What is Private Labeling and How Does It Work?

If you’re like most people, you’ve probably heard the term “private labeling” but have no idea what it means. Or maybe you have a general idea, but would like to learn a little more about it. Either way, you’ve come to the right place. In this article, we’ll explore what private labeling is and how it works in a way anyone can understand.

 

What is private labeling?

Entrepreneur magazine defines private labeling as “licensing your product to another company to sell under its own name, rather than under yours.” Of course, this defines the process from the manufacturer’s perspective instead of the seller’s. But you can probably see that a seller would be the one who bought the product and put their own branding on it. And both parties have the potential to benefit from these transactions.

 

How does private labeling work?

Some manufacturers will sell their products at huge discounts without branding or labeling to customers who sell them for a profit. These sellers will usually try out the products and if they think there’s a market for them, they’ll label them and sell them in their own stores or places of business.

A good example would be a neurosurgical office in Jefferson, NJ that wishes to brand their own pain relief cream but doesn’t want to spend the time or money creating it. They might be able to find a company who manufactures a product they’re willing to endorse and ask for a license to private label it. If the manufacturer agrees, they’ll sell the product to the doctor’s office below retail and the office will then have their own labels made to put on the cream.

 

Who uses private labeling?

It might surprise you to know that almost every big retailer in the world uses some type of private labeling for their products. It’s not even uncommon for brand-name companies to sell their own products and also license other retailers to sell them with their own labels. Costco, for example private labels their Kirkland Signature brand and reports that it accounts for about a fourth of their sales. But you don’t have to be a big name to profit off this model. Many online sellers, especially on Amazon, find products to private label as a means of building their own brands and making sells.

 

How do people profit from private labeling?

The reason private labeling is such a good business model for entrepreneurs is because of the consistency of the product and the steadiness of the supply. One of the most difficult things for any reseller is consistently finding product to source. But if they find success with a private-labeled product, they can get a steady supply from the same manufacturer. And if they find a good manufacturer to do business with, they also won’t have to worry about the consistency of quality. This can help them build long-term relationships with repeat customers, which is good for business and good for advertising. For example, if they sell private label supplements, they’ll probably have the same customers for long periods of time. They might even be able to sell subscription services and auto-ship their items every month.

On the other side of that is the manufacturer. You may wonder how a manufacturer can profit from selling their products at such low prices. But the fact is they are not going to mark their product down below their margins. And even if they make less product per item by selling them this way, they’ll have higher bulk sales and therefore, higher overall profit. They’re also able to sell these types of items cheaper because they’re able to save on overhead. They don’t have to pay printers for labels and packaging. And they can usually get away without any marketing once they’ve gotten a few repeat customers.

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