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What Is Private Labeling, and How Does It Work?

BySammi Caramela,
business.com writer
|
Nov 14, 2018
Home
> Marketing
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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 Coscto, 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 an extensive list of private-label brands you might never have realized existed.

According to the Private Label Manufacturers Association, "Private label market share has reached nearly 25 percent of unit sales in the U.S. and is expanding faster than national brands." The technique is only growing, and many businesses can benefit from it – on either end of the deal. Here's everything you need to know about private labeling.

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 it 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's 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 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.

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 PLMA hosts trade shows where you can find potential partners. Of course, you can find countless other options through a simple Google search.

Sammi Caramela
Sammi Caramela
See Sammi Caramela's Profile
Sammi Caramela has always loved words. When she isn't working as a Business.com and Business News Daily staff writer, she's writing (and furiously editing) her first novel, reading a YA book with a third cup of coffee, or attending local pop-punk concerts. Sammi loves hearing from readers - so don't hesitate to reach out! Check out her short stories in Night Light: Haunted Tales of Terror, which is sold on Amazon.
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