What Is Private Labeling, and How Does It Work?

By business.com editorial staff,
business.com writer
| Updated
Mar 12, 2020
Image Credit: Dean Drobot/Shutterstock

Should your store expand to offer its own labeled products to compete with big brands?

A private-label product is made by a third-party company but sold under a specific retailer's brand.

The practice is far from a foreign concept to many retailers. Many consumers are unaware of its prevalence, but it's a common practice in today's shopping environment.

For instance, if you've been to Costco, you may be familiar with the Kirkland brand, which consists of items from clothes to food. Kirkland Signature generates about one-quarter of Costco Wholesale's sales and is known as a private-label brand. Amazon also has private-label brands you might never have realized existed.

According to the Private Label Manufacturers Association, "Private-label market share has reached nearly 25%% of unit sales in the U.S. and is expanding faster than national brands."

What is private labeling?

"Private labeling is selling products a business makes under another company's or business's brand," said Sara Nesbitt, CEO of Coastal Carolina Soap Co., who has three private-label accounts. "It is a fabulous way for a brand to put their products in people's hands. For the business carrying these products, private labeling allows them to sell products they have no way of manufacturing themselves with their unique brand on them."

Private labeling can also describe the practice of taking an ingredient or component supplied and produced by a secondary company and using it to benefit another brand's product, often without explicit attribution, added Rob Terenzi, co-founder of Vega Coffee. Most private-labeled products are sold at a lower cost.

How does private labeling work?

Private-label manufacturers secure deals with individuals or brands to sell their products under the manufacturer's name with no attribution. The products can be sold independently or in support of other products.

For example, Vega Coffee is purchased by ice cream manufacturers as an ingredient and by other coffee brands to be sold in their marketing and packaging materials. Even though the brand doesn't receive recognition, it experiences increased sales volume, helping it lower costs across consumer-facing product lines and paying its farmers for their contributions, said Terenzi.

He added that this is a mutually beneficial agreement, as the distributing business can leverage the social impact of Vega Coffee. "In other words, while XYZ brand of coffee may not mention Vega Coffee in their marketing, they will say that their coffee benefits farmers in Latin America, thereby driving more sales through their built-in audience."

Private labeling works best for products that improve the value of other products, like Vega Coffee does for its ice cream manufacturer.

If you want to start selling a recent product with no prior experience, private labeling is a great way to start. Consumers will be more willing to purchase your merchandise through larger manufacturers than through a business that has made no previous transactions, but your product must be able to sell itself without special promotions or brand advertising.

However, if you're looking to build your brand, don't rely too heavily on private labeling, as you will not be credited for your products. The technique is better suited for individuals looking to experiment with production rather than starting a well-known and respected business.

The advantages of private labeling

There are both advantages and disadvantages to private labeling for products that are developed and sold by the company that produces them. Some of the advantages of private labeling may include:

  • Loyalty: The key to long-term business success is building a loyal customer base. Branding through private labeling is a great way to build loyalty from customers who like your products. With limited accessibility, customers become attached to your brand, allowing them to feel as though they are among a select few that own it, which ultimately increases loyalty and sales among your customer base.

  • High margins: Brands with private labeling usually have a higher profit margin than resale products. The reason for this is because the cost of making your own products is generally lower than buying products that are premade, especially if the development and marketing of the products are of high quality.

  • Wholesale income: In addition to exclusively selling your product, you may consider operating as a wholesaler for your brand and offering limited access to other retailers that pay a premium acquisition cost for the right to carry your brand. This will generate additional income as well as spread your brand exposure.

  • Exclusivity: Private labeling allows you to separate yourself from your competitors. One of the best things about private labels is that you alone have the exclusive right to sell the product. Good marketing will create a demand for it, which benefits you, because you are your customers' only source for the product.

The disadvantages of private labeling

Just like everything else, there are disadvantages to private labeling. The good news is that by planning ahead, you can usually avoid the main drawbacks of private labeling.

 Some of the disadvantages may include:

  • Minimum orders: Most manufacturers have a basic requirement of minimum orders when you want them to produce customized products for your private labeling. Unfortunately, in many situations, the minimum order is much larger than what you would otherwise order.

  • Dead inventory: Some retailers make the mistake of ordering a line of privately labeled products without knowing whether or not their customers will like the product. This can leave you with a lot of unsold (dead) inventory.

  • Customer perception: It is common for people to trust a brand they have used for a long time, as opposed to trusting a little known private-label brand. For this reason, do your research on customer preference before investing in private-labeled products.

Choosing the right private-label manufacturer

Before choosing a manufacturer, you should conduct research on your target customers so you're familiar with their purchasing patterns and form the best proposal to potential private-label brands. Attend networking events, trade shows, etc., to improve your products, make contacts and gauge competition. You might also consider patenting your idea to prevent competitors from creating similar products.

When deciding which private-label manufacturer to invest their product in, many companies or individuals choose Amazon. However, you should also consider various manufacturers specific to your products. Take Vega Coffee, for instance: It secured deals with ice cream manufacturers and other coffee brands rather than turning to a broad marketplace.

The Private Label Manufacturers Association hosts trade shows where you can find potential partners. Of course, you can find countless other options through a simple Google search.

business.com editorial staff
business.com editorial staff
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