Do you have a product idea you would like to bring to life and sell to the market, but you are unsure which production option between contract manufacturing and private labeling is best for you?
If so, this article will demystify both concepts and discuss the pros and cons of each model, including the differences between both models.
Let’s start with the difference between both production models, then focus on each:
目录
Contract Manufacturing vs. Private Labeling: The Differences
| Feature | Contract Manufacturing | Private Labeling |
| Control | Contract manufacturing gives you more control over production elements like prototyping, product design, manufacturing, etc. | You don’t get as much control as you get with contract manufacturing because private labeling involves carrying already-made products under your brand name. |
| Customizability | For example, when working with an end-to-end contract manufacturer, you can change the prototype in the product design phase and keep tweaking things until you get the final product that goes through a dry-run production before moving on to full-scale production. | Private labeling is not as customizable as contract manufacturing. Since the model involves selling already-made products under your brand name, you have very limited customizability options beyond branding and marketing |
| Wait periods | Compared to private labeling, contract manufacturing takes longer. That’s because it may take longer to design, prototype, test the product, and make changes and additional prototypes to arrive at the final product. | Private labeling has shorter wait periods. Once you find a private label manufacturer who carries products you’d like to sell, you can get started quickly, especially if the manufacturer has stock ready for your brand. |
| MOQ | Compared to private labeling, contract manufacturing tends to have a higher MOQ—because of the process of designing, manufacturing, and assembling products | Private label manufacturers have individual policies on the minimum order quantity, but in most cases, private label manufacturers have lower MOQs than contract manufacturers |
What is Contract Manufacturing?
Contract manufacturing is a business model where small and medium-sized businesses–such as dropshipping businesses—outsource product production to a third-party manufacturer.
In contract manufacturing, a dropshipping business owner who wants to produce, say, gym clothes—or other product lines—without investing in the cost of setting up an in-house manufacturing process can contract the job out to a third-party manufacturer with that capacity.
Contract manufacturing is popular, especially among dropshipping business owners, for various reasons. The chief of these reasons is that contract manufacturing makes it easier for business owners to bring new products to the market at friendly production costs.
The other advantages and disadvantages of contract manufacturing are:
Contract Manufacturing: Pros and cons
| Pros | |
| Reduced costs | Because contract manufacturing eliminates the need to set up and kit out a manufacturing plant, it helps reduce startup and overhead costs—or keep them low—which can help businesses get a higher return on investment faster. |
| It makes it easier to get to market | Modern-day contract manufacturers use innovations like CNC machines, 3D printers, and rapid prototyping to create products quickly. This efficiency means you can take products to market faster because the process makes it easy to go from product to development to a ready-for-market product quickly. |
| It’s labor and resource-saving | Besides kitting out a factory, you need skilled workers to manage the production line; this, as you know, can be costly. Contract manufacturing eliminates all these labor costs because contract manufacturers have ready staff. Additionally, because contract manufacturing takes care of the manufacturing process, it frees you to focus on other important aspects of your business, such as selling products, marketing, and branding. |
| Flexibility | When you get into a contract manufacturing agreement, the contract manufacturer takes over the production process. This allows a business to be more flexible. For example, when you don’t have to worry about managing a plant, you can dedicate more time to R&D, marketing, branding, customer outreach, etc. |
| Expert help and guidance | Some contract manufacturers go out of their way to support business owners by providing technical insight into the production process, including product testing for potential flaws and risks that may be costly down the line |
| Better quality products | Contract manufacturing gives more control over the product design process —especially when contract manufacturers offer end-to-end services. This control allows you to create an end product that matches your exact specifications, leading to higher and better quality products. |
| Flexibility | Contract manufacturing is one of the most flexible business models for small and medium-sized businesses because contract manufacturers offer competitive prices, thanks to their capacity to buy raw materials in bulk. Buying raw materials in bulk makes it easier for business owners to scale production flexibly without incurring additional fringe costs. Additionally, because contract manufacturers keep a prototype model on hand, it is easier to manufacture and scale production up or down. |
Even though contract manufacturing makes the production process easier and more manageable for small business owners, it also has some disadvantages, including:
- It’s not easy to find high-quality contract manufacturers: The process of finding a reliable and high-quality contract manufacturer takes time and requires diligent, time-consuming research.
- Production delays: Although most contract manufacturers have efficient production facilities and processes, in some cases, perhaps because of workload issues—since contract manufacturers often have many clients—there may be production delays.
- Higher startup costs: Although you won’t have to set up a manufacturing plant, in most instances, contract manufacturers will ask for a lump sum upfront to cater to the production process. While this sum may be nowhere close to the amounts it would take to set up a manufacturing plant, the sum is still usually high, which can be a barrier to entry for small startups.
- Higher MOQ: Contract manufacturers need to buy raw materials in bulk. Because of this, even though most serve multiple customers and there may be raw material overlaps between businesses, most of these manufacturers will have higher minimum order quantities to ensure they optimize the production line. Higher MOQ can be a barrier to entry for small businesses and startups.
