Private labeling has become a go-to business model for numerous companies seeking to establish a unique market presence. But what exactly is private labeling, and how can it be effectively utilized for your business?
If you want to understand the essentials of private labeling, its benefits and drawbacks, and how to discover and sell private label products successfully on Amazon, you’ve come to the right place.
In this article, we will cover all you need to know about private labeling, from understanding its benefits and drawbacks to discovering the most effective strategies for finding and selling private label products. Let’s dive in.
What is Private Labeling?
Private label is a term for own brand. In other words, private label products are products that are manufactured for a specific retailer and then sold under the retailer’s brand name.
A private label product is usually a generic product that’s been modified for a specific company. This modified version is then sold under the company’s own brand name. This brand name can correspond to the name of the retailer, but can also be completely different (think of Walmart’s Great Value brand).
The trend of private labeling comes from the USA and is especially popular with young entrepreneurs who want to start their own businesses without having to manufacture products on their own.
In private labeling, retail companies legally act as the manufacturer of the product and are thus responsible for compliance with all rights and obligations, while the physical manufacturing is done by someone else.
In recent years, private labeling has experienced an upswing, primarily due to e-commerce. However, private labeling is nothing new. The private label business model has been in operation by retailers around the world for decades.
Private labeling is also becoming more and more interesting for entrepreneurs who sell products on Amazon. In fact, in 2022, about 54% of all Amazon sellers were selling private label products. And on top of that, Amazon has its own private label: Amazon Basics.
What Is the Difference With White Label Products?
White label products are products produced in their most basic form without specific branding or modification and sold to multiple retailers, unlike private label products that are produced for one retailer exclusively.
This allows companies to buy items in bulk and brand them with their own custom branding. The key advantage here is that product development and manufacturing have already been completed, so companies can save time and resources.
The term white label is derived from the traditional white labels that are applied to these products. These labels are like blank canvases, ready to be filled with the branding of an individual company.
However, if companies purchase white label products and modify them in some way (changing their color, etc…) and then apply their own branding, the result is a private label product. The private label product is unique to the company that brands and distributes it.
So, the main difference between the two is personalization. While white label products are neutral, mass-produced, and applicable to a variety of brands, private label products represent special-made products specific to a brand and sold exclusively by a single retailer.
How Does Private Labeling Work?
Private labeling is a collaboration between two entities: the private label manufacturer and the private label seller.
The seller is responsible for branding, marketing, and retail. Private label sellers have to build up their brand image and customer loyalty. The manufacturer is responsible for manufacturing the product. The best manufacturers ensure high product quality while keeping production costs relatively low.
To start a private labeling business, sellers must determine the products they want to sell. The next step involves selecting a suitable manufacturer. The choice of the manufacturer depends on several factors including product type, quality standards, and production capacity.
For example, if a retailer is planning to specialize in organic food, they might choose a reputable organic foods manufacturer, known for its adherence to strict organic standards. Similarly, for a cosmetics line, a retailer might collaborate with a well-established cosmetics manufacturer.
Now the real work begins, the private label seller needs to work on building a strong brand and use marketing to stand out in the market. At the same time, it’s important to keep a good relationship with the manufacturer to make sure the products are always high quality and delivered on time.
How To Find the Best Private Label Products
The first thing you need to do is decide which private label products you want to sell. Here are some criteria for finding a successful private label product on Amazon:
- High profit margin: make sure to choose products with a profit margin of at least 25%.
- Small and light: Since shipping and storage costs depend on the size and weight of a product, you benefit from lower shipping and storage costs with smaller and lighter products.
- High demand: Choose products that are in demand all year round.
- Low competition: Products with low competition allow you to increase your sales faster.
An effective tool for identifying high-potential products on Amazon is Helium 10. Here is a step-by-step guide on how to use this tool:
1. Sign up for a free Helium 10 account
2. Navigate to the Helium 10 Black Box Tool
3. Set the desired product criteria: Use the filters to set, for example, the number of sales for products with high demand or the number of competitors for products with low competition. If you’ve never heard of product research, check out our guide: What to Sell on Amazon.
4. Click on “Search” to view the search results.
Focus on products that are worth analyzing in more detail. For example, exclude products from big brands, as it is difficult to compete with them.
What Are the Benefits of Private Labeling?
Private labeling creates a USP
The main benefit of private labeling is that it lets you create a unique selling proposition (USP). For example, you can achieve a USP with adding a special feature to your product or combining different products together to one.
With a USP, your product becomes more distinctive, making it different from what competitors offer and help your product stand out.
Low start-up capital
If you want to sell your private label products on Amazon with an own logo and packaging, you can get started with a starting capital of as little as $1,000.
Of course, $1,000 is the absolute minimum. In many cases, a higher start-up capital may be necessary. But what is $1,000 for a business start-up anyway?
This small start-up capital is very appealing for many young entrepreneurs who want to start a business with their private label product.
