Retail Dogma

Private Label : Definition, Example, Pros & Cons

Private label is a concept in retailing, where a retailer contracts a third-party manufacturer to manufacture their products under certain specifications, and under a brand name that belongs to the retailer.

A lot of retailers who sell multi-branded products in their store sometimes opt to private label part of their product offering to realize higher margins from it.

For example, a lot of grocery stores such as Target or Costco create their own private label products after analyzing the demand on certain product categories and decide that it would be more profitable for them to sell those categories under their own label.

They usually come to this decision after analyzing their inventory metrics and realize that certain categories have high demand (sales) and yet the margins realized on them are very low, and so the return on this inventory is low.

They then adjust their buying strategy to include private labeling for those particular products, and so increase their GMROI.

In this article we are going to discuss the advantages and challenges of private label, and give real life examples on how to create a private label brand.

Advantages of Private Label

Profitability

Is Private Label Profitable?

Private label business model can be very profitable for retailers who pick the right products, based on demand analysis, and decide to invest in creating them on their own to realize higher profit margins.

This is because the demand is already there, and the retailer is already getting traffic to his store, so just by switching to their own brand they get to sell those same products at higher margins from day one.

When you manufacture your own products you will get them at a fraction of the price that you might get for branded merchandise. This is because the branded merchandise has factored in the price all the costs of product research & developments and also the costs of building & marketing a brand from scratch.

Control

Having complete control over the entire value chain from idea development to the successful sale of the product is of course enticing. It allows the brand owner to apply all the feedback they get on the product from the end consumer back to developing even better versions.

Scarcity

Scarcity simply means that something is not readily available in big quantities for everyone to grab at any time.

Whenever there is scarcity, i.e low supply/high demand, the price automatically goes up and the product and service are more profitable for the seller.

When you do your own products you have control over this dynamic, vs. if you sell other brands that are available for anyone to source & sell at lower prices.

Customer Loyalty

When you develop products under your name you start also having your own customers that prefer your brand over anyone else’s.

This customer loyalty is very precious when you factor in the entire customer lifetime value (i.e. how much one customer will contribute to your business throughout his lifetime).

Customer acquisition is very costly, and to get back adequate return on your investment on marketing you probably need multiple purchases from the same customer later on. This is achieved by building loyalty around your brand.

It would be very hard to maintain such loyalty if you are merely selling other brands that they can find anywhere else, unless of course you provide great customer experience… or you are selling at lower prices, i.e lower profits.

Challenges of Private Label

MOQs

The main challenge with private labeling, and why it is easy for big retailers vs small retailers, is adhering to MOQs.

MOQ stands for minimum order quantity. It is the least amount you have to order per style in order for a manufacturer to make this product for you.

Manufacturing is not cheap and runs on very low margins, so factories always demand a minimum quantity so that the operation will be feasible for them.

When you sell your own brand you will have to check if the sales you are going to generate are enough to clear all the merchandise you have to order from the factory (it is in 1000s).

This also takes us to the following point.

Less Variety

If you have to contribute capital to huge quantities per style, then by default you will have less styles to offer your customers vs. if you were sourcing branded merchandise and only getting 200 pieces per style. In this case your budget would buy more styles and you will offer more variety.

Read Also: Depth vs. Breadth in Assortment Planning

As a small retailer you will probably start with few customers, so having more styles will allow you to sell more pieces per customer or get repeated sales from the same customer. If you only have very few styles but high quantity, the same customer will not find anything new to buy because they already bought those styles.

Product Development & Innovation

If you are going to build your own brand be prepared to be constantly developing new products. Be prepared to keep this creative machine going forever.

This is especially true if you are doing private label for clothing.

If you are going to start a fashion line, this would also mean launching a new collection every 6 months.

Be prepared to attend fashion shows and trade shows, where you find out about the latest trends in style as well as fabrics and patterns. Then you will use this information to develop new designs and get the factories to manufacture them for you.

This lengthy process takes almost 9-12 months, so you have to be 1 year ahead with your ideas and plans.

High Capital

As mentioned earlier, you need to commit to high order quantities and this will require high initial capital.

It depends on the type of product you will get manufactured, but be prepared to spend at least 10,000$ and make sure to use this capital wisely to get the best variety of products to drive your sales in the coming period.

