Private label products have gained popularity in the ecommerce industry as a lucrative side hustle and a way to scale revenues. But what exactly does private label mean? And what are private label products?
Private label products are made by a third-party company but can be rebranded and sold by another company. Private label products could be anything from a bottle of ketchup to a T-shirt to bath tissue.
The practice of private labeling is remarkably common—and it’s almost certain that you’ve used a private label product at some point. That said, one of the most well-known private label product lines is the Kirkland brand, which generates about one-quarter of Costco’s sales.
Private label products allow companies to leverage the strength of their brand and retail operations without taking on the significant manufacturing and distribution costs that they would incur by creating products themselves—as Costco has done with Kirkland.
Private label products can generate a meaningful profit for retailers and build credibility with consumers for relatively little investment, provided companies understand their market.
With that in mind, if you’re a small business owner or interested in starting a business or side hustle that sells private label products, this guide will help you understand how private labeling works and what some of the advantages and disadvantages of this practice are.
How Does Private Labeling Work?
Private label product manufacturers secure deals with individuals or brands to sell their products without attribution. Manufacturers do this so that they can sell their products to more resellers without being limited by a single brand name.
For example, a company that makes nootropics, a popular supplement often used in “brain boosting” products could sell their product to a single supplement retailer, but why stop there? Does anybody really care who made the nootropics?
If the company doesn’t feel compelled to put their brand on their product, they can sell to dozens of retailers who will then either rebrand the nootropics directly or use them to create new products. That makes more revenue opportunities for them, while the retailers who buy their products don’t have to worry about manufacturing the products themselves.
The retailer that buys a private label product will specify everything about it, including what goes into the product, how it’s packaged, what the label looks like, and how it’s priced. They’ll pay to have it produced and delivered to their storefronts, warehouses, or anywhere else they’d like.
Private labeling works great for businesses with a lot of brand clout already— think—Costco’s Kirkland, as we mentioned, or Target’s Archer Farms chips and crackers—but it can also be a lucrative side hustle.
If you don’t have any experience selling products, private labeling is a great way to make some extra money by selling on Amazon or other online retailers without having to invest in creating a product from scratch.
Some of the most popular private label product categories include:
- Personal care
- Cosmetics and hair products
- Paper products
- Household cleaners
- Condiments and salad dressings
- Dairy items
- Frozen foods
Advantages of Private Labeling
Private labeling comes with a number of advantages, which is why there are so many private label companies in existence today. In fact, according to one report, there are more than 335,000 private label clothing manufacturers alone in the world today. So, what are some of the benefits?
No, you’re not actually making the product yourself, but you do have a high degree of control over the product you ultimately sell to your end consumer.
You can institute whatever brand name or packaging you’d like, price your final product however you’d like, and most private label manufacturers will work at a retailer’s discretion, giving you greater control over product ingredients and quality.
Private label manufacturers allow you to bypass vendors to go directly to the source for any particular product. When you buy from a vendor, you often have to pay a premium for their brand name or the marketing they put behind their products.
When you buy directly from the manufacturer, you have a good chance of getting a better deal or even receiving wholesale prices when you buy a certain amount of inventory. Because you’re the one putting the branding and marketing behind the end product, you can secure a better profit margin.
Private labeling, ironically, gives you greater exclusivity in the marketplace. Yes, you may sell something that is extremely similar to competitors, but when you slap your own brand and packaging on it, it becomes uniquely your own.
No product is completely original or unique. Strong marketing will create a greater demand for your brand while working with a private label supplier gives you greater control to alter the product to address customer complaints or issues quickly.
Build Your Brand
Let’s say you run a hair salon. You’re a popular salon that cuts and styles many customers’ hair, but you’d like to make a little more money and raise brand awareness.
Working with private label suppliers to sell shampoo, conditioner, coloring, brushes, and other products with your brand on them could give you additional revenue opportunities and help market your business. Private labeling can be an excellent way for small businesses to grow their reach in the community and beyond.
The key to any business is maximizing customer lifetime value, which is effectively a measurement of customer loyalty. Businesses that sell awesome private label products may build a loyal customer base that keeps people coming back.
To continue our hair salon example, if people fall in love with your shampoo, they’ll keep coming back not only for regular haircuts, but also to get more of that shampoo. Your storefront is the only place they can get it, which adds to the exclusivity of the product and keeps it in high demand.
Disadvantages of Private Labeling
Although there are many advantages of private labeling, it’s by no means a perfect business model. If you’re considering private labeling, you should be well aware of the risks and be ready to respond with action should you encounter any of them. Some common downsides are:
It’s easy to get excited and think that your customers will buy just about anything from you. But if you order a whole lot of a single product without analyzing your customers’ needs, you may end up with mountains of dead inventory.
With branded merchandise, you can get a return authorization. With private label goods, you very likely will not be able to return them. That may leave you with lots of products that you can’t sell and absolutely nowhere to put them. Not to mention, you’ll be out a bunch of money, too.
To make it worth their while, most private label manufacturers require a minimum order amount before they’ll consider customizing products for you. That may present a challenge when you’re just starting out, especially if you haven’t fully developed your brand or you haven’t identified your customer base.
Ordering $10,000 worth of merchandise is a very bold step to take when you’re just starting a private label business. Make sure you do the research to find the best places to source products and work with vendors to see if you can find creative solutions.
Some people just assume that private label products are worse than the brand names they already know. If you’re going to consider selling private label products, make sure you know your customers’ preferences and understand their biases.
If they’d rather buy TRESemmé products at your store and aren’t interested in your own hair products, then you don’t want to waste money trying to sell them.
The Bottom Line
Private label products can make a great addition to your store or serve as a viable side hustle, but it’s important to understand the risks. If you’re considering getting into the private label business, make sure to verify that your customers actually want to buy branded products from your business.
Research suppliers to find the right partnership for your business, start slowly by testing one or two products instead of an entire line, and collect feedback on your branding and packaging. Private labeling has grown in popularity because it can be extremely lucrative. Hopefully, this guide will help you get started successfully.