Definition: Licensing your product to another company to sell under its own
name, rather than under yours
Inventors of just one product typically won't have a lot of luck
selling that product to mass merchants, because mass merchants
don't want to buy from small, unknown companies that could be
unreliable suppliers. But rather than accept defeat, inventors
often turn to private labeling. They find another company that does
sell to mass merchants and offer their product to that company to
sell under its name.
Products that are natural extensions of other product lines are
ideal private-label products. For example, your product might be a
rack that allows people to bake four sheets of cookies at a time
instead of just two sheets. This product may not have enough appeal
to get mass merchants to carry it from a separate company. But the
product is an ideal complement for a company that sells other,
similar baking products.
Private-label marketing gets you shelf space, but that doesn't
mean the product will be supported by an advertising campaign. Your
product needs to "sell itself" on the store shelf to do well in a
private-label program. You need a product that will sell at five to
six times its manufacturing cost to have room for the extra
discounts required. Most ideal private-label products are easy to
produce in volume and inexpensive to manufacture.
As long as your manufacturing costs leave you enough profit room
to hire a contract manufacturer, one advantage of a private-label
agreement is that you might be able to get a big order or a
commitment before you actually have to produce a product. This
could allow you to borrow money or possibly get extended terms from
the manufacturer that will make your product. Another big benefit
is that operating costs are low. You can make and ship all your
products to one customer.
The major appeal of private labeling to private-label buyers is
that they can generate a little extra profit without a lot of extra
work. And if sales don't work out, the private-label buyer just
stops buying your product.
You can form successful relationships with private-label buyers
by:
- Making things easy. Ask the buyer for a
purchase order, and state that you'll supply the product in the
buyer's package, or that you'll modify your package to the buyer's
specifications. If necessary, you can also offer training to the
buyer's salespeople, and you can even offer to maintain a website
for the product. If you are selling to a retailer, you might want
to offer a display, and you could even show a diagram of what
complementary products yours should be displayed next to.
- Providing top-notch service. Provide
marketing support, such as attending trade shows, doing publicity
releases, actively working a web page, or offering layouts for ads
or brochures. You can also offer to provide customer service for
handling product problems, to take care of product returns, and to
suggest product improvements.
- Paying attention to your product's
packaging. Your private-label buyer is probably not going to
invest any money in marketing. So potential buyers need to see your
product and immediately realize its benefit. If you have a consumer
product, take time to package your product so it sells itself. The
packaging and design of a product are important if your
private-label agreement is with a retailer.
- Understanding the competition. Companies
take on private-label products primarily for competitive reasons.
To sell the concept effectively, you need to know your target
company's competitors and how your product improves the company's
position in relation to them. Being familiar with the competition
is also important if retailers are the final stop in the targeted
distribution channel.
To find potential private-label partners, do an internet search
for "private label," and you'll find hundreds of companies that
market private-label products in dozens of ways. Also check out the
Private Label
Manufacturers Association, which hosts trade shows and offers
information for potential private-label manufacturers.
Before you approach a company for a private-label contract, make
sure you've taken these five steps:
1. Protection. Companies buying private-label products
usually aren't overly concerned about your patent status. But you
do run the risk that the company might decide to make the product
or that a competitor might quickly introduce the same product. If
you have enough money, you can apply for a utility patent before
approaching the company. If your funds are limited, apply for a
provisional patent, which gives you a one-year leeway until you
have to apply for a utility patent.
2. Prototypes. Inventors need a "looks like, works like"
prototype before landing a private-label agreement. A company wants
to not only see, but also to test your product before deciding to
go ahead. If you can't make the prototype, you can get a contract
manufacturer to make it for you at a low cost-provided you sign an
agreement to give them the business if you get the sale.
3. Research. When you approach a company with a
private-label proposal, show them that their target customers like
and need your product. This can be shown by having surveys of
potential customers, or interviews or supporting letters from
influential users.
4. Manufacturing. You're responsible for providing the
product in a private-label agreement, either by making the product
yourself or by having a contract manufacturer make it. No matter
how low your margin is, start with a contract manufacturer to
ensure the agreement gets off to a good start. You can switch to
your own manufacturing operation once sales are secure.
5. Key Contacts. Key contacts who can get you in the door
of your target customers include salespeople, marketing personnel,
regional sales managers or top executives. You can meet these
contacts by attending industry trade shows or association
meetings.
Private-label marketing can help you generate quick sales, but
it does so at a price. First, the extra discounts cut into your
profits. Second, you have your product promoted under someone
else's name. Third, your agreement probably restricts the
distribution outlets you can sell through. All these factors work
against you in launching your own larger business. One of the
reasons most private-label products are accessories or
complementary products is that it's hard to build a powerful
company out of those types of products. If your goal is to create a
base on which to build, use private-label agreements sparingly.
Often, inventors sell the product themselves in their major markets
and use private-label sales in smaller markets.
You can't afford to rest on your laurels after signing a deal.
You need to write a first-year plan to get your product up and
running. In your plan, you should include sales promotions, sales
materials, visits to customer locations, required training, new
product development, attending trade shows, market research for new
products, an ongoing system of customer feedback, and quarterly
reviews of sales status. Your goals in the first year are to be
sure the sales and marketing effort for your product is
first-class, and to network with both company contacts and
influential end users. The success and staying power of your
agreement will increase as you become better known to people
involved with the product.