Own product design
Private labeling offers many opportunities for retailers, allowing them to customize many aspects of their product offerings. For instance, retailers can not only create their own product designs but also tailor packaging and branding.
This level of customization helps differentiate their products in a competitive market, providing a unique selling point that can attract more customers.
Control over pricing
By selling private label products, companies gain full control over their pricing strategy. This gives them the flexibility to adjust prices depending on the market situation, cost structure, and competitive landscape.
Rather than being locked into the pricing constraints of established brands, private labeling allows companies to dynamically price their products to take advantage of market opportunities, maximize sales, and strengthen their market position.
Higher profit margins
Retailers can usually charge higher prices for private label products than for resale products because they can use their brand’s reputation and the unique features of their products to their advantage.
By incorporating unique features into private label products — whether it’s innovative design or improved functionality — retailers can differentiate their products from others. This differentiation not only attracts more customers but also allows retailers to charge a higher price.
Increased flexibility
When selling private label products, retailers can quickly change from one product to another product depending on demand and price. They aren’t stuck with a product, price, or marketing strategy that won’t sell.
Step-by-Step Guide to Successful Private Labeling
1. Comply with legal requirements
The initial steps for starting a private label business involve ensuring compliance with all legal requirements. As a private label business owner, you need to officially register your business and keep detailed records of all financial transactions.
Moreover, you must register for tax purposes with the IRS to obtain an Employer Identification Number (EIN). This number is essential for tax filings, handling payroll, and opening business bank accounts.
You can apply for an EIN through the IRS website. The application process is straightforward and can typically be completed online in just a few minutes. Once your business is registered, you will use your EIN for all transactions involving federal taxes and when dealing with other financial institutions.
2. Find private label product
If you want to find a suitable private label product, it is a good idea to look specifically for a product where the demand is high and the supply is low.
If you want to know exactly how to find private label products, then read through the article what to sell on Amazon. This post explains in detail how you can find a really awesome product.
With the help of Helium 10 or Jungle Scout, you can make your search for potential private label products much easier. With Helium 10 you can check the margin of any product on Amazon. For this you have to proceed as follows:
1. Register for a free Helium 10 account.
2. Download Helium 10’s Chrome Extension.
3. Search for the product you want to sell.
4. Check the profit margin.
5. Make sure that your profit margin is higher than 10%.
You can then sell these products directly through Amazon using the tools mentioned above.
3. Create a list of potential products
For the product selection process, it’s advisable to create a diverse list of potential products. Utilize the strategies outlined in the article what to sell on Amazon.
Additionally, you can explore Alibaba.com to find suitable products that align with your business. This dual approach ensures a thorough search and helps identify the most promising opportunities.
4. Determine the USP for your product
As mentioned above, a USP does not always have to be a completely new invention. By making a minimal improvement to your product, you can already create a strong unique selling proposition and thus the basis for your private labeling.
It is important that the change or improvement of your product brings real added value for your customers. A USP can be, for example:
- A set composition
- A striking color
- The correction of errors
- Technical features
- A better design
- Various sizes
The elimination of defects is particularly lucrative. With Helium 10, you can research all negative customer reviews and find out the most common flaws of a product.
Think about a solution and discuss it with your manufacturer. If you patent your solution, then in the long run you can leave your competition out in the cold.
Why would potential customers buy a product that is defective when there is a defect-free product that meets all their needs?
Even if you have a patent pending, your competitors cannot follow suit and you will be able to maintain your position as top seller for a very long time.
5. Competitive advantages in private labeling
e’d like to introduce you to Michael E. Porter’s generic strategies matrix.
You can use this matrix to figure out where your private label products fit in the market and to come up with new strategies for success.
You can mix and match different strategies — cost leadership, differentiation, and focus — as described by Michael E. Porter to find the best approaches for your business.
For example:
- A cost leadership strategy means aiming to offer the lowest prices compared to your competitors by leading in low-cost production.
- A differentiation strategy involves creating products or services that stand out and appeal more to your target audience than what your competitors offer.
- A focus strategy targets a specific niche market, catering specifically to the unique needs of those customers
Using Michael E. Porter’s matrix can help you understand and choose a private labeling strategy that makes your products competitive.
6. Find the best manufacturer
Once you’ve found a suitable private label product to sell under your own brand, you need to find a good manufacturer. The same manufacturer won’t be right for every retailer.
In private labeling, it’s common to purchase products from large manufacturers abroad (e.g., China). Of course, you should only choose manufacturers who already produce the desired product or are capable of converting their production according to your needs.
Make sure to find a proven manufacturer who can incorporate their know-how into the success of your business. Also, pay attention to recessions so that there are no problems with your production lines in the future that you can’t handle.
You can find a suitable manufacturer for your product on Alibaba or similar marketplaces.
7. Construct your private label product
Once you’ve found the right manufacturer, you can discuss what desired changes you wish to make to the existing product.
