URL: http://www.entrepreneur.com/magazine/entrepreneur/2000/april/24814.html

When the time comes for inventors to sell new products, they frequently head down the same, predictable path: targeting small markets and getting small footholds. Eventually, expanding their sales network becomes a top priority-and that calls for selling to big retailers. Small businesses face some marked disadvantages here: they only have one product, and they aren't big enough to guarantee delivery.

How can inventors get around this problem? By private-labeling their products. In this arrangement, inventors market their products under another company's name. Inventors benefit because their products are supported by the marketing power of an established company. Private-label partners benefit because the relationship broadens their product line, which enhances their competitiveness.

Size Small

Marilyn Searcy, 46, was wallpapering her home when she got the inspiration for It's a Keeper, an attachment that fastens to the top of a ladder and holds either a 2- or 5-gallon bucket. It's a Keeper lets users keep their tools at arm's length while working. "It's a great product for anyone who's ever had to go up and down a ladder to get the right tool for the job at hand," says Searcy, whose company, Searcy Enterprises, is based in Fremont, California.

Searcy started to sell It's a Keeper herself in 1995, and expects her 2000 sales to exceed million dollars. Looking back, Searcy says she had bigger goals when she started selling her product, but was stymied by her inability to secure larger accounts. "I could never get into the larger retailers," she explains. "I was too small a supplier, without any advertising. Another problem I had was that, at first, my product didn't fit every type of ladder."

Searcy tried to expand her distribution by changing the product. "I improved the product so one model could adjust to fit any ladder in the market. This way a retailer would not have to worry if It's a Keeper would fit the ladders it was buying," says Searcy. But, she explains, the retailers still wouldn't buy. In an effort to penetrate large retail chains once and for all, Searcy decided last year to pursue a private-label arrangement with a major ladder supplier that sold to Wal-Mart, Kmart and Home Depot. At press time, the contract was in its final phase of negotiations, and Searcy hoped to have the deal signed soon.

When entrepreneurs sell their innovations on a private-label basis, those products sell for less than wholesale. But even at the lower price, Searcy will benefit: The agreement will eliminate her marketing and sales costs for that product, and the increased volume will have allowed her to cut manufacturing costs.

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Don Debelak is a new-business marketing consultant and the author of Bringing Your Product to Market (John Wiley & Sons). Send him your invention questions at dondebelak@uswest.net.

Private-label agreements work for all types of inventors. But to succeed, you must find a company with a product line complementary to yours. Keep in mind that you don't want a private-label agreement with a company that already sells a competing product. Another consideration: Does that company sell to your target market? You should evaluate your potential partner by both size and breadth. Searcy wanted to partner with a company that had a strong presence in major discount and building-supply stores because they presented the largest potential volume for her product.

Searcy got her first lead while attending a how-to fair hosted by popular West Coast hardware retailer Orchard Supply Hardware. Her lead came when she met Hal Wrigley, president of Applied Concepts, located in Warrendale Pennsylvania, who private-labels a line of rubber grips to Sears. Searcy showed Wrigley her product, and got the name of the president of the ladder company that she's now negotiating with.

As Searcy found out, trade shows are an entrepreneur's best bet for meeting the right contacts. The best way to get started is by asking a company rep the following:

• Do you know of any companies that sell products on a private-label basis?
  
• Do you have any key contacts at those companies?
  
• What do you think of my product, and do you think it could sell?
  
• Can I use your name as a referral when I call to introduce myself

If you can, try to talk to a someone at one of the companies private-labeling products, rather than going through a middlemen. If the person at the company likes your idea, ask if they'll set up a meeting with decision-making executives at the company.

Private-labeling typically constitutes a "win-win" proposition for both parties. The big drawback for the inventor is that he or she must take a lower margin. That's usually offset in two ways: first, because they won't have sales and marketing expenses, and second, because manufacturing costs typically drop by at least 10 percent once production quantities increase. Private-labeling just might be your ticket to success if you don't have the resources to get your product on the shelves of major chains. Instead of getting discouraged if your sales are low, seek out a private-label partner with the resources to shoot your sales to the next level and beyond.

Today, Searcy has found a better solution: She's since hooked up with a U.S. manufacturing partner who delivers quality products every time. While inventors can often reduce costs by using overseas production, the risk isn't always worth it. Lower pricing means you have to place larger orders, and poor-quality products in bulk can be difficult to return. Here are some steps inventors can take to minimize problems:

• Contact your local Small Business Development Center (SBDC) for help. You can find a list of SBDCs on the SBA Web site. Click on the box for "Outside Resources," then click the SBDC box and it will take you to a list of offices throughout the United States. The page can link to an SBDC office you select. You can also check out the government section in the White Pages for the SBA office nearest you-it will be able to give you the phone number for your local SBDC.

• Make a list. Ask the SBDC for a list of resources or other contacts in your area that can help. You'll want a local contact, as you may require assistance a few times before finalizing a deal.

• Hit the Web. If you don't have an SBDC close by, you can also search these Web sites: http://www.chinesebusinessworld.com and http://www.taiwantrade.com.

• Get the names of at least three U.S. customers from potential manufacturers. Call those references to ensure those companies are satisfied with that supplier.

• Demand first-article inspection rights from manufacturers. First-article inspection rights let you approve the first production run off the manufacturing line. Only after you give the go-ahead can the manufacturer continue production.

Spell It Out

A private-label agreement will spell out pricing and exclusivity terms. In addition to setting the original price, terms may include the following:

• Price-increase provisions: The private-label customer may want to protect itself against large price increases, something Searcy included in her agreement.

• Price-protection provisions: These were also included in Searcy's agreement, and concern the retail customers' price for the private-label product in relation to what people would pay if they bought the product directly from the inventor. A clause might state that the private-label product will always cost a minimum of 25 percent less than the inventor's wholesale price, or that no private-label customer can have a lower price.

Exclusivity is another key issue in private-label agreements. Some potential exclusivity provisions are:

• Exclusivity by territory, in which the inventor agrees not to private-label his or her product to another company;

• Exclusivity by market segment, meaning the entrepreneur might grant exclusivity for a particular market. For instance, a manufacturer of a protective glove holder (worn on the belts of police, fire and paramedics) might have an exclusive agreement for the paramedic market with one manufacturer, while reserving the right to strike new private-label agreements for police and fire departments. Searcy's agreement included this provision as well;

• Exclusivity from other private-label agreements, where exclusivity may apply just to other private-label agreements, allowing the entrepreneur to continue selling the product under its own brand name.

• Exclusivity from the manufacturer selling under its own brand name, meaning the inventor agrees not to sell the product except through that one private-label agreement. The manufacturer also has to produce subsequent products at the same (or higher) quality level as the first product run.