Dermatologists Katie Rodan (left) and Kathy Fields (right)

Dermatologists Katie Rodan (left) and Kathy Fields (right) COURTESY OF RODAN + FIELDS

Dermatologists Katie Rodan and Kathy Fields first became known more than two decades ago for creating the three-step acne treatment Proactiv, long popular with teens. They eventually sold off their Proactiv rights to focus fully on skincare with their company Rodan + Fields. Now they're coming full circle, announcing Thursday that Rodan + Fields is entering the teen acne market.

Rodan and Fields, who both teach at Stanford Medical School and practice as dermatologists two days per week, said their motivation to make new products stems from their desire to help as many people as possible have “life-changing skin.”

“I had acne as a teenager and felt horrible about it,” said Rodan. Fields adds that even at age 60 she still sometimes gets pimples.

Rodan + Fields has already achieved great results for its two dermatologist founders. Private equity firm TPG Capital spent $1 billion last May for a 25% stake in the company; that investment boosted Rodan and Fields' fortunes to an estimated $1.5 billion each.

Founded in 2002, Rodan + Fields started out with a line of anti-aging products. It took a while to land on a business model that worked. They tried sales in department stores. Then Rodan and Fields sold the company to Estee Lauder in 2003, only to buy it back in 2007. Since then, Rodan + Fields has grown through a multi-level marketing network of about 300,000 independent sales reps that it calls “consultants” across the U.S., Canada and Australia.

Rodan + Fields trains independent consultants who are paid a commission for their own sales and the sales of people they recruit to sell products. The consultants, who do not stock inventory, use their online social networks to sell to other people they know, spread the word about Rodan + Fields and hold virtual events to promote items.

Rodan + Fields executives present selling for the company as a dream opportunity that empowers women to be entrepreneurs. In reality, only a small percentage of its consultants are financially successful. In its latest 2017 income disclosure statement, for example, Rodan + Fields reported that 33% of enrolled consultants earned less than $1,000 in annual payments, 44% did not earn any pay, while 22% earned between $1,000 and $25,000. Only the top 1% of paid consultants earned more than $30,185 annually.

“Consultants join the business for a variety of reasons and come from all walks of life,” Rodan + Fields said in an emailed company statement. “Some like the stay at home flexibility. Then, there are Consultants who use this opportunity to build their own business and an extensive team. Our Consultants choose how much time and resources to invest in their individual businesses.”

Such financial findings don't seem to have much impact. Rodan + Fields' consultant army has grown quickly, and so have sales. In 2008, the company had just 1,350 consultants, which grew to 150,000 people in mid-2016. Today there are double that number. Revenue followed a similar arc, rising from $24 million in 2010, to $627 million in 2015 and $1.5 billion in 2017, the most recent figure available.

Rodan + Fields CEO Diane Dietz and the founding doctors are betting that a new growth driver rests in a market it has so far left untouched: teens and their pimples. Its first teen acne product, at $89, is a two-step kit called Spotless, which Dietz said is expected to be the first in a series of products catering to the younger demographic.

“In sheer numbers, anti-aging is a bigger category, and we have multiple solutions within that,” Dietz said. “But the need for acne [products] is pretty sizeable, and that's why we're going after it.”

Research firm Euromonitor International estimates that sales of standalone over-the counter- acne products in the U.S. totaled $621 million in 2017, making up about a quarter of global sales. Skin care kits, sets of products designed to be used in sequence, generated $3 billion in the U.S. in 2017, Euromonitor found. The demand is out there. In the U.S., about 40% of adults and 85% of teens and young adults experience acne, according to the American Academy of Dermatology. Because many people can't make it to a dermatologist, Dr. Rodan and Dr. Fields see self-treatment as key to reaching more people with acne.

“There are still 'dissatisfiers' with the current acne products out there,” Deitz said. “They're drying, they're irritating. The thought was, can we develop a formula that really doesn't dry and doesn't irritate, but delivers great results?”

Spotless will be sold through the same multi-level marketing structure Rodan + Fields uses across its other products, despite its pitfalls. Company executives continue to champion their business model as a way to help customers find the right products, and to offer women a simple path to running a business.

Proactiv took off when doctors Rodan and Fields created a licensing deal with infomercial company Guthy-Renker in 1995 to sell Proactiv through the television advertisements that featured celebrities like Jessica Simpson and Vanessa Williams. Proactiv became one of Guthy-Renker's most successful products, bringing in a reported $1 billion in sales in 2015. In March 2016, when Guthy-Renker entered into a joint venture with Nestle to expand Proactiv's international sales, Rodan and Fields sold their remaining rights to Proactiv royalties for a lump sum, for a dollar amount that was not disclosed.

The new acne product from Rodan + Fields will face a host of competitors, including Johnson & Johnson (Neutrogena, Clean & Clear, and Aveeno), Reckitt Benckiser (Clearasil) and Unilever (St. Ives). However, Rodan+Fields is already the top seller of skin care sets, ahead of Nestle (with Proactiv) and Guthy-Renker (with Meaningful Beauty), according to Euromonitor. Rodan + Fields' Unblemish adult acne set, which also treats wrinkles, was the fastest growing skin care kit in 2017, according to Euromonitor's most recent data. Rodan + Fields' multistep regimen kits range from about $170 to $200 for a two-month supply.

“Innovation can take many forms, but in the end, consumers will choose the brands that work,” Fatima Linares, research manager at Euromonitor said in an email. “Efficacy is key in these types of products.”

Proactiv innovated by treating the individual's entire face instead of spot-treating with harsh chemicals. Rodan + Fields' chief scientific officer Timothy Falla said Spotless is “revolutionary” because it delivers a patent-pending benzoyl peroxide treatment that helps keep oxygen in skin pores, which balances the skin and makes it difficult for pimples to form. Rodan and Fields were adamant about creating a two-step system after learning from Proactiv that most teens won't use all three steps.

The doctors say the success of Spotless will hinge on the efficacy of the product and the power of selling through consultants, deflecting questions about the business opportunity to their CEO.

"We're devoted to purpose,” Rodan said. “We're not business people devoted to profits.”

> Source: Forbes