Once everything is settled, a sample will be made and sent to you by the manufacturer. If the sample meets your expectations, production can begin with your desired number of pieces.
8. Select sales platforms
Now that your product is ready to sell, you need to choose a selling platform.
We recommend that you sell your private label products on Amazon.
Amazon is one of the largest marketplace in the world, which allows you to generate an enormous reach. With Amazon, you can make your private label products available to a very large audience and increase your sales.
The advantage of private labeling in combination with Fulfillment by Amazon is that you can fully focus on marketing your own brand without the distraction of other business responsibilities.
Customer support, shipping, returns, and more can be outsourced to Amazon. Of course, there are fees for these services which vary depending on the size and type of product you’re selling.
Amazon is also known for its fast Prime shipping and uncomplicated returns. With an Amazon FBA business, you benefit from these advantages. They’ll see the Prime logo on your product and immediately trust you.
Besides Amazon, platforms such as eBay and Shopify are also a good choice. However, you should note that on eBay, for example, both private and commercial sellers can sell. Accordingly, customer trust on this platform tends to be lower than on Amazon.
Common private label products
A private label retailer can sell just about anything if they find the right manufacturer. Think about what your business goals are. What products can you sell to meet those goals? Not sure? Well, the most common private label product categories are:
- Electronics
- Clothing
- Cosmetics
- Home decor
- Pet products
- Coffee
Electronics
Electronics is a huge category that encompasses everything from microwave ovens to phone chargers. As the world gets more and more plugged in, electronic private labeling is becoming more popular than ever before.
Clothing
Many online and merchandise retailers use private label manufacturers to make T-shirts, hoodies, hats, dresses, handbags, and other generic items. They either get the basic products shipped from the manufacturer and then customize the products themselves or find a manufacturer that does customization for them.
Cosmetics
Everything from makeup to mouthwash falls under this category and can be private label products. Work with the manufacturer to customize the product formulas to better suit your brand.
Home Decor
Think about Amazon Basics. People are always looking for new ways to spruce up their homes, and home decor is essential for that. Many home decor retailers use private labeling to customize their products to suit consumer demand.
Pet Products
Many pet product retailers, especially those online, use private labeling for most products, such as leashes, toys, and even food. There are numerous dog food manufacturers that can even customize ingredients and flavor palettes.
Coffee
Most coffee retailers aren’t making the coffee themselves. They don’t grow their own coffee beans and roast them. Some might, but most retailers mostly use private label manufacturers, then customize the packaging according to their brand.
Well-known private label brands
Private labeling isn’t something done just by individual sellers and small-scale retailers. It’s a technique used by numerous national and international brands. At this point, nearly every sector of retail in the world involves some form of private labeling, whether it’s taking place online or in brick-and-mortar stores.
Some of the largest retailers in the US rely on private labeling. According to Numerator, the top private label retailers are Aldi and Trader Joe’s. In third place is Costco, followed by Sam’s Club, HEB, Walmart, and Lowe’s.
So, private labeling is anywhere and everywhere. Let’s look at a few established private label brands to see how they’re doing.
Kirkland Signature
Kirkland Signature is the private label brand of Costco. It’s known for its impressively low prices, as well as its high value. In fact, many Kirkland Signature products match the quality of high-end products, making them more attractive to Costco customers than competitor brands.
The Kirkland Signature brand has been around since 1995 and is completely private label. The brand makes up about a quarter of Costco’s total revenue.
Great Value
Like Kirkland Signature, Walmart’s store brand – Great Value – is similarly known for its competitive prices. Since 1993, Great Value has been made up of private label products.
However, Walmart has been under fire recently for raising the prices of their Great Value products. They claim it is a natural response to inflation, but some customers view this change as a demonstration of corporate greed. Use this situations as a lesson: a profit margin can make or break your business!
Amazon Basics
In 2009, Amazon launched their own private labeling brand called Amazon Basics. The brand focuses on basic everyday items, hence the name, and unifies its products through their simplistic, minimalist designs.
Besides being recognized for its more affordable prices, Amazon Basics is also known for its high quality. The brand’s Microfiber Sheet Set has been heavily advertised and has been rated nearly 400,000 times!
The best business moguls know that private labeling can give businesses a boost, whether their entire product lineup is private labeled or just a few products here and there. Starting your own brand has never been easier. All it takes is basic knowledge, a great business technique, and a lot of determination to make it work.
FAQ – Frequently asked questions
Private label products are products that are manufactured for a specific retailer and then sold under the retailer’s own brand name. So an outside manufacturer makes your own custom products.
In our article, we’ve created a guide for you on how to make private labeling work for you.
You can use tools like Helium 10 or Jungle Scout to find potential private label products. You can find detailed step-by-step instructions in our article.
In private labeling, the buyer specifies the design, parts or ingredients. With white labeling, the product itself already exists, so only minor changes can be made.
Private labeling is cost-effective, it creates a Unique Selling Proposition (USP), it brings certain independence and one is free in the choice of design.
