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Wei Linchao

Wei Linchao

Dropship and Logistics Specialist, the founder of Bestfulfill that help you with order fulfillment from product sourcing, shipping, branding, and customized package.

Why Are Private Label Products Cheaper?

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Are you new eCommerce or just wish to add a new line of products to your shelves? Private labeling is a great way to sell high-quality, yet affordable products that bear your brand name and logo. Truth be told, private label products nowadays are of comparable—if not the same—quality as name brand products in the same category.

Even so, you will find private label products to be comparatively cheaper—offering your business higher profit margins. So, why are private label products cheaper than name brand products? Get to know what makes private labelling cheaper than national brand products of the same quality.

What is Private Labelling?

A private label is a product that is manufactured by a third-party company for sale under the retailer’s brand name. In most cases, the private label manufacturer produces similar products for multiple brands simultaneously. In some cases, the manufacturer sells the same products to different brands—often referred to as “generic products”.

In such a case, you only change the labelling on the products before putting them up for sale. The is normally the cheapest private labelling option. The other option is to have the manufacturer produce items that are unique to your brand.

Image Source: (https://www.ecommerceceo.com/learn/private-labeling/)

In either case, you outsource almost all the manufacturing to a different company. This has been proven to save startup and medium-sized businesses money in manufacturing costs. In either case, partner with the best private label manufacturers to ensure that you get products that are just as good as the popular name brands in your industry.

What Makes Private Label Products Cheaper?

Most retailers and eCommerce store owners are attracted to private labelling by the promise of higher margins. In the end, you get to offer your customers high-quality products at a relatively lower price point and still make a decent amount of money in profit.

So, how exactly is this possible? Well, this is outsourcing your manufacturing needs to a third-party company can save you money in a number of ways. Discussed below are some of the reasons why private labels are often priced below name brands:

Image Source: (https://savingmoney.thefuntimesguide.com/store-brand/)

a.    Does Not Require You to Invest in Equipment and Facilities

Also referred to as “store brands”, private labels require you to outsource the manufacturing—and seldom labeling—needs to a third-party provider. As such, you won’t need to invest in the equipment and facilities required to produce your products.

This alone saves your business tens, if not hundreds—of thousands in manufacturing costs. Private labelling will also reduce your ongoing operating costs considerably. Since name brands manufacture their products in-house, they need to hire qualified staff and continually train new employees.

As you can imagine, manufacturing exclusive products in-house requires a sizable capital investment. This, in turn, makes name brands costlier than private labels.

b.    Economies of Scale

In order to achieve economies of scale, manufacturers need to optimize their production capacity—which often means increasing production. Increasing production levels spreads the manufacturing cost across a larger number of items. This effectively lowers your “per item” production cost.

As appealing as that may sound, it is not always possible when for name brands—especially when demand is low. To overcome this challenge, private label manufacturers produce similar items for multiple brands.

The manufacturer contracts their services to multiple retailers who are likely to use the same ingredients or components. Such economies of scale help lower manufacturing costs, and consequently the price of private label products.

Image source: https://www.dreamstime.com/economies-scale-illustration-icons-business-issue-presentation-meeting-image179497074

c.     High Demand

According to statistical findings, regional markets for private label brands has grown year on year amid the Corona pandemic. The strongest growth was recorded in Germany, UK, and Italy, where private labels have outperformed national brands.  This means that more of private label products need to be produced regularly to meet the growing demand.

This, in turn, facilitates economies of scale by requiring the manufacturers to increase their production capacities. In addition to lower price points, this growth may as well be attributed to retailer assortment expansion and the development of premium, innovative products.

Simply put, the fine balance between price and quality makes private label brands more desirable to consumers. In response to the growing demand, manufacturers are required to produce items in larger quantities. Increased capacity, in turn, lowers the “per product” production cost.

d.    Does Not Require You to Spend on Research and Development

Prior to manufacturing, national brands need to conduct the relevant research, product development, and testing. This includes all the direct expenditures a brand incurs in relation to the development, design, and enhancement of products and prototypes.

