What’s the Deal with Private Labeling?

There’s no “one right way” to run a successful reselling business—everyone has their own methods for finding merchandise, and they prefer different marketplaces. At its core, many resellers have similar business models: they buy returned and excess inventory from vendors or wholesalers to resell at a discount online. But some resellers actually sell merchandise as part of their own brand. In this type of business, resellers will purchase a larger amount of inventory from a manufacturer which they can sell on secondary markets, under their unique label. This is called “private labeling”—anyone who has looked into reselling may have come across this term.

While there’s plenty of information out there, it can be challenging to quickly figure out exactly what it is and whether it’s something worth pursuing. Below, we’ve shared answers to some basic questions about private labeling, a quick overview of how to get started, and where to look for support.

So, tell me one more time, what is private labeling?
Products or services manufactured or provided independently and sold under another company’s brand are private label. Grocery stores are some of the most common places we see them outside of the reselling industry. Take ketchup, for example: on the shelf the store-brand (e.g. Hannaford has a collection of store brands), name-brands like Heinz, and private label options with a unique recipe, such as Kamuk, are side-by-side. While resellers typically don’t private label grocery items, the ketchup example is recognizable and unique to help remember the distinction.

Is private labeling even legal?
Yes. Resellers cannot private label products that are patented or trademarked already. Instead, they are working directly with a manufacturer/supplier who agrees to put the reseller’s label on their products. Many resellers look to China for these types of arrangements. Private label sellers also have the option to design and prototype a product themselves and find a manufacturer to produce it.

Why don’t more people do it?
Many resellers advise against private labeling, particularly for individuals new to the business. Why? First, because private labeling requires an up-front investment in the product and the resources to design a logo—though the latter could be done for as little as $5. If a reseller wants to trademark their brand, they can do so for a $350 fee. Second, because private labeling is high-risk from a sales perspective. Private label sellers have to move product that lacks (at least, at first) the reputation and consumer trust that more established brands already have.

What’s good about private labeling?
High risk, high reward: When done successfully, private labeling can pay off in spades. The cost of merchandise is often lower when purchasing directly from a manufacturer, which means margins have the potential to be much higher. One private label seller named Susan made over $1,000 in profits in less than a month, a profit margin of approximately 45 percent. Another private label seller, Brian Leyde, turned a $100,000 per-month profit in less than a year.

Private label sellers also have more control over their inventory, and are able to create unique, compelling listings that are competitive with name-brands. For example, a private label may be marketed as more cost-effective, higher quality, or even more environmentally friendly than a name-brand option.

Finally, once the initial setup process is over, private labeling can be a relatively passive source of income. There’s no need to hunt for product week-to-week if the product being manufactured is turning enough of a profit. Many private labelers sell on Amazon using the Fulfillment by Amazon service, which means the manufacturer they’ve partnered with ships directly to Amazon, and the seller simply collects the profit (and works with customers or handles any issues that arise).

How long does it take to make money?
This will vary based on a number of factors, such as product, product category, and time of year. The private labeler mentioned previously, Susan, made $1,000 within three weeks. She mentions that her sales were around the holidays, so those peak-sale periods may be a good time to kick off a private label business—the faster a seller can accumulate buyers and reviews, the more likely other potential buyers will trust the unknown brand.

How do I get started?
Choose a product to sell—and choose wisely. A product that’s fit for sale under a private label is a product that sells well to begin with and has enough brand diversity to be competitive.

Most sellers agree on the following four-step process for getting a private label business off the ground:

  1. Choose a Product: Also known as the brainstorm phase, the first step is to find a product to sell by searching high-ranked products in general or by searching for the top-ranked items per category. Fewer reviews typically means competition isn’t too high. Sellers are also advised to choose products that are simple, easy to ship, and would be priced between $10 and $60.
  2. Research: Figure out what the competitive landscape looks like to make sure the product will be able to sell as a private label among other brand names.
  3. Find a Supplier: This is a manufacturer who will distribute the products without a label. As mentioned earlier, many sellers find a merchant partner in China. Most manufacturers will be interested in selling over 500 units at once, which is a high volume to invest in before seeing how a product performs. It might take some email back-and-forth to convince the supplier to sell less than that in the first shipment, if you’re not ready to take on such a large inventory.
  4. Create a Brand—and a Listing: A private label needs some branding, so resellers will create logos or company names to list their products under. Creating a listing that stands out among competitors is also essential—differentiating the private label from other brands.

For more details on each step of the process, there are a number of quality resources to reference. Check out The Selling Family’s webinar with private label expert Chris Guthrie or this private label how-to video series from Seller Labs (here’s part 1). Udemy also offers a private label course (with 12 hours of video content) specific to Amazon FBA for $20.

So, is this for me?
Think about the pros and cons: high risk for a potentially large reward, and high barrier to entry with the potential for a lower time commitment once the business is established. It’s also important to consider that some people’s entire businesses are based on private label products. Others supplement their retail arbitrage with private labeling.

With this information, the X-factor to consider is your own business. Ask questions like, do I have the capital for the upfront investment required? Is my reseller business successful already, or do I need to explore new areas? Do I have a great idea for a product and logo? Am I comfortable taking this risk? How will I handle returns?  Considering these questions will help you arrive at the right decision for your unique situation.

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