic level, both bikes can be ridden. We’ll forget that the bikes are for totally different markets, but for arguments sake let’s just say, a bike is a bike.

However, the same cannot be said of high performance sports supplements, which is why NONE of the great bodybuilding products are sold in high quantities at Wal-Mart or similar mass merchants.

There are many reasons mass merchants can’t sell high performance sports supplements, the most obvious is that the products inherently are not for the masses. More importantly, what I want you to know is that products that actually work (and are worth your money) must contain specific levels of active ingredients to make them work. This means you can only reduce costs so much, without sacrificing efficacy. Remember in our bicycle example, an expensive bike and a stripped down inexpensive bike are still both bikes. On the other hand, a supplement designed for specific benefits, when stripped down is not even remotely the same. The benefits of a miniscule 500mgs of glutamine are not even close to that of 5grams. The last example was actually suggested to me by the company president I just mentioned!

Oh, and that same guy DID eventually use the same strategy with supplements, and that brand (which seemed almost bulletproof at the time) is in a steep decline. You probably know the brand because the founder created a body transformation contest that changed millions of lives for the better. The company also produced a NY Times Best-Selling book, the industry supplement bible, tapes, videos and a magazine to get more people to make a body transformation, excel in sport, and get off the couch. Of course, this positive aspect of the company is a mere memory, and in my opinion, was killed by the same guys who came in and hacked the costs out of the company initially.

Ironically, one of the founders of that once powerful brand, Shawn Phillips, has a new company, that in my opinion represents super quality in every way. I really like their high quality meal supplement, and Shawn's blog site has tons of great info too.

It is easy to see that if product quality and education are reduced in our business in an effort to cut costs, the industry will never really grow.

Here’s another example.

I’d argue that the biggest problem associated with cost cutting in an effort to sell on price is that the tactic eventually becomes a self-fulfilling prophecy. What I mean is, the companies that fall into this trap must change their focus to cut costs on everything from quality control, ingredient sourcing, and eventually product efficacy. Some of the bigger companies even get on the “product treadmill” in attempt to keep revenues artificially inflated while they reduce costs. This is why you see companies launching a bunch of products when they attempt to go mainstream. This happened to great brands in the past like Twinlab, MET-Rx, and EAS. I am sure these companies did not skimp on quality (I worked with most of them), but they needed to keep cash flowing while they reduced prices to their retailers on existing items, so they launched a bunch products that were either not needed by consumers or not supported (through advertising) enough to be successful.

You can see this year-after-year, companies try growing their customer base and essentially “sell-out” the very soul of their brand in attempt to appeal to everyone. This is how many companies justify the cost-cutting behaviors. This is the tipping point in which most brands fail. Sure consumers benefit from lower prices for a while. In the end however, most companies simply incur a cost structure that cannot support the original intent to introduce worthwhile products to core consumers. I can say firsthand that this happens all the time. Many of the best products are developed from newly discovered ingredients and higher quality extracts, but inherently cost more because they are, 1) rarer, so volumes are low and 2) they must test out to a higher standard, usually based on the science. Moreover, since higher product costs do not play well into cost cutting brand strategy, all originality becomes dependent on smaller brands that must innovate to be noticed.

It is too bad that many of the smaller companies don’t have the marketing power to introduce their innovations to you. Like it or not, marketing is essential to any business. You simply can’t buy what you’ve never heard of.

One more virus that price wars carry is that they cause retailers to ask for bigger discounts from all brands, big or small, to satisfy their consumer’s obsession with price. (Ever wonder why some of the smaller, more innovative brands are not in GNC?) These retailers should be educating their staff on the product efficacy, improving customer service and promoting the brands that bring innovation and quality to the market. A business will never survive on one-time sales. Repeat business and satisfied customers drive profit and develop industries, not the “one and done.”

I believe each time retailers take value out of the consumer experience it causes demand to go down, not up. This is rampant in our business these days and has caused many good companies to stall, because their great products seem too expensive in the land of “cheaper is better”.

Remember, to get any benefit from performance supplements you need the knowledge and motivation to go to the gym. When this is reduced, so are the results people get from the entire experience and, in the end, the lifestyle never takes hold. It can never germinate into something that people take with them – something that becomes a part of them.

As a consumer, you need to evaluate your purchases on the performance benefits vs. price — this is where the real value lies. Some items you may go for a bit of a bargain, while on others you’d be better off paying a bit more for the innovation, quality control and brand reputation.

In many instances if you pay a bit more for a product you’ll be more likely to use it religiously, and comply with you entire program on a higher level. You want a higher quality of life, so why not start with a higher quality supplement program. It can only make you more serious, and you’ll probably be getting a product designed for an end benefit, not something designed around a price strategy.

By now, the above should make some sense, but let’s recap ways in which the entire cycle of cost cutting really affects you as a consumer.

1. An effective product has only so much cost that can be cut out of it before the whole product concept needs to be revisited.
2. When you demand lower prices, resellers must demand more discounts from the brands they sell. If the brands don’t make adjustments they’ll be gone.
3. In an attempt to remain profitable brands then lean on raw material suppliers and manufacturers to cut their costs. The result is ultimately lower quality goods.
4. When the market is saturated on the low-end, innovation is not needed and in fact avoided to stay within preconceived price parameters.
5. When quality and innovation ceases, the market shrinks, causing it to deteriorate even further.

It’s time that we let innovation prevail and buy from companies that create products for consumers that exceed their expectations; not disappoint. Let’s move towards building the industry on products and information that inspire people to stay in the market, which will ultimately bring costs down, due to higher demand.

My money is on the mid-size companies that actually want to stay true to the first law of success in our business, which is, being an enthusiastic consumer of their own products.

This approach worked well for Bill Gates and Steve Jobs right?


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