Private labeling is legal because a private labeling firm does not underhandedly try to pass off a manufacturer’s products as their own. Instead, they develop the product. and pay a manufacturer to produce it. The entire process is done above board and does not violate any commercial or intellectual property laws.
That said, it is important to understand how private labeling works and how to navigate it in accordance with the law. So, let’s look into the details, shall we?
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What Exactly Is Private Labeling, and How Does It Work?
A private label product is a product that is specifically designed and produced for one brand or firm. First, the brand identifies a product that it would like to offer its target customers. It then hires a manufacturer, shares all its product specifications, and packaging preferences.
The manufacturer, in turn, advises on the viability of the product concept and manufactures the product (according to the firm’s vision) at a fee.
Private Label Agreements
A private label agreement is a contract between a manufacturer and a retail company. In it, the manufacturer commits to producing a product based on your brand’s specifications and goals.
A comprehensive private label agreement includes elements such as payment terms, indemnification, product orders, and recall responsibility. The conditions should be discussed and mutually agreed on without violating the intellectual property rights of both parties.
Legal Requirements for Private Labeling
Brands are, legally, required to meet specific certification standards before they can sell their products to consumers. These standards are put in place to ensure that the private label items are safe for all consumers and are usually provided by specific regulatory bodies.
That said, product certifications may vary from one country to another. They are, nonetheless, essential because they validate the safety and quality of a product.
Notably, not all product approvals or labels are accepted worldwide. Some are also confined to a certain range of items like is the case with baby products or health-related items.
Is It Legal to Set Up a Private Label Business?
Yes, it is.
Brands are, in law, allowed to outsource the manufacturing of their products to independent manufacturers and later on-sell the products however they choose. Apple, for example, designs its products in California but has no factories. The parts of Apple devices are mostly manufactured and assembled in China.
Nevertheless, in most countries, the brand is often required to explicitly disclose where their products were manufactured. A private label business is also fully legal as long as it is duly registered, honors its tax obligations, and sells legal merchandise.
Building a private label enterprise takes effort, but it’s well worth it. Moreover, private labeling is entirely lawful as long all participants agree and abide by the terms and conditions of the model.
When Should You Switch to Private labeling?
Private labeling can take your business to a new level. It will, however, need substantial capital input and dedication. As a result, before choosing this model, ensure that you have completed the following steps:
- You Have Proven the Viability of Your Company Concept.
It may be unwise to develop a brand around a commodity or a specialty that isn’t in high demand. So, before engaging in private labeling, take time to research and ensure that your product concept is profitable and
- You Have Found a Number of Feasible Products
A broad niche is likely to provide better opportunities for your business than a narrow niche where you have little if any room to diversify your range of products. For instance, if you offer eco-friendly soaps, it would be an advantage to be able to sell other eco-friendly hygiene goods as well.
- You Have a Large Amount of Start-up Capital
Private labeling needs a large financial commitment compared to other business strategies like dropshipping. You will be required to pay for some manufacturing processes, like prototyping, in the early stages and most suppliers also have minimum order quantity stipulations. This, coupled with other products and logistical expenses, would require a tidy sum of capital.
Hacks for Starting a Private Label Enterprise.
- Find a Suitable Target Market
The sales you may make are often highly dependent on how well your private label products can address the needs of your target market.
When you decide what kind of products you would like to offer, look out for manufacturers with the right manufacturing capabilities.
Make a list of potential manufacturers, contact them and discuss the possibility of a private labeling partnership. If they are agreeable, proceed to find out what initiating the private labeling process would entail.
- Sample the Products
Share your product ideas with your chosen manufacturer and request samples to ensure that they understand the design and can deliver the quality standards that you have in mind.
- Launch and Promote your Shop
If the samples capture your private label vision, place an order for the manufacturer to produce your private label goods. Make an effort to also market the goods so that they are well-reviewed when they finally become available in the market.
- Advantages of Private Labeling
Private labeling benefits both the manufacturer and the brand. Let us take a look at the benefits you can expect as you venture into it, shall we?
- No Manufacturing Capabilities Are Required
The factory assumes full accountability for the production process from beginning to end. You would, therefore, not require any prior manufacturing resources to get started. Furthermore, in most cases, a well-established manufacturer would likely produce goods at a more cost-efficient rate.
- Sample Production Time is Short
If you have a consumer who needs a sample as the items are being manufactured, they are always at your disposal! The manufacturer will most likely have a sample item available for you to exhibit to potential consumers.
- Boost Profit Margins
The exclusivity of private label products allows you to set prices above the prevailing market rates of other run-of-the-mill products in the market. This could, in turn, offer you a better profit margin compared to other approaches such as white labeling.
Private labeling enables you to distinguish yourself from your competition. You can take time to research gaps in the market as well as how to fill them to gain an edge over other brands in your niche.
Disadvantages of Private Labeling
While private labeling has numerous advantages, merchants should be aware of these few factors that may have a negative impact on their business:
Given that the (MOQ) minimum order quantity is usually higher than a conventional manufacturing order, you may end up with a huge quantity of stock that may not sell as fast.
- Minimum Order Quantity Rules
Most manufacturers, regrettably, have an MOQ for bespoke items. While this may not be a problem for capable firms, startups, and small retailers may struggle to achieve a high minimum order demand.
- Quality Control Issues
Outsourcing manufacturing means that you do not have complete control over the production process or the quality of products that it yields. Nevertheless, your brand would still be liable for any quality or safety issues that may arise from the use of your product.
- Longer Shipping Periods and Increased Prices
When dealing with an international manufacturer, shipping is likely to cost considerably more and may take longer compared to situations where you would be producing the goods at your factory.