private-labeling

What Is Private Labeling? The Private Labeling Business Model In A Nutshell

Private labeling involves one company selling the products of another company using its own branding and packaging. In most instances, a retailer purchases products from a manufacturer that are then sold to consumers with the manufacturer’s brand and packaging visible. In private labeling instead, the retailer might have a third-party manufacturer produce goods and sell them under the retailer’s brand. Therefore the manufacturer acts as a private label, not showing its brand toward consumers.

Understanding private labeling

Sometimes, however, the retailer may sell private label products that are manufactured by a contract or third-party manufacturer and sold under its own brand name. The retailer acts as a de facto product manufacturer by controlling what goes in the product, how it is presented, and what the label looks like.

Private labeling is present in most consumer product categories, including personal care, beverages, pet food, cosmetics, condiments, dairy items, frozen foods, clothing, and household cleaners. In Australia and the United States, private label brands account for 18.1% and 17.7% of all retail sales revenue respectively. In Europe, these brands are more popular, comprising 41% of sales in the United Kingdom and 42% in Spain for example.

Examples of private labeling

Following is a look at some of the companies making a success of private labeling:

Amazon

how-does-amazon-make-money
Amazon has a diversified business model. Amazon’s primary revenue streams comprise its e-commerce platform, made of Amazon labeled products and Amazon third-party stores. In addition to that, Amazon makes money via third-party seller services (like fulfilled by Amazon), advertising on its platform, AWS cloud platform, and Prime membership.

The eCommerce giant owns over 100 private label brands that appear across various categories including food and beverage, electronics, and automotive. Many of Amazon’s private-label brands are created to mimic the success of brands that sell well on its platform. Examples include Amazon Essentials, Revly, Nod, and Happy Belly.

Trader Joe’s

American grocery chain Trader Joe’s sources most of its products from third-party manufacturers including PepsiCo and Snyder’s-Lance, the second largest salty snack maker in the United States.

Costco

retail-vs-wholesale
In a retail business model, usually, the company has direct access to final customers, which will consume a final version of the product/service, sold in units, and at higher margins. Where in a wholesale business model, instead, a company usually sells raw products in bulk to retailers and middlemen who sell directly to customers. In a hybrid model (like Costco) the wholesaler also sells to final customers.

The retailer’s Kirkland Signature private label range sells everything from batteries to wine to rotisserie chicken. The company reported in 2020 that it made $39 billion in revenue from the Kirkland brand alone in the previous twelve months.

Walmart

walmart-business-model
With over $555 billion in net sales in 2021 the company operates a differentiated Omni business model with three primary units comprising Walmart U.S, Walmart International, and Sam’s Club (approximately 12% of its net sales) a membership-only warehouse clubs. Together with Walmart+, a subscription service including unlimited free shipping, unlimited delivery from its stores, and discounts launched in 2021. 

Which has recently made a foray into private label apparel for men, women, and children. The supermarket chain also operates private label brands in wine, toys, tools, and consumer technology.

Advantages of private labeling

Private labeling has several benefits for the business that extends beyond the simplification of the product development process.

These include:

Control over costs

Despite not manufacturing the product, retailers still control the product pricing strategy and can optimize production costs to increase profit margins. Retailers also have the final say over specifics such as product quality, pricing, ingredients, and volume.

Product rotation

Retailers also use private label products to accelerate product rotation. Companies such as Nordstrom sell private label products to increase their responsiveness to seasonal trends and compete with fast-fashion retailers such as H&M.

Market stability

In countries where private label products are prevalent, consumers choose them for their quality, consistency, and affordability. Thanks to lower price points, private label products can boast steady sales even amid a recession. Since there is more stability and less price inelasticity, retailers may even increase their order quantities during economic downturns.

Nevertheless, there are some disadvantages too.

Disadvantages of private labeling

Production dependence

While retailers have control over many aspects of private labeling, they do not have control over the product manufacturer. Inefficient processes could cause inventory or quality issues and, in a worst-case scenario, the manufacturer may declare bankruptcy and severely disrupt operations.

Brand dilution and loyalty

Some consumers perceive private label products to be of poor quality, which can cause brand dilution for a retailer’s more premium brands. Furthermore, building any sort of brand loyalty to a bulk, low-cost product is difficult.

Cost

Some manufacturers will ask for an initial payment if it is the first time they are working with a retailer. There may also be a stipulated minimum order quantity to ensure both parties profit from the arrangement. These factors make private label products a challenge for retailers with smaller budgets.

Key takeaways:

  • Private labeling involves one company selling the products of another company using its own branding and packaging.
  • Private labeling is used successfully by companies such as Amazon, Trader Joe’s, Costco, and Walmart.
  • Private labeling gives retailers more control over costs and product development and also allows them to maintain sales in economic downturns. However, the approach is only as robust as the product manufacturer and some companies may find it difficult to build brand loyalty in a low-cost product from scratch.

Related Business Model Types

Platform Business Model

platform-business-models
A platform business model generates value by enabling interactions between people, groups, and users by leveraging network effects. Platform business models usually comprise two sides: supply and demand. Kicking off the interactions between those two sides is one of the crucial elements for a platform business model success.

Marketplace Business Model

marketplace-business-models
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.

Network Effects

network-effects
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.

Asymmetric Business Models

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.

Attention Merchant Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Wholesale Business Model

wholesale-business-model
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.

Retail Business Model

retail-business-model
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.

B2B2C

b2b2c
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.

Crowdsourcing Business Model

crowdsourcing
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.

Open-Core Business Model

open-core
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.

Open Source vs. Freemium

open-source-business-model
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.

Freemium Business Model

freemium-business-model
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.

Freeterprise Business Model

freeterprise-business-model
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.

Franchising Business Model

franchained-business-model
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.

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