Private Labeling is one of the most profitable business models within the ecommerce industry.
Some of the most successful brands around the world are in fact private label brands that source products from selected vendors who custom design them according to the brand’s specifications.
These brands then add their own branding and resell the products for much higher profit margins.
But Private label dropshipping is different.
It is an offshoot of the former that borrows some of the fundamental features from Private labelling. But throws in some added advantages from the conventional dropshipping model that can make the business slightly easier than it normally is. Confused?
That’s why we have created this guide for you. If you are new to ecommerce and are curious about how Private label dropshipping works, then stay with us as we break it down into bite-sized chunks of information.
- What is Private Label dropshipping?
- How does Private Label Dropshipping work?
- Benefits of Private Label Dropshipping
- Potential Disadvantages of Private Label Dropshipping
- How to Start a Private Label Dropshipping Business
What is Private Label Dropshipping?
Private label dropshipping is an amalgamation of two business models, Private labelling and dropshipping.
Let’s understand the Private Labelling part first. You will source a customized product from a supplier, who manufactures it for you and agrees to sell it exclusively to you.
Then, you brand the product and sell it directly to the consumer for a higher profit margin.
The dropshipping bit comes in during inventory stocking and fulfillment. With regular private labelling, you’d have to invest upfront in inventory, often in huge volume and stock it in your own or a 3PL’s warehouse. Then you’d have to generate sales and manage fulfillment, which is one of the most challenging aspects of ecommerce.
Obviously, the costs go up exponentially, as does the risk.
Certainly not easy if you are a one man band or have a small team.
With private label dropshipping, you don’t need to deal with inventory management. This obviates one of the biggest cons of private labelling – heavy upfront investments.
Private Label Dropshipping involves working with a reliable sourcing agent, who manages the backend operations for you, allowing you to focus on sales and marketing.
The inventory is stocked by the agent/supplier, who will handle fulfillment whenever an order is generated.
Related Reading: Private Label vs White Label
How does Private Label Dropshipping work?
Private label dropshipping works on a simple principle. You own and control the brand, while the role of the supplier or dropshipping agent is to stock up inventory and manage fulfillment.
You, as a dropshipper, aren’t responsible for any of it. Instead, you will be focusing 100% on marketing and sales.
Let us simplify this even further. Let’s assume that you have envisioned a unique product.
Step 1 – You contact a sourcing agent, who will connect you to some selected manufacturers who will then manufacture or design the product for you. The sourcing agent will also ensure that the manufacturer that they find, is in agreement to the contractual terms as well as financial bits of the deal.
Step 2 – You will be able to specify your product requirements in terms of quality, size, color etc., while ensuring that you get a profitable procurement price. Once specifications are finalized, an order is placed with the manufacturer and production begins.
Step 3 – The Sourcing agent will oversee the manufacturing process and ensure that the product meets your specifications, as well as quality is maintained. They can even conduct random factory visits, audits as well as send you samples for evaluation. It all depends on the sourcing agent to be honest.
Step 4 – Once the inventory is ready, the sourcing agent will collect it on your behalf and store it securely in their own warehouse.
Step 5 – You will generate the sales and when an order is placed, the agent will ship the product out to customer and the sale is recorded (in your books of course).
That of course, is a basic and somewhat dumbed down explanation of how Private label dropshipping works. But it should give you a fair idea of how the process flow works.
What are the Benefits of Private Label Dropshipping
Remember, we mentioned that its an amalgamation of both the business models? Think of it like cherry picking the benefits of both and applying them to your business.
Let’s look at some of the benefits:
1. 100% Control over the brand, product and its contents. Since you own all aspects of the product, such as product development, branding and marketing, you get complete control over how much you sell it for.
2. Since you own everything, there’s no middleman. Therefore all profits go to you alone. The profit margins are much higher than what you’d get with other dropshipping models.
3. No Inventory management required. When you are private label dropshipping, there’s no need for a warehouse or storage space to handle inventory. Imagine the cost savings with this alone. Warehouses generally charge according to the space that’s occupied by the inventory depending on the number of days. Considering that you’d be ordering a large volume because the MOQ requirements are generally higher, you would spend a fair bit on inventory storage itself, which is saved.
4. All marketing funds for the product go towards generating sales and building brand awareness, rather than going towards managing inventory or warehousing costs. Sales and marketing is the sole focus, as well as product development.
5. You can choose your supplier/manufacturer directly and work with them to customize products for specific regional markets. This ensures that you get a product that’s designed for a particular region’s demands and tastes, which makes it even more attractive to customers in those regions than mass produced generic products.
Potential Disadvantages of Private Label Dropshipping
As with every business model, there are also certain disadvantages. And despite the benefits listed above, private label dropshipping has a few drawbacks that you should also be aware of.
1. Compared to white label dropshipping, product development is generally more expensive than sourcing a product from Alibaba or AliExpress. This is because you need to decide on design parameters, components, dimensions, technicalities, brand name and branding before approaching suppliers, which can be a lengthy process.
2. Some of the challenges from the Private Label business model remain unchanged. For instance, the MOQ required for product customization is high, which means that you may have to order in bulk before getting started. This can be a costly affair if you are starting out with very little capital.