Marketing & Branding Costs

Since you are not selling popular brand names and starting from scratch, you will need to spend extra on marketing to build up the new brand name.

This could be either by spending big money from the get going and getting it outsourced to an agency or by doing it yourself from scratch and setting up all your marketing channels and then spending smaller amount on ads from time to time.

Read More: How To Actually Make Money With Ecommerce?

Agility

One of the reasons of why I run boutiques is the desire to stay agile in the retail field.

If a new trend comes up tomorrow, I find a supplier and bring those products into my stores. If a product gets out of style quickly, I simply stop ordering it and replace it with another one. If my sales show a slowdown in certain category, I quickly adjust my OTB and act on it before it is too late.

With the longer timeframe (like we said, one year on average) for developing your own products, you might not be as agile.

Agility is actually one of the ways small retailers can compete with big retailers. It can be one of your competitive advantages in this highly competitive market, so don’t lose this ability unless the payoff is really worth it.

Private Label vs White Label

To apply scarcity to private labeling we need to understand the difference between private label vs white label. There is a very thin line between them and people often confuse them together.

The main difference between private label vs white label lies in the product development. If you have developed the product yourself, even if it resembles other products, but you have added some additional functionality or different design elements, this is private label.

On the other hand, if you are sourcing a product that has already been developed by another company and you don’t add anything to it except for your logo, this is white label.

Example

A couple of years ago there was this trend of social media influencers launching their own brands of false eyelashes. It boomed and gained traction, so I decided to source them for my stores.

I contacted one of the influencers and we made a deal to have her line at our stores with her branding and display on consignment basis.

Read Also: Consignment Store: How it really works

During that time she shared with me how she is anxious about the manufacturer possibly using her packaging/branding for someone else because, as she put it, “We are all using the same manufacturer in Malaysia. It’s the same products and we just put our logo on it.

This is called white labeling.

A D V E R T I S E M E N T

This product worked very well at the beginning and was selling at very high prices initially. But after so many influencers started sourcing exactly the same product and “just put their logo on it” there was suddenly a glut in the market of eyelashes and customers would come to the store and ask us why this is so expensive?

This is exactly why white label does not provide any scarcity.

Private Label Example

Amazon Private Label Brands

One of the best examples of using private labeling to generate more profits is Amazon’s private label brands.

Amazon has been very smart in utilizing their power of attracting many customers to their platform and selling millions of products everyday to collect and create a huge set of very useful data, that is then put into an even more profitable use.

Amazon's Private Label Strategy

Amazon’s private label strategy depends on determining the demand on the products through analyzing the purchasing data from millions of transactions, picking the clear winners, and then offering those products at better prices under a private label brand name that belongs to Amazon.

By analyzing data we don’t only mean what gets sold and what not. We also mean the feedback that people give on those products and the returns or refunds requested.

Amazon private label brand
Source: Amazon

All this allows amazon to create a product that fits exactly what people are looking for. That’s also why many of Amazon’s private label brands have good ratings.. simply because Amazon knows “what good looks like” through their data analysis, and it has delivered just that.

However; because of all the challenges of private labeling we have listed before, Amazon started tweaking this strategy more towards Amazon Exclusive, where it shifts the heavy lifting involved in creating and maintaining private labels to the manufacturers, and then gets exclusive rights on selling those products in return for marketing support and other perks from their side.

How to Start Your Private Label Brand?

1. Define Your Niche

Decide about the segment of the market you want to compete in, and how you can position yourself and your products as the answer for the needs of this market.

Avoid the classic mistake that many new businesses fall into, which is trying to be everything for everyone. Especially if you are a small business with limited resources, it is hard to dominate multiple segments and categories, but easier to cater for a specific niche that has been overlooked by big businesses.

2. Learn Marketing

There is a misconception about marketing that restricts it only to promotion & advertising. In fact advertising is only small part of marketing.

Marketing starts with understanding customer needs and creating a product that fills those needs. It is going to be part of your entire private label journey from the minute your start thinking about starting a brand, because you need to figure out who your customers are and what will work for them. Then after creating the products you believe they need, you will craft your message carefully to speak to the particular audience you are targeting.

We explain the fundamentals of marketing, and how they apply to different aspects of retailing, from buying, merchandising, pricing and communication in this introductory marketing course. We also apply all those learnings on starting a hypothetical clothing line.

