In business, you need to develop products and services to meet customers’ needs. You can consider selling other companies’ products. However, this approach has many limitations. First, the owners decide the design, packaging, and feature of their products. They can also decide to terminate it. Such action will mean that you will be out of business.
For you to avoid such a situation, developing or manufacturing your products is the solution. But the cost of setting up a manufacturing firm is high. You might not be able to raise the necessary capital to establish a production line. Here is where the private labeling and manufacturing business model comes to play. So, read on to learn what this model entails.
What is the Private Labeling and Manufacturing Business Model?
Have you ever been through this situation? You bought products from different brands. But when you check their specs, they are the same. The only difference between them is the branding and packaging. If so, you have come along with the private labeling and manufacturing model in practice.
In a simple definition, this model involves selling items or products of another manufacturing company under your brand name. Here you sign an agreement with the original designer or manufacturer. The agreement gives you the power to repackage, rebrand, and sell the items as your own. A manufacturer can sell the same item to private labeling companies that brand and sell them to customers.
You can confirm this by visiting various online stores. On their list, you will come across different brands offering a specific item. The item may vary in price and packaging. But when you look at the features and specs, you will note that they are similar. With this information, you won’t be wrong to conclude that they are using the private labeling business model
How Does Private Labeling and Manufacturing Business Model Work?
The private labeling and manufacturing concept involves two parties. The first part is the private label company. This party can be an entrepreneur or a business entity. As one of them, you develop an idea of the product you want to produce based on the market demand. Since you do not have a firm to manufacture it, you work with a manufacturer. The manufacturing company produces the product and sells it to you for repackaging and rebranding.
The next party is the original design manufacturer (ODM). ODMs are manufacturing companies that do not sell products under their names. Their role is to make the product and sell them to private labeling companies. The ODMs give you a license and patent to sell the item as your own. So, they incur the production costs and design the items according to your ideas or based on their templates/prototype.
As such, this model involves selling third party products under your brand name. You do not incur the manufacturing costs.
Example of Private Labeling and Manufacturing Business
The examples of businesses using this approach are limitless. Ranging from phone brands to apparel and fashion businesses, all these use private labeling.
For example, Vega Coffee is a company that uses this model. The company sells its coffee to ice cream manufacturers. These manufacturers do not brand their coffee ice cream under the Vega brand. Instead, they sell it as if they are the original manufacturers.
Tesco baked Beans is another example of private labeling. This brand sells baked beans from other company’s by branding them. Also, Amazon uses a similar approach. In other words, the items you buy from a supermarket or store carrying their name, it is likely that they are using private labeling. These are products from third parties but sold under the retailer’s name.
Pros and cons of Private Labeling and Manufacturing business model
If you are looking to make a step in the market by establishing your brand, you need to consider private labeling and manufacturing as your business model. This model allows you to own products without having to acquire the factors of production. But here are some of the advantages and drawbacks of this model
Pros
Power over the production process
When selling other brands’ products, you have zero input on their production. You cannot dictate what you need to see in them. So, you cannot control their content. Private labeling is different. The approach hands you the power to control their production. You can inform the manufacturer about the features and content you want on the product.
Easy adaptability
No doubt, the product market is not static. The customers’ needs and preferences change from time to time. For your business to survive, you need to adapt to the new market needs. This aspect is hard when offering other brands products.
With private labeling, adopting a market change is easy. You have the opportunity to add or improve a certain aspect to meet the current customer needs. As noted above, this is possible as you have control over the production process.
Good for brand establishment
The sustainability of any brand depends on its ability to establish a reputable brand. Selling products under your name is the only secret to realizing this objective. Private labeling comes in to facilitate the achievement of this goal. By selling items under your name, you start a journey of building a sustainable brand. Hence, it is a good approach to enabling you to establish your brand.
Cons
Challenge in building customer loyalty
Though this model helps you to build a brand, it is hard to establish customer loyalty. As you are aware, customers are on the lookout for items from an established brand. They are unlikely to trust new brands particularly when they are not in the limelight. As such, despite having quality products under your brand name, you will face challenges in winning customer loyalty.
Conclusion
In a word, private labeling and manufacturing is a prevalent business model. Many businesses and brands that you know use it in sourcing for their products. The model enables you to have your brands without having to acquire a factory. Also, it enables you to kick off your brand-building journey from the first day. However, you will face competition from established brands despite offering similar products to them.