- Risks to intellectual property: Outsourcing to contract manufacturers demands that you give the contract manufacturer access to your product design, even patented ones. This can be risky because contract manufacturers employ many workers. Even though these manufacturers vet their employees very well, it’s not unheard of for workers to leak intellectual properties to the public—or even competitors. Fortunately, you can hedge against this by having an iron-clad contract.
Which Businesses Can Benefit The Most From Contract Manufacturing?
All businesses can benefit from contract manufacturing. However, this model is especially well-suited to bootstrapped startups and small businesses looking to get products to market at a low cost without setting up factories and production lines.
A dropshipping business is a prime example.
Let’s now focus on private labeling:
What is Private Label Manufacturing?
Private labeling does not require you to set up a production line or hire a contract manufacturer. Instead, you find a manufacturer who already produces products in your target market—for example, gym clothes or shampoos—and get into a private label contract where you sell their products under your brand name.
In private labeling, a manufacturer produces a product that a business owner then takes, brands, and markets under a certain brand name.
For instance:
Let’s say you’re a small business owner looking to private-label—and perhaps dropship—gym clothes. In this case:
You would not design and produce the clothes in-house or outsource the manufacturing process to a contract manufacturer who would need to design, manufacture and assemble the pieces. Instead, you would find a manufacturer or supplier of privately labeled gym clothes and get into a contract to sell that manufacturer’s product under your brand name.
Like most business or production models, Private label manufacturing has advantages and disadvantages. Starting with the pros, the most apparent ones are:
The Pros and Cons of Private Labeling
| Pros | |
| Zero manufacturing experience required | In private labeling, you do not need any manufacturing experience. All you need to do is find a private label manufacturer in your intended industry—whether that’s cosmetics, food, clothes, etc.—and market their products under your brand. |
| It’s highly adaptable | Private labeling is a versatile business model that makes it easy to bring brands to market quickly. For instance, when a retailer finds a private label clothing manufacturer with ready-made clothing pieces waiting for branding, it becomes easier for this retailer to get the products to market faster. This adaptability means brand retailers can get new products to market faster. |
| Good profit margins at low operating costs | Private labeling has the potential for good profit margins at low operating costs. The potential for high profits at minimal or zero operating costs is exponential because the private label manufacturer handles everything to produce the end product. Because of the cost-effectiveness of private-labeled brands, business owners can take brands to market at an affordable price without compromising quality. |
| Very expansion friendly | Because all it takes is to find a potentially profitable private labeled product, private labeling is especially ideal for business owners with a penchant for rapid expansion. It does not involve spending a lot of time, energy, and resources on R&D, which makes it easier to add new products to a brand line, thereby making it easier to expand a private labeled business. |
| More control | Besides having more control over the production costs, branding, and marketing, private labeling also gives more control over the end product. For example, some private label manufacturers can allow you to customize the brand to fit your audience, perhaps by changing some aspects like product design, the colors, and even some components. Private labeling also gives you more control over brand management and loyalty over time, making it easier to build a profitable private label. |
| The potential for additional income streams | In some instances, once you get into a private label contract, you can also wholesale some of your products to other retailers. This can create an extra income stream for your business —from the premiums other retailers pay to carry or sell your products. |
Although private labeling is very beneficial, especially to small business owners, it also has a few downsides that you need to consider before adopting this model:
- Minimal control over product development: Although some private label manufacturers will allow you to customize products, most have a limit to how far you can go with this. For example, in the case of a patented formula, you have no real control over formula changes, making it challenging to customize the product to changing market and customer demands and needs.
- MOQ: Like contract manufacturing, private label manufacturers may ask brand owners to sign an agreement indicating the minimum order quantity over a period, say a month. In some instances, the minimum order quantity may be higher, making this a possible barrier to entry for bootstrapped businesses.
Which Businesses Can Benefit The Most From Private Labeling?
Thanks to the low startup costs involved, private labeling is especially ideal for startups and small, lean businesses. It makes it easier for such businesses to get branded products to market quickly without focusing on production—focusing on marketing the brand and making sales instead.
Private labeling is especially ideal for dropshipping businesses because most modern private label manufacturers from China and worldwide offer private label dropshipping. Private label dropshipping takes care of product production, branding, packaging, and shipping to customers, which frees you to focus on marketing your private label brand.
Conclusion
As this article has illustrated, Contract manufacturing and private labeling have their unique advantages and disadvantages. Fundamentally, the model that’s right for you as a business owner boils down to your business needs.
If you want to bring a unique product to the market—perhaps something with a custom formula or design—contract manufacturing is the right fit for you because it allows you to customize and prototype the product.
On the other hand, if you want to get into a market fast, perhaps to test product viability, private labeling is the right choice because it makes it easier to jump in, get started, and take products to a ready-market fast.
