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.