Yes, private labeling is worth it!
Whether private labeling will be worth it for you specifically as a business owner boils down to your understanding of its benefits and drawbacks.
Benefits like a low barrier to entry, lower operating costs higher profit margins, drawbacks like limited production and operational control shall be discussed in this article, along with everything you might need to know about private labeling.
Let’s start with upsides:
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Hows Private Label Doing?
Consider these statistics:
- In the US, the private label market was worth $158.8 billion in 2020, according to Statista
- The global private label food and beverage market will grow at an average CAGR of 8% to hit $15.1 billion by 2028, according to an industry report by FIOR
- In Europe, Private label brands grew by more than 30% and showed positive market penetration in over 16 countries in 2020, according to a report by Nielsen
- Between 2007-2012, the global private label market expanded to reach over $350 billion, according to a report by Euromonitor.
These figures indicate that the private label market is robustly growing and will continue growing long into the future as consumer trends change and consumer brands become more and more popular, making the prospect of entering into it worthwhile for savvy business owners.
11 Reasons Why Private Labeling Is Worth It:
Besides the enticing market facts and figures highlighted above, private labeling is worth it because:
a: Low barrier to entry
Consider a conventional scenario where a business owner who doesn’t have manufacturing facilities wants to bring a product to the market, perhaps a new shampoo scent.
In such a case, this business owner would have two options:
- Set up manufacturing facilities, including kitting the processing plant and hiring qualified professionals to run the plant. As you can imagine, this can be pretty pricey, especially because manufacturing processes usually involve more than just the production line. For example, the business owner would also need an in-house research and development team in this case. This can be pretty pricey, raising the barrier to entry.
- The second option is to hire a contract manufacturer or third-party manufacturer. While this option is better and less costly than setting up a manufacturing plant from scratch, contract manufacturing also has a high barrier to entry. For example, because of the raw material sourcing, research and development, and prototyping involved in third-party manufacturing, contract manufacturers usually have high MOQs that can make it difficult for startups to enter a market.
Private labeling is worth it because it has one of the lowest barriers to entry.
In the example above, all the business owner would need is a shampoo manufacturer or supplier who offers private labeling. From there, he would choose an ideal shampoo scent or line of scents, get into a private label contract with the said manufacturer or supplier, and start selling them under his brand name in the market.
Another element aspect that makes private labeling worth it in terms of a low barrier to entry is that most private label brands do not have to deal with the conventional business issues most eCommerce businesses face.
For example, as a private label brand, you won’t have to deal with inventory, packaging, and even order fulfillment, especially if you work with a private labeler who offers dropshipping services.
All you have to do is pick a product from their line of private label products, private label it, and have the manufacturer/supplier fulfill orders as you receive them. This makes it easier to get into a market, especially because most private label manufacturers have low or no minimum order quantities.
b: Lower operating costs
As mentioned, private label brands do not deal with manufacturing, warehousing, and packaging costs because, in most cases, the private label manufacturer handles all this, which lowers operating costs for a private label business owner.
Owning and operating a private label brand has such low costs that there are plenty of success stories of business owners running private-labeled Amazon FBA businesses with little overhead cost while generating thousands of dollars in revenue per month.
c: More control
One of the upsides of a private labeling business model is that it gives business owners more control over key business elements like production, branding, and marketing.
For example, many private label manufacturers will allow you to customize ingredient and brand packaging, including the product’s shape and color. Additionally, because you won’t have to deal with tons of overhead costs and production elements, you have more control over marketing and branding, making it easier to build a lovable market brand.
d: Higher profit margins
Because you have more control over product pricing, you can price your private labeled products at whatever price you want. Most retailers price their products at two or three times higher than the cost to acquire the products from a private labeler, depending on the kind of brand they want to establish. This markup means you can create a competitive and profitable brand.
Additionally, most private label manufacturers already have these products manufactured. Thus, they won’t incur additional costs to private label them for you —because they have all the tools and materials they need. That means they can sell these products to you at below-market prices, which means you can price them accordingly to earn the best profit margins possible.
e: Zero manufacturing experience/expertise needed
One of the upsides of private labeling is that you don’t need manufacturing expertise or experience. All you need to do is align yourself with a private label manufacturer who can handle the entire production process.
f: Minimal brand building risks
Private labeling is a low-risk business, especially when building a marketable brand.
The low-risk nature of this business model comes from the fact that you won’t need to put down truckloads of capital into setting up a manufacturing plant or pay labor costs.
Modern-day private label manufacturers know that the solopreneurship trend is growing rise and how capable solo entrepreneurs are at building influential market brands. They are, thus, willing to work with anyone to private label smaller batches for business owners looking to test a product in the market. This lowers your risk as a business owner, more so because you won’t have invested a substantial amount upfront.
g: Market edge
Because you won’t have to deal with production costs, overhead costs, and other costs common with conventional eCommerce stores, you will be free to focus on marketing and building your brand.
