Wellness Investors: Beware The Placebo Trap

Wellness Investors: Beware The Placebo Trap

Dr. Jeff Chen, MD, has pioneered history’s first easy path to clinical validation for non-pharmaceutical products through Radicle Science.

The wellness industry is booming as consumers increasingly abandon the paternalistic, one-size-fits-all, prescription drug approach and flock toward a self-directed, non-pharmaceutical paradigm. This shift toward personalized self-care, prevention and natural alternatives has ballooned the wellness sector. McKinsey estimates that the global wellness industry is now $1.5 trillion and growing up to 10% CAGR.

As a physician and having run clinical trials on natural products at UCLA, I’ve seen firsthand how even the most promising treatments fail to beat placebo when subjected to rigorous human research. And as the cofounder/CEO of the digital health company Radicle Science, I’ve watched technology evolve to a point where we can now dramatically improve the cost and speed of clinical proof generation for wellness products.

Eroding Trust In Healthcare Is Growing The Wellness Industry

Rather than having to create demand de novo, the wellness industry merely needs to redirect existing spend from the adjacent massive traditional healthcare market—which is easy considering 2 out of 3 patients surveyed say trust in healthcare has declined. The largest reason for this trust erosion is feeling the “healthcare system acts out of self-interest rather than mine as a patient.”

With more people turning away from traditional healthcare, the tremendous upside of the wellness industry has clearly caught the attention of investors. From 2020 to 2022 alone, $146 billion of investment poured into the global wellness industry.

Proven Products vs. Placebo

But there’s a problem for most wellness investors. How do you know your money is funding a product that truly works? A company may have testimonials, five-star reviews and sales growth, but all of that could be due to the consumer’s beliefs about the product, rather than the product itself.

This belief results in the “placebo effect,” which is why rigorous clinical trials compare a product against a placebo (which looks like the product but has no active ingredient of its own, e.g., a sugar pill). This is necessary to prove any real effects of the product beyond placebo.

What’s the problem with placebos? Placebo effects tend to wear off, and when they do, your customers will drop off. This forces tremendous spending on acquisition since it can cost five times as much to acquire new customers than keep current ones.

Since repeat customers generate more than half of the revenue for a majority of businesses, pretty packaging of a placebo will likely struggle to sustain sales. Perhaps the boom and bust commonly seen with wellness brands isn’t due to the hype cycle, but rather the placebo cycle.

Why Few Wellness Products Have Clinical Proof

Historically, wellness products haven’t been able to access high-quality clinical trials comparing their product head-to-head against placebos. Clinical trials have traditionally served pharma companies; their business models (based on patented chemicals and resulting monopolies) can afford the tremendous cost and slow timelines of traditional clinical trials.

But AI, virtualization and the birth of the “proof-as-a-service” category has democratized access to clinical proof. Because of this, wellness brands can access affordable, rapid, standardized, automated, direct-to-consumer clinical trials.

Meeting New Federal Guidelines And Retailer Requirements

New federal guidelines now require brands to support all health claims with “high quality, randomized, controlled human clinical trials,” which might stand in stark contrast to the “research” some brands conduct on their existing customers. The guidelines also apply to anyone involved in “marketing and promotion” of the brand, including retailers and advertisers. This may explain why retailers are increasingly asking for clinical proof from brands.

And the regulators are biting to show that they aren’t just barking. In March 2023, federal regulators began investigating social media platforms for their potential role in advertising misleading products, including ones with fraudulent health claims. Then, in April 2023, federal regulators sent warning letters to 670 wellness companies related to health claims without proof.

The ROI In Proven Wellness Products

So why should you invest in wellness brands that have proven themselves better than placebo? Besides being the morally right thing to do, it is also right for your ROI. Proof can increase pricing and sales. A recent UCSD study found that consumers were willing to pay at least 20% more for supplements that were “clinically proven” and twice as likely to have high purchase intent.

Avoiding Placebo

Generally, the only way to truly know if a brand’s product is better than a placebo is to look for a clinical trial that has at least these five elements:

1. Third-party run, so the research is less likely to be manipulated.

2. Double blinding, so there is less bias since neither the study volunteers nor the researchers know who got the placebo vs. the brand’s product until the study finishes.

3. Placebo control, so the performance of the brand can be accurately benchmarked to that of the placebo.

4. Randomization, so volunteers are randomly assigned to receive the placebo vs. the brand and thus confounding factors (like diet, medication use or genetics) are spread evenly and unlikely to be the cause of any differences in outcome between the groups.

5. Statistical significance, so we know the brand outperformed the placebo by enough margin that the results were unlikely due to random chance.

Also, once you’ve identified brands that are proven to work, you also want to ensure their manufacturing is consistent and clean. Certifications from organizations like USP, NSF, UL, and the Clean Label Project can give you reassurance that the brand is able to repeatedly produce their product, with all listed ingredients at the listed doses and free of contaminants.

The Proof Is In The Pudding

Proof-as-a-service disrupts the status quo and makes clinical proof as affordable as marketing exercises, such as hiring a PR agency. When a brand doesn’t invest in any proof generation, they can be severely limiting trust, CLV and profits. This should be a red flag for investors—the brand may already suspect they’re no better than a placebo!

Proof increases consumer and retailer trust. Proof differentiates from competitors. Proof deters FTC action and class-action lawsuits. Proof boosts valuation. Proof quashes employee skepticism and lifts morale. And proof is finally accessible for most brands due to the emergence of the proof-as-a-service category. So let your investment dollars flow where the proof goes. Whereas the truth can hurt, proof heals.

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