Starting a retail business is hard work. There’s a never-ending to-do list, from building a website and hiring employees to managing inventory and producing products.
But what if you could outsource that last step to a supplier that’s already set up to create your products? In fact, this is what most retailers do—in a type of supplier relationship called private labeling.
Private-label products are produced by a third-party manufacturer based on retailers’ specifications. Retailers then market and sell those products under their own brand.
If you want to know what private labeling is, or how to create a private-label line of products for your store, read on.
Table of contents
What is private label?
A private label refers to a product manufactured by one company and sold under another company’s brand name. Retailers often use their private-label lines to offer exclusive products, expand their catalogs, and undercut competitor pricing.
Private-label products can be similar to items that already exist on store shelves, but the exact manufacturing formula of the product must differ. For example, if a private-label business sells a box of chocolate chip cookies, the precise recipe won’t be found under any other label. The same applies to private-label brands selling electronics, jewelry, clothing, pet foods, etc.
How does private labeling work?
The private-label business involves two types of companies:
- Private-label manufacturers, which work with businesses to design and produce a product.
- Private-label sellers, which brand, market, and sell private-label products to retail customers.
A reliable private-label manufacturer will ensure product quality and keep production costs under control.
A savvy private-label seller will build brand equity among consumers, advertise, and set up a profitable pricing model.
Private labels vs. white-label products
Private-label goods shouldn’t be confused with white-label goods. White-labeling also involves a third-party manufacturer making a product on behalf of a retailer. However, white-label products are not custom-designed for a seller.
A white-label manufacturer makes large amounts of generic product, then sells it to individual retailers. Each retailer sells those products to consumers under a brand name.
In other words, private-label product lines are unique and sold exclusively through a single retailer, like Costco’s Kirkland Signature or Amazon’s Basics range. White-label products are generic and sold under the brands of multiple retailers.
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The benefits of private labeling
The private-label business model offers advantages to both manufacturers and retailers. These benefits include increased profit margins and control over branding.
Private label benefits
- A unique value proposition
- High profit margins
- Customized pricing control
- Customized marketing control
A unique value proposition
Private labelers get to design and sell their own products that are distinct from established brands, store brands, or other private-label brands. As a private-label entrepreneur, you can pursue novel product ideas without regard to what the rest of the market is doing.
Some (often larger) retailers use private labeling to create value product ranges and undercut competitor pricing. However, smaller businesses may choose private labeling to develop premium products that they wouldn’t be able to produce alone.
High profit margins
Private-label products often have higher profit margins than resale products. Retailers may choose to set a high price point for their unique private-label products—or leverage their existing brand power to cut marketing costs for private-label product lines.
Depending on the type and quantity of items produced, as well as the level of customization, manufacturers may be able to offer private-label products for less than resale products.
Customized pricing control
Private-label sellers and producers can tweak manufacturing costs and price points on their product lines. They can experiment with different price formulas to maximize profit margins.
Customized marketing control
As a private-label retailer, you can choose the marketing campaigns used to promote your branded products. You don’t have to adhere to the sometimes stiff, outdated campaigns run by national brands.
It can take months or years for an established brand to change its product formula, pricing, or marketing strategy. Private-label sellers, on the other hand, can pivot quickly. They can respond to negative reviews or low sales and adjust to make the best product for the best price.
Private label drawbacks
Despite numerous benefits, private labeling also has its drawbacks. These include the risk of inconsistent products and the challenge of building a brand from scratch.
Dependence on third-party manufacturers
One of the main drawbacks of private labeling is the dependence on third-party manufacturers. If the manufacturer runs into problems, such as production delays or quality issues, it can directly impact the private-label seller. This can lead to stock shortages, customer dissatisfaction, and potential damage to the brand’s reputation.
Less scope for innovation
When you’re working with private-labeling services, there may be limits to the level of product customization available. Depending on suppliers and product categories, retailers won’t always have as much control over the product design process as they may want.
However, issues with product design can be mitigated by developing a close working relationship with your manufacturer, opening the possibility for bespoke research and development.
Examples of private-label products
You may be surprised to discover how many consumer products and national brands are made by private-label manufacturers. In fact, the private label model exists across most product categories, both in online and brick-and-mortar stores.
- Pet food
- LED lights
- Phone accessories
- Smart backpacks
- Personal care products
Many pet stores, particularly online pet stores, sell private-label food made by big manufacturers that serve many clients.
Online marketplaces are filled with private-label LED lights, each with a slightly different design but sourced from a few manufacturers.
Chances are the third-party accessories you buy for your phone—chargers, cases, etc.—were made by a private-label manufacturer and sold under another company’s brand name.
Many online clothing retailers use private-label garment manufacturers for shirts, dresses, skirts, shoes, handbags, and more. These clothing manufacturers can print custom designs on apparel. They can also offer custom tailoring and leatherworking.
Smart backpacks have enjoyed growing popularity in the ecommerce marketplace. These portable pouches can charge electronic devices such as laptops and phones. Some can play music through a built-in loudspeaker. You can partner with a private-label manufacturer to create a customized smart backpack for your customer base.
Personal care products
Lots of personal care products, from mouthwash to makeup, come from manufacturers that serve private-label sellers. The formulas for these products will be customized for specific clients, but they’re produced on the same assembly lines.
3 examples of private-label brands
Here are three examples of large retailers that have launched successful private-label brands.
It’s worth noting, however, that you don’t necessarily need to offer private labels under a new or separate brand. Smaller businesses may choose to incorporate private-label products as part of their existing product line.
1. Kirkland Signature
Launched in 1995, Kirkland Signature is Costco’s private-label brand. It includes a wide range of products produced by various national manufacturers, and is known for offering impressive value for money to customers.
Take Kirkland Signature vodka, for example, which has been compared favorably to high-end brands like Grey Goose. Or Kirkland Signature extra virgin olive oil, which is USDA-certified organic.
Kirkland is an example of a private-label product line that has grown to national status and become synonymous with its retailer. Sales of Kirkland products now account for approximately a quarter of Costco’s total revenue.
2. Amazon Basics
Amazon Basics launched in 2009 and allows Amazon to compete for sales with other retailers on its own marketplace.
The private-label line under its own brand name offers electronics, home goods, pet supplies, and other affordable items—often at the lowest price points in a product category.
Some of the most popular Amazon Basics products are device charging cables. These cables are praised for affordability compared to those from official manufacturers such as Apple, which place high profit margins on their accessories.
Another well-known private-label bargain product is the Amazon Basics Microfiber Sheet Set, which has been reviewed by customers more than 450,000 times.
3. Harrods Own Label
Unlike Amazon Basics and Kirkland Signature, which harness private labeling to lower consumer prices, luxury UK department store Harrods uses its private-label brand to offer a range of premium goods.
Harrods’ own brand covers a range of products, including gourmet food and beverages, plus high-end fashion, accessories, and home goods.
Its selection of teas, for example, is sourced from around the world, packaged in distinctive Harrods-branded tins, and sold for higher prices than similar products from other retailers.
Key points: What is private label?
- Private-label products are produced for brands by third-party manufacturers.
- The business model is popular among large retailers, who use private labeling to create in-store brands with value-for-money products.
- Increasingly, private-label manufacturers are also working with smaller businesses to produce unique products and premium branded items.