When Should You Switch to Private Labeling? Thinking of switching to private labeling? Here's what you need to consider before pivoting to this business model.
By Steve Tan Edited by Jessica Thomas
Opinions expressed by Entrepreneur contributors are their own.
Private labeling involves finding items that customers are already shopping for and then branding and selling them as your own. It allows entrepreneurs to build a brand without having to start from scratch. More importantly, it saves you from having to worry about manufacturing your own products.
Like other business models, private labeling requires certain levels of preparation, especially because it entails establishing your own brand name. If you're still on the fence about this or you're in the process of evaluating your preparedness, then I encourage you to use this article as your guide.
Why shift to private labeling?
Private-labeled products usually have higher profit margins. The branding component and the added packaging customizations can increase their perceived value, giving you greater flexibility to set competitive prices.
Plus, it's much easier to put a label on an existing product than spend time and money on developing new ones. With private labeling, you can cut costs on product development — not to mention the associated staffing costs.
Another advantage of this business model is that there's more than one way to go about it. Thanks to the popularity of third-party ecommerce services like the Fulfillment by Amazon (FBA) program, you don't necessarily have to worry about warehousing your private-labeled products or customizing their packaging by yourself. The service provider will take care of these for you.
Related: Guide to Starting a 'Fulfillment by Amazon' Business
Additionally, depending on the resources of your chosen private label suppliers, you might be able to request product customizations that could help your brand stand out.
When should you shift to private labeling?
Shifting to private labeling can potentially take your ecommerce business to the next level. However, it will also entail new levels of capital investment and commitment. With that, make sure that you have done the following before deciding to use this model.
1. You have validated your business idea
It's never wise to build a brand around a product or a niche that doesn't have enough demand. So before you invest anything into private labeling, you must first validate your business ideas through product and market research.
You can use online tools to assess the existing demand in a particular niche. One of the best ways to do this is by finding out the search volume of niche-relevant keywords — which you can do using free tools like Google Keyword Planner and Google Trends. Aside from search volumes, Google Trends can also provide a glimpse of where a niche is going and if the demand in that market is on the rise or declining.
Another good move that you can take is to test products using your existing store. If a product proves to be profitable for a considerably long period of time, then it will likely sell even better when branded with a private label.
2. You've identified several viable products
Unless you're after building a one-product store, you should identify at least a few products that go well with your chosen niche and branding. For example, if you are selling environment-friendly soaps, you can try selling other environment-friendly hygiene products as well.
Having more complementary products allows you to cross-sell, upsell and increase the average order value of your customers. You could even explore creating product bundles.
You don't necessarily have to launch multiple products all at once, but planning your product line extension in advance can help ensure the longevity of your private label business.
Related: How to Thrive in Niche Markets
When conducting product research, consider using automated tools that can save you time and provide you with accurate information (price, daily or total sales, product rating, etc.). If you plan to use Amazon as your sales channel, it's a good idea to explore this platform's Best Sellers page, which reveals top-selling products in different product categories.
A lot of considerations go into product selection. But for new private label stores, it's advisable to pick products that are easy and cheap to manufacture in bulk. Small and lightweight items are also ideal, particularly because they're less expensive to package and ship out.
3. You have substantial startup capital
Compared with other business models like dropshipping, private labeling requires a significant financial investment. You'll have to pay for products upfront. Plus, in most cases, suppliers will impose a minimum order quantity (MOQ) before they work with you. Add to that the cost of branding your products, product packaging and your online store.
This is why you need to make an honest assessment of your financial capability. Shifting to private labeling is usually recommended for experienced business owners with products that already have a strong demand or those who want to scale up their company. If you don't think you're ready to scale, then you might want to delay your plans to private label.
4. You've already figured out fulfillment
Will you fulfill products in-house, use FBA or tap any other third-party fulfillment center? Whichever you choose, you should have a clear idea of how your fulfillment process will be — including the part where the branding or private labeling will take place. Also, calculate the costs of everything (from product sourcing, to warehousing, to packing and shipping) before choosing which route to take.
Another option you can explore is to find private label suppliers that offer dropshipping or that can take care of order fulfillment for you. This way, you can focus on other aspects of your business, especially marketing.
5. You can accommodate all legal requirements
Creating a private label involves some legal paperwork, which is why you should consider whether you're ready to set up a legitimate business entity or not. Also, although you're not required by law to register your trademark, you should still consider doing so in order to gain proper legal protection.
A trademark protects your brand identity in the marketplace, so it's a good idea to register. It will also protect you against infringement suits.
Give your brand a unique identity with private labeling
Private labeling simplifies the process of building a brand. It can give your products a unique identity, even if several other vendors are selling the same items. Plus, switching to this business model can give you greater control over the direction of your branded store.
No matter where you are in your ecommerce journey, you can start thinking about your next scale-up strategy right now. Refer to this guide to assess your readiness, and then decide for yourself if private labeling would be your ideal next step.
