At Ease, Private!

Striking the Deal

To find the right company to work with, Levin started by collecting the names of the vendors that sold the products in drug store nail departments, mass merchandisers like Kmart and nail salons. He then contacted the president of each company. "I found quickly that I always got the best response from the president, even if I had to contact him or her repeatedly," Levin says. Sometimes he was shuffled off to someone else in the company, but that person was, according to Levin, "always more receptive when I was referred by the president."

Private label deals don't have standard terms. In Levin's case, he provides his product to his customers, who then package and sell the product themselves--with Levin receiving a percentage of each sale. Other private label sellers get a fixed price.

The goal of any private label agreement is for both parties to make money. Typically, companies marketing private label products have a 25 to 30 percent cost markup (see "M&Ms"), and if retailers are involved, they will mark the product up another 50 to 100 percent. The kinds of products most likely to succeed at private labeling are therefore those that feature a sizeable percentage difference between what they cost to produce and what they end up selling for. One unit of Levin's nail-repair product, for instance, costs less than 20 cents to make and is eventually sold for $2 to $3.

The other big concern in private label sales is exclusivity. Inventors don't want any exclusive contracts that would prevent them from selling either to other private label customers or directly to consumers on their own. But often, the private label customer wants an exclusive deal in order to avoid competition. Most inventors agree to an exclusive contract only when the private label customer agrees to a minimum (usually a high minimum) yearly purchase that makes it worthwhile for the inventor to go with just one customer. Levin doesn't have an exclusive agreement, and he is free to sell the product himself or to other private label customers. He has had two other private label customers over the years, but they didn't keep selling the product. Levin is also free to try to market the nail-repair kit on his own. He has chosen not to do so because his experience has been that retailers aren't receptive to one-line companies. But he's working on expanding his product line so that one day he might be in a position to sell his own product line under his company's own name.

Going Private?

Private label sales are a great option when you run into market obstacles. But they're also an ideal choice if you'd prefer your product be a part-time venture, or if you can't properly fund the product yourself. A part-time effort works well with private label sales because you have just a handful of customers who purchase your product. Your customer takes care of distribution, marketing and invoicing--and, as a result, the only role for you to play is providing the product.

If you lack funding, you can use a private label sales agreement to get a manufacturer to make the product for you without an upfront investment on your part. Or you may be able to persuade a manufacturer to wait for payment until the private label customer pays you. With a deal like that, you can sell your product with virtually no investment.

Despite the drawbacks to private label sales--lower profits and less control over how the product is sold--these agreements offer many advantages, especially for those who lack the experience, funding or time to market their products. Private label sales are an option worth investigating for every new product.

FOR MORE INFORMATION


Don Debelak is a new-business marketing consultant and author of Think Big: Make Millions From Your Ideas.

Contact Source

Custom Solutions Inc.
(925) 837-4324
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This article was originally published in the April 2002 print edition of Entrepreneur with the headline: At Ease, Private!.

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