The private labeling business model entails developing a product, finding a manufacturer to produce it for your company, and selling it under your brand name.
Selling branded products, on the other hand, involves buying goods developed and manufactured by established brands then reselling them at a profit.
Both of these approaches can be profitable but they also have their fair share of pros and cons. It is, therefore, important to weigh each approach against your business goals before taking it up. Come along as we compare them and give helpful insights on how to choose between them.
| Private Labeling | Branded Products | |
| Startup Costs | High due to multiple expenses. | Low due to fewer costs which can also be mitigated. |
| Risk Level | High because the entrepreneur assumes all risks directly. | Manageable because the risk is tied more to brands than your business. |
| Business Growth Potential | High. It also offers more control over growth opportunities | Relatively low and dependent on brand innovation. |
| Market Competition Levels | Low to manageable because private label products are unique. | High because branded products are accessible to most entrepreneurs. |
| Profit Margins | High | Low |
目录
Private Labelling
► Advantages of Private Labeling
- Creative control- developing a private label product gives you a chance to choose all the design details, raw materials, and branding techniques that go into making it. You get to make exactly the kind of products that your customers need or those that align with your brand image.
- Exclusivity- private label products are custom-made for your brand. It means that you would be the only one supplying that specific design of products in the market. They subsequently give you an edge over your competitors.
- Pricing freedom– creating a unique product differentiates you from other sellers in the market. As a result, you would have more freedom to set your price either marginally lower or marginally higher depending on what you reckon would work in your favor.
- Customer loyalty– modern consumers are quickly warming up to niche brands that are relatable and built on ethical principles. Victoria’s secret, for example, has been a giant. in the undergarments industry for decades but is now losing its customer base to brands Parade, Liberte, among others.
Source: Statista
► Disadvantages of Private Labeling
- High capital requirements– private labeling comes with product development, sampling, testing, and manufacturing costs. You will likely also incur other expenses such as shipping (if you manufacture overseas), product certification fees, business registration fees, and marketing costs. To put it briefly, it requires a substantial amount of seed capital.
- High risk exposure- if you choose to develop and sell your own brand of products, you become liable for any product malfunctions that customers may experience. You may also suffer direct financial loss if your private label products do not sell well.
- Time constraints– it takes time to develop and get a private label product to the market. Moreover, other brands may even get their product to market before yours and cost you a huge part of your anticipated product market.
- Manufacturer challenges- it is not always easy to find an effective, affordable, and reliable private label manufacturer. Plus, even when you do, they may sometimes fail to deliver on time or produce a lower standard of goods than required. All of these issues are not only frustrating but could have severe negative consequences on your business.
Branded Products
► Advantages of Selling Branded Products
- Brand recognition- customers are often more open to buying products from brands that they recognize as opposed to new brands that they are not used to.
Source: Global Banking
- Lower startup costs – selling branded products only requires you to register your business, buy inventory, and create an efficient and pleasant shopping experience for your customers. It costs considerably less than manufacturing your own. You can even start with crucial setup details that are within your budget and expand over time.
- Reduced risk exposure- if the branded products that you sell present any adverse effects to consumers, most of the blame is assigned to the brand because they are the ones that make the products.
- Flexibility and growth options– when you are selling branded products, you are not tied to them beyond the inventory that you buy. If demand for certain branded products falls, you could always start selling products from other brands. It is also easier to expand the product variety that you offer by introducing new products from the same brand or others.
► Disadvantages of Selling Branded Products
- Stiff competition- any entrepreneur can access and start selling the same branded products that you are offering. This business model is thus prone to high levels of competition and requires you to constantly find ways to outdo your competitors.
- Slim profit margins- some branded products come with a recommended retail price that you can only adjust by a very small margin. On the other hand, you may also be restricted to staying within a specific price range because it is likely other sellers are retailing the same products.
- Ripple effects– the reputations of the brands you sell can positively impact your sales. However, if the brand is hit by a scandal or suffers a product recall, your business may equally suffer a negative ripple effect.
- Limited innovation– selling branded products means that you only rely on the innovation of the brands that you buy products from. Unfortunately, sometimes when a brand creates a successful product it can be reluctant to innovate because what it offers already seems to have earned a loyal customer base.
Key Factors to Consider When Deciding Between Private Labeling vs Branded Products
One of the more effective ways to choose between two business approaches is to compare their features side by side. So, let us pit key factors of private labeling versus selling branded products and see when each of these models may be more suitable than the other.
◆ Cost Implications
Private labeling presents a higher burden of costs compared to selling branded products. It may also take a while before it starts bringing real profits because consumers often take time to embrace new products.
In comparison, selling branded products attracts lower costs. Plus, you can source branded products wholesale to lower your startup costs, sell them online to avoid overhead costs, or sell them vja dropshipping fulfillment.
As such, if you are working with a slim budget, it may be wise to start by selling branded products and pivot to private labeling later on, if you want to.
◆ The Needs of Your Target Market
Some markets are prime candidates for selling private label products while others are too set in their ways to consider other brands. It is, therefore, crucial to extensively research your target market and find out where they fall on this spectrum.
If the market is rigid, branded products may be best. On the flip side, if it comprises curious consumers that are open to new things, private labeling could be a viable option.
That said, business dynamics are not always black and white. If you believe that you can create a private label product that can solve a unique problem for your target market, it may be worth the risk to do so.
◆ Business Growth Opportunities
Private labeling can be tough in the startup stages. However, if your products become a hit in the market, you can expand your product collection and even start selling to consumers in other regions.
In contrast, growing your business when selling branded goods takes a different tangent. Your options may include:
- Selling a wider variety of brands.
- Expanding the range of products that you sell. For example, if you sell make-up you could broaden your niche and start selling branded skincare products in general.
All options considered, private labeling gives you more control over how to grow your business. Meanwhile, selling branded goods keeps you reliant on the innovation of brands. So, if you are hoping for long-term and substantial business growth, private labeling could be the better option.
◆ Risk
If you are risk-averse, selling branded products would be your best bet because you can tell whether or not a brand is popular before stocking its products.
Moreover, while established brands are not above reproach, they seldom make mistakes that could ruin their reputations. Even when they do, they have the resources to smooth such catastrophe’s over.
On the other hand, if you are comfortable enough to take on a high risk for a high reward, private labeling would be an ideal approach for you. Besides, you do not have to simply jump into it. Research can offer lots of helpful insight. You could also order a small batch of products at first then increase the quantities as demand rises.
◆ Profitability
Private label products can usually be sold at a higher price than prevailing market prices. Subsequently, you would have better control of the profits you make unlike with branded products where pricing is determined either by brands or market forces.
The Verdict
Private labeling could be ideal for you if you:
- Have adequate startup capital and are okay with taking a calculated business risk
- Are targeting a market that is open to new products
- Can create a product that solves an unattended problem for your target market
Selling branded goods may, however, be a more suitable choice if you:
- Have a limited startup budget
- Prefer the flexibility of being able to sell different brands and keep up with market trends
- Are operating in a rigid market where consumers are unwilling to try new products
On the upside, no matter what business approach you choose, we can help you achieve your goals. We have years of experience in product sourcing and can also harness our networks to find top-notch private label manufacturers or provide private label dropshipping services.