3. It is critical to find a reliable and trustworthy sourcing agent to work with. Especially if you are new to the industry, there’s a risk of being conned by agents who may recommend suppliers which do not meet your quality and/or specifications requirements, or overcharge for their services. Trying to do this without a sourcing agent may be futile, because of the sheer extent of factors to tackle.
4. There’s inventory storage and returns processing, which may come up when you scale your business upwards. If you’re not used to handling sales reports and order processing, then slowly, its starts to get tougher.
However, most of these drawbacks have workarounds and easy ones at that.
How to Start a Private Label Dropshipping Business
Once you have understood all the pros and cons of a private label dropshipping business, it’s time to get started. We briefly touched on the workflow a while ago.
Time to delve into it with more detail.
1. Have a proven product for the market
The success of every dropshipping business depends largely on the product. There are a million other factors, we know. But if you do not have a winning product that’s in demand in the market, even attempting it is futile.
There are several ways to find out whether a product has demand. There are marketing agencies who can crunch some numbers and offer you actionable data. But there’s another foolproof way to do it – Testing!
Setting up a tiny dropshipping store and testing generic versions of the product you have envisioned is a great way to test the waters. This will give you an idea about the USPs and potential flaws of the design, giving you ample time to tweak your design before launching it.
2. Choose the way how you want to private label it
Once you have a winning product, there are multiple ways to private label it. One is to change the product features to iron out creases and fine tune it until it becomes a masterpiece.
This is going to be more time consuming because it involves a lot of prototyping and market research. But the results are going to be worth your time and effort as you will have a product that no other manufacturer is selling or planning to sell anytime soon.
Another way to do it is by using custom packaging materials, tags, stickers and design elements. This is simple and easier to do that altering design features. That said, you run the risk of offering a similar looking copy of a product if your supplier does it for you. Your competitor will have an edge over you with this strategy.
You can also choose to make some minor changes in the design or color of the product and do custom packaging, tags and stickers on them too. This way you get a combination of both worlds. A slight difference between your product and the other’s, but not much.
Have a plan in mind before you approach a manufacturer with an idea of having it made for you.
3. Find the right dropshipping agent/supplier
Finding the right supplier is perhaps one of the most challenging tasks in the ecommerce space.
The challenges are many. You may not be located physically in the country that you are trying to source from. Language is a problem. Communication is a hit or a miss. Besides, you will, in all probability be dealing with a large MOQ. How do you ensure that you don’t sign up an unscrupulous supplier who tries to rip you off?
That’s why we recommend working with a trustworthy dropshipping agent instead. Agents have a different approach to doing business. Instead of trying to make profit from every sale, they are more interested in building a strong relationship with their clients.
They work on a referral basis and make sure that they provide the best service possible. They generally have a vast pool of vetoed suppliers to choose from. People that they have worked with and can trust.
They handle the communications and the entire backend of the business. All of this for a very nominal fee. It’s a no-brainer choice.
4. Gathering product information
Once you have a list of manufacturers/ suppliers/agents, it’s time to get to work. You will have to send out a product enquiry to each of them so that you can track down the perfect supplier.
Each enquiry will have to contain detailed information about the product. Be as specific as you can. What’s the product size, material, weight, technicalities, and specifications if any.
The more details you provide, the easier it will be for them to come up with accurate quotes for your products.
Asking for samples and referrals is also a must-do!
Once you get the quotes, compare and shop. Don’t use the price as a sole yardstick for analyzing a supplier/agent. Look for credentials, expertise and referrals.
Confirm everything on paper to avoid discrepancies down the road.
5. Place the order
It’s time to place the order. You don’t always have to start off with the MOQ agreed upon in the contract, mind you. Most manufacturers/agents will be more than willing to send sample orders to you.
A sample order is like the final step before the bulk order. Think of it like dotting all your i’s and crossing all your t’s. The sample order allows you to take a real-life look at the quality of the product, its design features etc. Ensure that the specifications and technical bits match what you had envisioned and requested.
You can negotiate with them on things like pricing, shipping, MOQ before placing the final order.
6. Launch ads & start selling
You have a product in your hand!
Time to put it up for sale online so that people can purchase it. You will have to start advertising your new business, most likely with PPC ad platforms like Google Adwords or Facebook Ads.
One of the best ways to create an ad is to actually include the product image in the advert itself or a cool video. If you are inexperienced with PPC, you can burn your budget in no time. Work with a skilled PPC management team.
It will save you time & money and produce much better results. Once you start generating sales, it’s time to start fulfilling the orders.
7. Fulfill the order
Order fulfillment is the final, but most crucial step.
Depending on whether you are working directly with a 3PL fulfillment service who is handling the fulfillment for you, or you are working with a sourcing agent, they will have a system in place which is integrated with your store.
This is an automated system that requires very little manual input. At Sourcingbro, we have software that integrates with most ecommerce platforms. From inventory management to logistics, everything is automated.
But not all agents and manufacturers have a completely automated system in place. If you hate working with CSV files fulfillment as much as we do, then you’d want to confirm this beforehand.
Private Label Dropshipping is the most refined and current business model in the ecommerce space. One that gives you all the advantages of a direct selling business and none of the hassles.
The key to running a successful ecommerce venture is finding an agent that can handle both sourcing and fulfillment activities. A good agent will do all of this for you at a fraction of the cost.
We hope that this article helps you understand the nitty gritties of this business and helps you set up a successful private label dropshipping venture. If you need any help, we are all ears. Speak to us now.