3. Create Your Private Label Brand Guidelines

Since you are starting the entire brand from scratch, you will have to define your brand guidelines. This includes the color scheme of your brand that will be uniform across your marketing materials and your brand logo. It also covers your brand’s persona; what this brand stands for and how it wants to come across to its customers.

This is of course closely linked to defining your target audience in the first place, as this will dictate the look & feel of your brand.

Is it a value brand? Is it premium? Is it luxury? You have to decide on that.

Avoid things like “affordable luxury”. There is no such thing, and brands that attempted to pursue this strategy, again, because they were trying to be everything for everyone, have failed and reverted back to specific positioning and branding.

Read also our article on How to Start a Clothing Line? for more on the branding side.

4. Find Reliable Private Label Suppliers

Finding reliable suppliers for your private label business is key to success.

You will need to do your due diligence to make sure your suppliers are capable of delivering the right quality that you are going to put your name on.

The last thing you need is a failing product launch, filled with customer complaints or even a good launch that you cannot capitalize on, because your supplier does not have the capacity to accommodate your rising demand, and you are not getting replenishments on time .

Read Also: Bargaining Power of Suppliers

5. Know Your Numbers

Understanding how numbers work together in retail is a very essential skill, in order to succeed in this business. Learn about Open to Buy, so you can calculate how much inventory you should carry, in order to achieve your targeted sales.

Read Also: Open to Buy : The Complete Guide

Learn about cash flow management & working capital, and why you shouldn’t be having all your capital tied to idle inventory that you are neither able to sell nor do you have enough cash to buy new ones to sell.

Read more on Retail Financials

You want to also be familiar with retail math in general. Understanding things like gross margin, conversion rate, retail KPIs and how to generate and read all the different kinds of reports is an essential part of retailing.

6. Grow Your Business

Today there are numerous online tools and resources that you can leverage to grow your business. Starting from free platforms you can build your website on like WordPress, e-mail marketing tools, social media platforms,.. etc.

Of course not everything will be free, you can expect to pay a portion of your revenue on sales & marketing. If you have done the previous step of knowing your number, you will already know how much you can dedicate to that and execute accordingly.

Read Also: How Retailers Set Their Marketing Communication Budget?

It might also be good for you to use a marketplace initially, but in this case please read the next point.

7. Control Your Channel

If you are going to create your own private label brand, make sure you keep control over your sales channel.

It’s a free market, and you can expect that if you achieve success at selling something and someone else has access to your data and control your customers, they can use that, and by time you will no longer have the same results.

This is what could happen if you sell only through marketplaces, and the marketplace starts to compete with you, by creating their own private label brand.

What’s worse, is that in this case you won’t have access to your customers’ data, because the whole sales process was controlled by the marketplace.

Instead; use the marketplace as a complimentary sales channel, in addition to your primary sales channel, which is your own website or your own brick & mortar stores. The marketplace will give you access to a wider market and give your brand greater visibility, but at the end of the day, your customers will know where to find you, and how to buy directly from you.

To take this concept further, and use the marketplace as a driving force to your own sales channel, you can start creating products that are exclusively being sold on your website or at your store, and can not be sold through the marketplace. This way, customers can get introduced to your brand through the marketplace items, and if they want the exclusive products, they will buy them at your store.

8. Patience

Of course there are going to be motivational moments here and there like “Getting your first sale“, but for the momentum to build up you need to give it more time.

24 months seem to be the magic number for most online businesses, but again, it differs from one to another. So whatever you do, please don’t give up on your business before 24 months. By that time you will be able to figure out what the real potential of your business is.

This is another reason why you need to get behind your numbers and the finances of the business, because you want to make sure not to burn your cash too soon.

9. Pivot

Pivoting must be the most unexpected thing to happen to startups, yet it is very common. It simply means shifting to another way of doing business. This could be by changing your business model, changing your product line or changing your entire strategy.

Check out our members area for alternative business models for retailers.

The reason many startups pivot is because we learn as we go. This is one of the best things about entrepreneurship, that we can afford to fail and get up and try again in a different way and fail again and learn from it and, ultimately, we find the best way to run this business.

Access our members area and read about the exact criteria that make a product a good candidate for private labeling in our member exclusive articles.