Already decided to sell on Amazon? Excellent!
The next step is to choose a suitable selling model. To put it into simple terms, a selling model is how you plan to sell your products online.
Out of the numerous ways to sell on Amazon, two, in particular, remain seller favorites all year round: private label and dropshipping.
The question then is: why are private labeling and dropshipping so popular? Well, for several reasons. But before we get into these reasons, we want to highlight that both selling models have their pros and cons—there is no ‘get rich quick’ scheme on Amazon and anyone that tries to convince you otherwise shouldn’t be taken seriously.
In this blog post, you’re going to learn about private label, dropshipping, white label, private label dropshipping (including the pros and cons), and also find out which selling model in the private label vs dropshipping debate comes out on top!
Private label selling is when you create a unique brand, purchase products manufactured by a third party, and sell them online. The product created is according to your (i.e. the private label seller) specifications, including the packaging, logo, and overall design.
The most significant upside of the private label business model is outsourcing the manufacturing process. You—the private label seller—do not need to purchase land and expensive machinery to create products. Instead, simply buy them in bulk at discounted prices (usually from manufacturing hubs located in China), and have them shipped to your local marketplace!
In terms of the potential to create a massive and ever-growing brand, Amazon’s private label has no equal. However, like all business models, it has its share of pros and cons. Let’s analyze the main ones to see whether private label selling is your cup of tea (or coffee).
When done right, private label selling can set you on course to create and own a million-dollar eCommerce brand. The biggest advantages of private label include:
Private labeling gives you total control over the manufacturing process i.e. how your product and product packaging are designed and your brand and store aesthetics. This is not possible with other business models like dropshipping. You’re also not at the mercy of your supplier when it comes to quality control. Since you’re a valuable client, the manufacturer must adhere to your standards and not vice-versa.
Incorporate best business practices like routine product inspection and open communication to maintain product quality which, in turn, lead to increased sales and positive customer feedback.
It’s not uncommon for private label sellers to generate anywhere from a 20 to 35% profit per sale (and higher in some cases). The two main reasons for such significant profit margins are:
The option to protect your product with trademarks, Amazon brand registry, and the Transparency program deters other, not-so-nice sellers from leeching sales off your product listings. Fewer competitors and an absence of price wars also contribute to stable profits all year round.
Investing time, effort, and finances create positive customer experiences which eventually leads to increased brand loyalty. Add higher-quality products to the mix and soon your small-time Amazon brands will start generating serious revenue.
Private labeling also lets you scale and grow your business. After one or two successful private label product launches, intelligent sellers invest their energies into building a store. Then, they enter related product niches and rely on their past experiences to replicate the same success.
Take the Anker brand, for example, which started its business on Amazon. Today, it’s a household name for all types of charging technologies with an estimated worth of around $1.1 billion—an ideal showcase of the business potential Amazon private labeling holds.
Here are a few things about private labeling you should keep in mind:
Private label products can sell well and make you a lot of money, but the business model requires upfront financial investment. Things that you will need to spend money on include:
Of course, the costs can significantly vary depending on the type of product you wish to sell and the level of competition within your targeted niche.
Outsourcing product manufacturing to third parties is convenient; however, you’re still depending on your supplier to produce quality goods (according to your desired specifications) and do so on time, every time. The risk increases if your supplier also happens to be the one responsible for shipping products to your local marketplace (going with freight forwarders mitigates this risk).
You’re also relying on the manufacturers to up their game during peak holiday seasons like Black Friday and Christmas. Also, disruptions and unforeseen events such as the pandemic or trade restrictions due to global politics can hamper product supply.
That’s precisely why you should spend time researching quality suppliers and manufacturers from platforms like Alibaba.com. One way to circumvent this problem is to work alongside established names in the industry. Here’s a helpful product sourcing tool that connects you with reputable suppliers on Alibaba.com.
With the private label business model now clear, it’s time to see what a dropshipping eCommerce business is all about.
In the dropshipping realm, you advertise and sell products to customers through your eCommerce store without having to maintain, purchase, or store inventory. Instead, all of those aspects of your business get outsourced to a third party, making dropshipping the most ‘convenient’ way to sell products online.
How the business model works is, you first set up a dropshipping store and enter into a partnership with a product supplier (which could be an agency or service provider) or a manufacturer. Your partner is responsible for handling product manufacturing, storage, and fulfillment while you handle marketing and customer support.
