Private Label Business Model – How Does It Work? (Explained)

Companies that use a private label business model sell ‘private label’ products. These are products manufactured by a contract or third-party manufacturer and sold under the brand name. The retailer gives the product’s specifications to the manufacturer, usually detailed, and then pays the manufacturer to produce it. The manufacturer also delivers the product to the retailer’s store.

There are various categories in which private label products are prevalent. Some of these include personal care, cosmetics, paper products, household cleaners, beverages, dairy items, and frozen foods. However, private label products are less common than other types of products.

Private label products can be highly beneficial for companies. It allows companies to increase their offered products but also allows them better credibility and trust with customers. Usually, customers can’t tell the difference whether a company’s products are private label. Another name used for private label products is Original Equipment Manufacturer (OEM) products.

How does the Private Label business model work?

In a private label business model, there are three parties involved in two arrangements. The first arrangement is between a company and its customers. The customers buy a variety of products from the company. However, these products do not usually come from the company itself but a manufacturer unknown to the customer.

The second arrangement is between the company and the original manufacturer. The company and the manufacturer have a close relationship in this type of business model. The company gives detailed information to the manufacturer, for example, specs, size, packaging, etc. The manufacturer then produces the goods and sends them over to the company.

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In this business model, the manufacturer of the goods and the customer never interact with each other. In fact, the customers do not usually know that the products are not the company’s own but produced by the manufacturer. The company applies its brand to those goods, therefore, marketing them as their own.

What are the advantages and disadvantages of the Private Label business model?

There are several benefits and drawbacks to using a private label business model for companies. Some of these include the following.

Advantages

The private label business model grants companies more control over overproduction. The company gives directions and provides the specs of the products they want. Therefore, they get more control over the end-product as compared to other outsourcing business models. Similarly, they also get more control over pricing as they have more control over the product.

The private label business model is also highly adaptable. Smaller companies can quickly get a private label product in production when the market demand for new features increases. For example, smaller companies can capitalize on it more quickly when there is a new fashion trend, while larger companies may not go for it.

The private label business model also gives companies more control over branding. These products come with the branding or label of the company rather than the original manufacturer. Through this, the company also gets more control over the profitability of its products. Similarly, the lower costs of production and pricing give more control to the company, thus increasing its profitability.

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Disadvantages

The disadvantages of using a private label business model are fewer compared to its advantages. The most crucial problem is that private label companies are heavily reliant on their product manufacturers. Since the production process is in the manufacturer’s hands, the company must rely on them for its products. Similarly, any problems on the manufacturer’s side can also impact the company negatively.

Similarly, due to its reliance on manufacturers, companies also need to pay additional care to their relationships with manufacturers. If the company does not find the right vendors or does not maintain positive relationships with manufacturers, they may lose them, which can be harmful to the company.

Lastly, the private label business model makes it difficult to build loyalty for the manufacturer’s brand. By not using its branding on its products, the manufacturing company does not get the exposure to create its own brand. The manufacturer is also reliant on the company to sell its products. Any problems in their partnership can be problematic for both sides.

Examples

Tesco is a company that sells products from other brands but also has its own brand of products that it gets through private labels. Almost all retail companies use private labels up to some extent. On the other side, Richelieu Foods is a private-label company that produces food items for various brands, such as Save-A-Lot, Sam’s Club, Aldi, etc.

Conclusion

The private label business model is for companies that provide details of the products they want to manufacture and get readily marketable products. These are common in various categories. Private labels can prove to be highly beneficial for companies. However, it can have a few disadvantages as well.

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