What Is Private Labeling and How Does It Work?

What is private labeling?

Private labeling allows brands to outsource product sourcing and manufacturing to a third party. With private labeling, you apply the brand to the packaging only when it is time to sell the product. Although many consumers are unaware of the prevalence of this practice, it is common in today’s shopping environment.

For instance, if you’ve been to Costco, you may be familiar with the Kirkland brand, which includes items ranging 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, “Store brands accounted for nearly 30 percent of all new dollar sales flowing into the U.S. retailing industry last year.”

Private labeling is a great way for businesses to get their products into people’s hands, said Sara Nesbitt, CEO of Coastal Carolina Soap Co.

“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,” Nesbitt said.

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, said Rob Terenzi, co-founder of Vega Coffee.

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, Terenzi said.

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, such as Vega Coffee does for its ice cream manufacturer.

If you want to start selling a recent product but have 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. However, your product must be able to sell itself without special promotions or brand advertising.

Advantages of private labeling

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

• 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 that, ultimately, increases loyalty and sales among your customer base.
• High margins: Brands with private labeling usually have higher profit margins than resale products do because it is generally cheaper to make your own products than it is to buy premade products, especially if the development and marketing of the products are 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 and spread your brand awareness and exposure.
• Exclusivity: Private labeling allows you to separate yourself from your competitors. One of the best things about private labels is that in many cases, you have the exclusive right to sell the product. Good marketing will create demand for the product, which benefits you because your company is the only source of the product. [See our guide to creating a business marketing plan.]

Disadvantages of private labeling

There are some disadvantages of private labeling, but by planning ahead, you can usually avoid them.

Disadvantages of private labeling may include the following:

• 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 their customers will like the product. This can leave you with a lot of unsold inventory.
• Customer perception: It is common for people to trust a brand they have used for a long time as opposed to a little-known private-label brand. For this reason, do your research on customer preference before investing in private-label products.

Choosing the right private-label manufacturer

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

Many companies or individuals choose Amazon as their private-label manufacturer, but you should also consider manufacturers specific to your products. For instance, Vega Coffee 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 other options through a simple internet search.

Popular private-label manufacturers

• Alibaba: The mega-website has made it much easier to source products outside the U.S. The comprehensive directory connects brands to manufacturers that can create the products they want. It covers a wide range of categories, including electronics, lighting, cookware and personal care products.
• Wholesale2b: This online company offers a directory of top dropshipping suppliers. Dropshipping is when the manufacturer handles product shipping, thereby eliminating your need to obtain warehouse space to store your goods and hire employees to complete the shipping process.
• Worldwide Brands: Founded in 1999, Worldwide Brands conducts research on third-party manufacturers and provides their information to subscribers. This directory can help you decide which private-label manufacturer is best for your needs.

Jennifer Dublino ​​contributed to this article. Source interviews were conducted for a previous version of this article.