When looking for a private label manufacturer, you should consider choosing one that offers research & development services. As opposed to in-house research and development, such a manufacturing partner will save you money and still deliver uniquely branded products.

e.    Lowers Launch, Distribution, and Marketing Costs

In most cases, manufacturing and distribution costs for private label brands is 40% to 50% less as compared to name brands. In addition to hefty marketing budgets, name brands also spend a considerable amount of money running their distribution channels.

Image Source: (https://hbr.org/1996/01/brands-versus-private-labels-fighting-to-win)

With private label products, much of the marketing responsibility lies with the. As the seller of a private label brand, you will not need to market the brand extensively as a name brand would. As a matter of fact, most store brands limit their marketing to in-store promotions and seldom local media promotions.

By so doing, the retailer does not incur much costs distributing or marketing the products. This goes a long way in making private label products cheaper than name brands.

f.     Leverage on lower labor costs

According to statistical findings, unit labor costs have risen considerably in over 85 United States Manufacturing industries. This is one of the reasons why domestic sourcing is so expensive in the US. In essence, the country enforces minimum wages and restricts working hours.

This calls for better working conditions and higher wages. These, in turn, drive the cost of national brand products higher in the country. On the contrast, private label manufacturers in China do not need to incur such hefty infrastructure and payroll expenses.

Although manufacturing costs in China have increased slightly, they are not nearly as high as they are in the US. China particularly boasts of considerably lower labor costs. This plays a significant role in reducing the prices of private label products manufactured in China.

g.     Long Manufacturing Contracts

According to the US Bureau of Labor Statistics, food prices rose by about 7% between January 2021 and January 2022. This rise particular affected the renowned name brand food products as opposed to store brands. To safeguard their products from such fluctuations, most private label brands have extended manufacturing contracts with their private label manufacturers.

Such contracts stipulate that the preset prices will remain the same throughout the contract period—regardless of the changes in the industry. By so doing, the leading store brands are  able to keep their prices low and constant for the foreseeable future.

H.     Vertical Integration (Vertical Monopolies)

In microeconomics, vertical integration refers to a scenario in which a company owns its supply channel, distribution channels as well as every aspect of manufacturing. With a name brand, it is almost impossible to apply virtual integration. 

This is because the products have to go through multiple parties—such as wholesalers and retailers—before reaching the end consumer. Each of the players in between the manufacturer and the consumer needs to add a markup to the price for them to make a profit. This increases unit prices progressively as the products move down the supply chain. 

Image Source: (https://learnbusinessconcepts.com/vertical-integration-explanation-with-real-industry-examples/)

Private label brands, on the other hand, integrate multiple level of the supply chain to the manufacturing of their products. Not only does this streamline operations and allow for standardization across the value chain, but also has multiple cost benefits to offer. 

Both partial and complete vertical integration offers store brands such benefits as: 

  • Reduced manufacturing costs 
  • Allows the brand to capture both upstream and downstream profits 
  • Enhances production efficiency and quality control
  • Allows for easy management of prices by reducing margins 
  • The cost reduction benefit offered by the vertical integration of store brands eventually translates to low product prices for the end consumer. 

I.     Heightened Competition

Brand name products are often produced by a single manufacturer. Generic products, however, are likely to be produced by multiple manufacturers—which increases competition. The introduction of similar products to the market by different brands increases competition, which has been proven to drive prices down.

Based on findings by the FDA, if a name-brand product has only one private label competitor, the private label products will be priced about 39% lower. However, of two competitors exists for the same product, the store brand products may be priced up to 54% lower than the name-brand products.

As you can see, the ever increasing competition between name brands and store brands has helped lower private label product prices.

Conclusion

 Right from sugar and flour to medications, store brand products are priced considerably lower than their name-brand counterparts. For instance, store brand groceries can be up to 25% cheaper than popular brands. The higher price tag associated with name brands may be attributed to the expenses the brands incur researching, developing, distributing, and marketing their products.  

Private label brands essentially outsource their production and manufacturing needs, which helps keep their prices low. In addition to low costs, you also need to match the quality offered by name brands for your private label brand to thrive.

As such, you need to partner with a private label manufacturer or supplier that offers high-quality products at lower price points. Rather than having to scour the internet for such a manufacturer, you should consider working with the leading private label dropshipping suppliers like Bestfulfill.

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