Private Labeling refers to manufacturing or acquiring a product via a third-party, and labeling it under a specific brand for retail. The type of manufacturer depends on the entity involved in private labeling, however, in most instances, includes an online marketplace such as Ali Baba or a foreign manufacturer or seller. The product is then customized in several different ways such as adding a logo or imposing a unique identifier to stand out from the competition.
Private Label products are sold to consumers via a retail outlet or through online marketplaces such as Amazon, attracting buyers who are willing to pay a premium. It may seem like somewhat of a foreign concept, but the practice is fairly common and in-fact many large corporations use this technique to drive sales and turn around high profits.
Why Would a Company Private Label Products?
The reason behind private labeling is simple. Mass producing thousands of original and innovative products is not a viable strategy for a single company. You are most probably using several private labeled products without even knowing. For example, do you by chance happen to own any athletic sneakers or attire? They most likely come from a company that practices private labeling e.g. Nike or Adidas. Another great example is the Dollar Shave Club, if you’ve ordered a razor from them, you should know that it’s 100% a private label product.
The examples mentioned above should give you a pretty good idea of how common private labeling is. It has amazing potential and like everything else a few downsides as well. So without further a do, let’s get into a few of those to give you some insight.
Is Private Labeling Always a Good Strategy?
At this point, some of you may be convinced that Private Labeling is a great way to acquire goods while others might be a bit skeptical if it’s really a good long term strategy. To give you a more realistic image of what private labeling truly is, we will explore a few pros and cons and clear any doubt or misconceptions around the topic.
Advantages of Private Labeling
- Anyone who knows how to operate a business, knows that demand and profits are mutually exclusive. The demand for a certain type of product is always fluctuating. Market trends are volatile and a business needs to constantly tweak products to stay ahead of the competition. Fortunately, private labeling allows companies to instantly make changes and adjust to market trends. This is one of the best ways to maximize profits, while also providing a product that consumers want to use.
- Speaking of profits, private labeling allows businesses to have complete control over pricing and profit margins. Since products are acquired for a relatively cheap price, it isn’t hard to stay competitive. However, this doesn’t exactly mean that a businesses can keep the price tag as high or low as they want. Having a smart pricing strategy is essential! If the product isn’t competitively priced, customers will flock to the competiton. Making it too cheap might give the impression of selling something of inferior quality. You need to undercut the market by just the right amount to ensure a good price to sales ratio.
- A really important thing required for a business to succeed is creating brand loyalty. If you have a brand, through which you sell high-quality products, you’ll attract a lot of customers. Those customers will, after some time, come back to purchase from you again. They will then inform other people and through word of mouth, you’ll be gaining a lot of traction. That’s why private labeling is so great as it allows you to create a brand through which you can gain the loyalty of thousands of customers, therefore ensuring that you always have a form of sales.
- Arguably the most important advantage of private labeling is the control over branding. When it comes to branding, whether it is packaging or logos on your product, you have complete control.
Disadvantages of Private Labeling
- A common misconception, an issue that private labelers face, is the perception that private labeled products are not up to the mark in terms of quality. While this may be true in some cases, most of the time the reality is quite the opposite. Because of this misconception, consumers are weary of making a purchase, therefore driving away sales. To combat this private labeling brands put in place solid quality control measures, ensuring that only the best product reaches their customers.
- Since private labeling doesn’t involve producing your own goods, it can often result in a dependency on the manufacturer. Luckily, there is a good way to circumvent this problem and that is by diversifying manufacturers for a particular product. This is especially true for bigger brands that have a ton of sales for a single product.