The finer details of each contract vary from one company to another, but the usual way dropshipping works is:
In a nutshell, this is how you would dropship products. Now let’s go over some advantages and disadvantages of dropshipping products on your website and Amazon store.
A few reasons why sellers would prefer dropshipping over vs private labeling or white labeling include:
Dropshipping products involves virtually zero overhead and startup costs. You don’t have to pay for storage, shipping, facility maintenance, rent, or the resources needed to process orders. Almost anyone can start a dropshipping business due to the low barriers to entry.
Deep knowledge about logistics and product research is not a prerequisite to dropshipping products online. That’s another reason why people eventually expand their product categories and dropship dozens of products simultaneously.
There are more ways to dropship products than private labeling—you can sell them via your eCommerce website, Amazon store, or leverage social media platforms if that’s your thing. Dropshipping doesn’t require a seller to be a jack-of-all-trades. As long as you can market products well enough and bring in sales, the chances of you doing good business are high.
Now, onto the not-so-desirable side of dropshipping products on or off Amazon.
There are quite a few significant downsides to dropshipping.
The low barriers to entry tempt sellers to try their hand at dropshipping before private label selling. The low investment required makes dropshipping highly competitive—but that’s not the only thing you have to worry about.
An abundance of dropshippers can result in continual price wars, especially for high-demand products. Engaging in these wars can cut deep into your profits, making the entire ordeal not worth the effort.
Since you’re not involved in the manufacturing process, you don’t have much say in the final product. Sure, based on the feedback you get, you can make suggestions on improving the product your dropshipping.
Ultimately, the final say on the end product turns out (including the packaging) are matters outside of your control, which isn’t the case with private labeling.
Similar to the last point, shipping products to customers is also something you have no control over. Irrespective of whether the manufacturer fulfills orders or a third-party service provider, any mistake on their part damages your reputation.
Things get harder if you decide to dropship on Amazon as you’ll have to adhere to strict rules and regulations or risk not only losing out on customers, but also possible account suspensions, effectively bringing your (perhaps only) source of income to an abrupt halt.
You also have your hands tied when running promotions and special offers like free shipping or bundle packs, especially during the holiday seasons.
We read about the power of brand building when discussing the advantages of private labeling. Unfortunately, when dropshipping products, you’re basically selling similar or the same products as your competitors, making it almost impossible to stand out from the pack.
Even if your business is booming, it isn’t easy to differentiate your offerings from the rest. On the other hand, the value of a private label brand only increases with time (provided your business continues to grow); this is not the case with dropshipping.
The positives of selling private label products make it an ideal business venture for those serious about selling products online. Dropshipping may be more beginner-friendly; however, you’re not building a business—there’s no brand building or asset creation.
Recently, a new type of business emerged known as private label dropshipping. It claims to combine the strengths of both while discarding the disadvantages, but is that factually true?
The process of dropshipping private label products begins with identifying a high-demand product. Some sellers rely on software to validate their product ideas, whereas others prefer to use manual methods.
Once a product is identified, the next step is to get in touch with third-party manufacturers willing to sell you such products at the desired price point. You then create your brand and apply your label to these products. The final step is listing your product on your eCommerce store or website and start advertising to bring in traffic and sales.
Although private label dropshipping claims to cherry-pick the advantages of both dropshipping and private labeling, in reality, there are cons to dropshipping private label products as well.
Note: When dropshipping a private label product, you decide how the product is made and not the manufacturer. Simply applying your brand label to generic products is known as white labeling, as we’ll find out later on.
Combining dropshipping with private label gives you the following benefits:
Private label dropshipping has its share of drawbacks.
A few reasons not to dropship private label goods:
To circumvent the negatives associated with private label dropshipping, sellers turn to what’s known as white label dropshipping.
White label is pretty much the same as private label dropshipping. The only exception is that you purchase generic products (as you would in dropshipping) and apply your brand to it and sell it online. Multiple sellers may offer the same white label products but set drastically different prices due to each brand’s perceived value.
After going through each business model, it’s safe to conclude that private labeling is:
On the other hand, dropshipping makes sense if:
Our recommendation is to go for private labeling (not private label dropshipping) over other selling models, including wholesale, arbitrage, and handmade. You’ve already gone over some of the reasons why private labeling is the right way to sell online.
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