So many labels! So many business models! So confusing!
Hey, chill out. If you are unsure what to choose between these three, let me help you out. Today, you will learn about:
- What is a private label?
- What is a white label?
- What is dropshipping?
- Pros and cons of private label
- Pros and cons of white label
- Pros and cons of dropshipping
The two terms that most people get confused about are white label and private label. By the end of this tutorial, you should be able to distinguish the two, plus dropshipping, and then you should be able to decide which path you want to take.
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What is a private label?
A private label business is a model where you develop your own product and have a supplier manufacture it for you.
In private label, the products your brand and it is sold under EXCLUSIVE rights to you. What it means is that the manufacturer cannot sell the product to anyone else.
Great examples are shoes and dresses whose manufacturing process is outsourced in China or other places in the world. These are called original equipment manufacturers.
In private label, you have control over the product design. It is also within the boundaries of your contract to tell the manufacturer what to put in the package, what comes with the purchase, what color or sizes the products should be, and so much more.
If you watch Shark Tank, you will realize that most of these product developers that pitch their ideas to the Shark Tank panel will eventually be in the private label business.
What is a white label?
On the other hand, white label is a process where a manufacturer just keeps on producing products. Retailers can ask the manufacturer to stamp their brands on the product, but the retailers have no say how the product should be made.
In short, it is like as if a retailer buys the products in bulk, stamps his brand, and then sells it in retail stores.
You can see examples of white label products in grocery stores. Sometimes, you will see cooking oil, soy sauce, and vinegar whose brand names match the grocery store’s name. The grocery store does not manufacture these products. They just order it from a supplier and the supplier stamps their brand on it.
So how does this work?
Let us say that John manufactures sponges. I tell him to give me a thousand pieces every month, and then stamp my brand name on it—Matt’s Kitchen Essentials.
Now, you also want to sell kitchen sponges. So you go to John, and you do as I did. This time, John stamps the name of your brand on the sponge products—ABC Kitchen Tools.
Here is the thing: what you and I are selling are the same thing. Only the packaging has changed.
In white label, both you and I cannot tell John to change the color of the sponge or to make it bigger. John will just keep producing these sponges and also sell them under his own brand.
The moment I tell John to make a bigger size, which he is not currently producing, it becomes a private label business model.
What is dropshipping?
Dropshipping is a business model where you sell someone else’s products for a profit. In dropshipping, you do not buy your inventory.
Here is how dropshipping goes:
- You sell the supplier’s products in your online store
- A customer orders from your store and pays
- You order the product from the supplier
- The supplier ships the product directly to your customer
The difference between the price you paid to the supplier and the price you sold it for is your profit.
Pros and cons of private label
Here are the PROS of a private label business:
- Exclusivity – the manufacturer cannot sell the product to anyone else. The products are made exclusively for you.
- Production control – you are in charge of the quality of the manufacturing. If it is food, you have a say at the ingredients of the product.
- Pricing control – since it is your product, you strike a deal with the manufacturer to charge you less if you buy in volume. Both you and the manufacturer can control how much money you want to spend on packaging, or whatever it takes to reduce your costs.
- Value – you are in control whether you want to give out freebies, or if you want to increase the content of the product, and so on.
Here are the CONS of private label:
- Dependency – since you did not put up your own manufacturing plant, you have no control over the facilities. You cannot tell the manufacturer to buy new equipment. You cannot tell the manufacturer to improve its technology, etc. Also, if the manufacturer’s plant breaks down, your business is impacted.
- Cost – while we said earlier that you are in control of the cost, this can also become a disadvantage. The moment you ask a manufacturer to change the packing or the production sizes, there may come a point when their existing machines cannot support what you are asking for.
If this happens, a manufacturer may re-negotiate your deal so they can cover their costs for buying new equipment.
Pros and cons of white label
Let us take a look at the PROS of white label:
- No headaches – in white label, you take the product as it is and just brand it with your name; you do not have to design a product, much less figure out how it should be manufactured
- Price – white label products are really cheap because they are mass-manufactured
Here are the CONS of white label:
- Inconsistent quality – you have no control over how the manufacturer creates the product; you buy it as it is
- Production control – you cannot impose how many items that manufacturer will produce unless you pay for it upfront; if the manufacturer decides to put a halt on this product, you cannot do anything to reverse that decision
- Liability – even if you are not in control of the product quality, you are liable for any customer returns or issues
To make white label work, you need to be an established brand with a following, like a grocery store. Take Walmart, for example. If it decides to start selling pickled jalapenos under its own name, customers are likely to buy. They know Walmart, and they trust it.
If you do white label and you are not known in any industry, you will struggle with your marketing efforts. The good news is that there are white label dropshipping products that you can find in AliDropship.
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You can strike a deal with the supplier and then ask them to brand the items with your name before they ship it to your customers. This practice is not uncommon to dropship private label clothing companies.
Pros and cons of dropshipping
Finally, let us talk about dropshipping. Here are the PROS:
- Low capital required – you only need $29 to get started to dropship with Shopify
- No inventory to keep – you only buy the product once a customer orders it and pays you
- Low upkeep – the monthly subscription to maintain your website is only $29—less if you build it on WooCommerce with Bluehost
- Work anywhere – manage your business no matter where you are; no need to talk to a supplier over the phone or in person—everything is automated
- Lots of tools to support you – there are thousands of apps and dozens of dropshipping platforms, all of which are so easy to use; you can build a store in one day
- Thousands of suppliers – there are thousands of merchants who will ship the item t your customers
- Sell globally – you can sell your items globally; you do not even have to worry about shipping
And here are the CONS of dropshipping:
- Product quality – you are not in control of the quality of the products you sell
- Competition – because of the low barrier to entry, you are competing against thousands of other dropshippers
Here is a bonus: you can find private label dropshipping suppliers, and also white label dropship suppliers. They will manufacture your items, keep the inventory, and ship the item for you. However, you have to buy wholesale.
The thing is, you pre-pay the goods that are manufactured or branded exclusively for you.
Private Label vs White Label vs Dropshipping: what is the best choice?
Here are my thoughts on how you should choose the right business model for you.
- Private label products – you developed your own product, and you are ready to distribute your items to other local retailers who will carry your brand;
- White label – you want to sell generic items, and you do not want to design your own product, but you want your own brand; you must have capital to keep inventory
- Dropshipping – you do not need branding, and you are satisfied with re-selling what is available from manufacturers
For me, dropshipping is still the best way to go if you are a beginner. Private label and white label are best left to medium-sized businesses—those who have the capital to keep stock or inventory, and those who know how to reach out to local retailers to carry their brand.
After your success in dropshipping, you can start looking forward to branding products that you source from suppliers. This time, you will keep your inventory, or have a deal with the supplier to package it for you.
Finally, you can move forward to designing your own product and choosing a supplier who will fulfill the manufacturing process as per your specification. Take baby steps, and you will one day get to your dream of having your own brand.
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