The ability to focus on marketing and branding while your private label manufacturer handles production, warehousing and order fulfillment will give you a competitive market edge against competitors not using private labeling.
Having more control over pricing will also give you an edge because you can offer competitive prices or even bundle products to offer your customer base the best value for money.
h: Better brand and customer loyalty in the long-term
Times have changed, and long gone are the days when customers favored brand name goods and considered them superior to private label brands. Today, many successful private label brands have proven that building a private label brand with a long-term customer and brand loyalty is doable.
One of the reasons for this shift is that private labels have more control over quality and branding, allowing them to create a consistent brand image that attracts and retains customers.
For these reasons, and many others specific to each retailer, private labeling is worth it.
However, like most things in this world, private labeling also has a few select downsides that you should know as you determine whether it will be worth it for you —or not.
The Cons of Private Labeling (When Private Labeling May Not Be Worth it)
These downsides include:
a: Dependence of a third-party
If you don’t want to depend on a third party for your production, private labeling may not be worth it for you because the model depends very significantly on private label manufacturers.
b: Limited production and operational control
The private label business model calls on you to work with a private label manufacturer who handles all the production and operational costs. Thus, private labeling may not be worth it if you want more control over these elements.
This becomes especially apparent in cases where some private label manufacturers have restrictions on what you can change about the products they have available for private labeling—formula, product design, etc.
For example, if a private label manufacturer decided to stop manufacturing a product you have private-labeled that’s also doing well with your customers, it can negatively impact your brand.
Fortunately, choosing a reliable private label manufacturer can help you avoid such instances.
c: It takes longer to build a brand
Warren Buffet has a quote that summarizes this issue well: “It takes 20 years to build a reputation….”
Indeed: it takes a lot of dedicated time and energy to build a reputable brand, more so because consumers are very loyal to one brand —more than 50% of consumers remain loyal to one brand.
Thus, as a private label brand owner, it will take a lot of time and energy to create a loyal brand following, and you have to get everything right because the last part of Warren Buffet’s quote above states: “… and five minutes to ruin it.” If you change something that your customers dislike along the way, perhaps your logo, packaging, or product quality, it will hugely impact your brand, sometimes beyond repair.
Some other private label downsides you may have to consider to determine whether it’s worth it for you include:
- MOQ: All private label manufacturers have minimum order quantities that you need to sustain. Some manufacturers have high and restricting MOQ, but with a bit of research, you can find a private label manufacturer with manageable MOQs.
- Production delays: Because private label manufacturers work with many retailers, there may be production delays, especially if you don’t keep an eye on key metrics. Fortunately, you can avoid this by working with a trusted private label manufacturer and ensuring that you don’t over-purchase and undersell.
Conclusion
All in all, private labeling is worth it if you’re looking to get into a market fast, perhaps to test demand for a product. It’s also worth it because of its low barrier to entry, low operating costs, control over branding and marketing, higher profit margins, and all the other upsides we discussed.
On the other hand, if you want more control over product production elements, it may not be worth it for you.
Given this, it’s best to consider your options and everything we’ve discussed so far to determine if private labeling is right and worth it for you as a business owner.
Private Labeling FAQ
Here are some commonly asked private labeling questions:
How can I choose the right private label manufacturer?
The best way to choose the right private label manufacturer is to conduct thorough market research.
Start with researching your target audience to ensure you know the products they want to purchase or are already buying in the market. Knowing what your audience wants will help narrow down your list to manufacturers only dealing with products you want to private label.
After understanding your audience, use the following Google search parameter, “private label manufacturer + (your product of choice),” without the quotes, for example, “private label manufacturer + shampoo,” to create a healthy list of potential private label manufacturers.
From there, research each manufacturer, keeping in mind trust indicators like reviews, registration, years of operation, etc., to determine which private label manufacturer is right for you.
Besides the above process, you can also find a reliable and ideal private label manufacturer by attending networking events and trade shows.
When is the right time to shift to private labeling?
There is no right or wrong answer here, but you will know that it’s the right time to shift to private labeling if:
- You have done proper and exhaustive market research and validated your business idea
- Market research has helped you identify several viable products within the same niche.
- You have the required startup funds —while private labeling startup costs are not all that high, you will need capital to meet minimum order requirements and make down payments.
- You have a clear fulfillment process —Unless you intend to work with a private label manufacturer who offers dropshipping and order fulfillment services, only consider private labeling after creating a robust order fulfillment process.
- You can meet all legal requirements, including setting up a legal private label entity and trademarking your brand name to ensure other retailers don’t infringe on and take advantage of your brand’s success.