Private Labeling Business Model (With Pros & Cons List)
A private label product is manufactured by a contract or third-party manufacturer that is sold under a retailer’s brand name. As the retailer, you will specify everything about the product—how it’s packaged, what the label looks like, anything else that goes with it—you will pay the manufacturer to have it produced and delivered.
The opposite of this is buying other companies products (with their brand names on them) and reselling it, which is known as arbitrage.
Private label is mostly synonymous to a white label product. Where a white label product is a product or service produced by one company (known as the manufacturer or producer) and other companies (known as the marketers or entrepreneurs) rebrand the product as if they had made it. The only real difference is that with private labeling, you have more choice.
For example, Costco sells a variety of branded vitamins from companies such as NatureMade, but it also sells its own vitamins under the Kirkland brand—Costco’s private label brand.
Private labeling sounds like a great idea, here are some of the biggest advantages associated with it:
- Control over production – Third-party manufacturers work at the retailer’s direction, you have complete control
- Control over pricing – Since you have control over the product and brand, you get to determine product cost and pricing
- Adaptability – Small retailers can move quickly into a private label product production and you can easily add or subtract features by interacting with your manufacturer
- Control over branding – Private label products and white label products bear your brand name and packaging, specifically designed for the product
- Control over profitability – Since you have control over production costs, order quantities and pricing (and have lots of options), you can control the level of profitability
- Reduced Competition – With a private label, you know own your product and brand and you aren’t competing on just price anymore, but rather marketing and branding
Although the disadvantages are limited, it is still important to discuss the differences and be aware:
- Manufacturer dependency – Since your production and product line are in the hands of a third-party manufacturer, you are dependent on their schedule and equipment. It is incredibly important to establish partnerships with well-established manufacturers
- Difficulty building loyalty – Household brands are well-recognized and are found in many retail outlets, whereas your brand is the newcomer, needing to build its reputation
- Competition – This is a double-edged sword, being on advantages and disadvantages. Unless you have an exclusive partnership with your manufacturer, your product will be produced for many other companies and will face stiff competition. The only thing separating you is marketing and branding
- Dead Inventory – If you make a bad choice on a product to private label, you’re stuck with it. With traditional, branded merchandise, you can usually return it
- Minimum Orders – most manufacturers will require a minimum quantity in the order before they will consider to manufacturer your product, this varies depending on the manufacturer and product
Private label products are typically sold at a lower price point than brand name competitors, although some private label brands are now being positioned as premium products or niche products with a higher price tag associate with it.
Amazon Private Labeling
Amazon has been a popular channel for small companies or sole proprietors to launch a private label product. By leveraging the Amazon FBA infrastructure, small companies can launch private label brands without having to invest in any storage facilities. Amazon even handles all of the backend logistics.
Since there are so many private label products on Amazon, most buyers don’t even think twice about buying them, and instead rely on reviews. This makes it a perfect channel to sell private label products on. On eBay, most people are searching for specific brand name items. But on Amazon, they are looking for a product that will do a job.
Private labeling or white labeling can be a great thing, but before you jump in to it, you must know the risks. Start slow and east into it. Test your idea with one product at a time, and be sure to do the research. You need to know the ins and outs before anything else.