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Private Label Agreements

Private label manufacturers make products for other companies to be sold under the buying company’s name. Inventors frequently pursue private label sales to build a quick sales base or when the market resists a one-line company. For example, most inventors won’t have much luck selling a painting accessory to mass merchants such as Wal-Mart. Rather than accept defeat, inventors often find another company that does sell to mass merchants. They then offer their product to that company to sell under its own name. The mass merchants may then be willing to buy your product.

Private label manufacturers cut into an inventor’s profits, as private label manufacturers will buy the product from you at 20 to 25 percent below what distributors will pay, but in return inventors have an established sales base. Since inventors can sell both on a private label basis and under their own name at the same time, a private label contract can provide the volume inventors need to successfully launch their own businesses.

Inventors can also sell on a private label basis to a retailer. For example, Sears Craftsman products aren’t made by Sears. They are made by other companies that sell to Sears on a private label basis. You need to offer 50 to 60 percent off suggested retail pricing when selling on a private label basis to a retailer, but that is a much better deal for inventors than having to offer a 30 to 50 percent discount off the wholesale or distributor price.

Most inventors will find that distribution, marketing and gaining market acceptance are three big problems when starting to sell a product. Private label is one way to overcome those obstacles. When trying to sell the product under your own name, the cost of marketing and distribution for the first two or three years is often 20 to 40% of sales, and sometimes more. The increased discounts you offer based on private labeling are offset by saving on marketing and distribution.

Perfect Products

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 selling other similar baking products such as cookie trays, spatulas, and cooling racks. The baking product company will be receptive to an offer to sell a product on a private label basis because it enhances its line and gives the company a better chance to secure shelf space in major retailers. The same situation applies to private label agreements with retailers. They look to add products that complement other products in their private label line.

Your Goals

• Entering competitive markets where one-line companies are at a marked disadvantage.
• Developing sales for a product that helps consumers but doesn’t have the potential of being a major factor in the market.
• Creating a sales base that will help support sales under an inventor’s own brand name.
• Securing a distribution contract so that an inventor can secure the financing he or she needs to begin production.
• Having just a few customers so that the inventor can operate his or her business on a part-time basis.
• Developing a relationship with a company that could eventually result in a licensing agreement.

How to get started

Prototypes

Inventors need a “looks like, works like” prototype before landing a private label agreement. A company is going to want to not only to see but to test your product before deciding to go ahead. If you don’t have the ability to make the prototype, you probably can get a contract manufacturer to make it for you at a low cost if you promise, or sign an agreement, to give them the business if you get the final agreement.

Research

When you approach a company with a private label proposal, you want to show them that their target customers like your product and feel it helps them accomplish their goals. This can be shown by having surveys of potential customers, or by having interviews or supporting letters from influential users. The best research might arise from a study of a group of target customers actually using the product, with the results demonstrating that your product is a big benefit to them.

Manufacturing

You are responsible for providing the product in a private label agreement, either by making the product yourself or by having it made by a contract manufacturer. Typically you will need to have a manufacturer who will be willing to make your product in a large enough quantity so it will be of interest to the private label partner.

Picking target private label partners

Companies that have the second through fifth market share positions are usually best to approach, as they are typically not complacent and they are more willing to take a chance on a new product. You want to approach companies where your product is a good fit with their product line. You want the potential buyer’s sales force to be already calling on or selling to your target customers.

Inside support

When you are targeting a company or distributor, you need someone within the company to help promote your idea. You can meet contacts at your target company at trade shows, or by just contacting the company and finding the salesperson that covers your area. Salespeople, regional sales managers, and marketing personnel all can be the right one to push your product with company management.

Approaching the target company

The best approach is to decide on the target end user price and then to approach the company and say you are willing to sell it on a “private label basis for 40% of the end-user price.”  Most companies will only want to pay 35% so expect to pay less. This percentage is low, and you may only make 25% on your product sales. But you won’t have sales and marketing costs, you will typically end up with much higher sales than you could generate on your own, and often are opening the market up for your own sales efforts in a year or two.