Private Label or Formulation?

It’s a marketing issue. Or company development issue.

The same. It depends where you want to be in 5 years time. I decided to become a product designer. Why? Because I wanted to be able to manufacture at OEM pricing rather than simply sell someone else’s ideas. And then you have to decide how to grow the company.

It’s not a simple decision to make.

The factor that’s primarily important is probably your profit margin. For the sake of argument, lets assume 50%, and your product sells at retail for $10. That means that you can spend no more than $5 per unit - marketing, sales, overhead, formula, packaging, labeling, testing, shipping, etc.

Typically, to get to that number, you can spend no more than $2.50 on the product and it’s associated packaging. Now you have a “buy or make” decision. It’s a large investment to set up your own manufacturing facility. What’s the ROI? Can you do better investing that money elsewhere? 

You have a similar decision facing you on private label versus contract manufacturing. Private label gives you the most product for your money, but at what cost? If you want to make your own formulas later, you will have to pay extra to reverse-engineer the private label formulas. Contract manufacturing requires a greater upfront cost, but you will potentially own your own formula, which could save you money down the road. Again, what’s the ROI on that investment? Would you be better off investing that money in marketing/sales instead?

The higher your profit margin and sales volume is, the easier it becomes to justify contract manufacturing. If you envision a lower profit margin, or low sales volume, or both, then private label is the way to go, at least initially.

Many of my clients will opt to go with Private Label. As @Belassi points out, it is really a Business decision.

First, read up and refine what natural means. Since “natural” is really only a marketing buzzword, more clearly defining this term will be helpful in both Product Development of Custom Formulations as well as vetting any Private Label products. I won’t belabor this point since in past threads there is a great deal of guidance in this manner. My point is “natural” simply has no legal definition for the most part and really doesn’t address the issues well enough to grant your company a coherent standard.

Private Label can enable you to launch a wider variety of Products initially. Many Private Label Formulations are very good Formulations and should be examined to see if they fit your companies Business model. Private Label products allow a growing line to offer a wider range of products on day 1 and as such you can gather real world sales figures. As anyone can attest, everyone has had a Product that they thought was going to be the next big thing offered in their line and it flopped. They can also speak about how a product they put little thought into became a sales leader. On the downside, you have very little if any opportunity to customize the products. PROS: Less initial financial outlay, decent products if you examine them keeping your Business model in mind and a wider range of offerings day 1 which will give you sales figures which you can use down the line to direct your Custom Formulation program. CON: You really get what you get, no Customization.

Custom Formulation allows you to design a product from the ground up or to emulate an existing product. Many have negative feelings about using another product as a starting point but this is not necessarily wrong. First, if the product has come to your attention, it likely has merit and potential in the Market. Also, you are not just “knocking off a product”, but have an opportunity to improve upon the product. You can also design a product from the ground up. You start with the benefits you want to deliver and the qualities of the final product. Select raw materials that realistically deliver these benefits (promises) to the customer. Develop the product to feel and apply as you would like. Probably the biggest downsides to this process are cost (realistically the process from design to manufacturing can run in the 5 figures range and you will need to buy as many as the minimum run size of your manufacturer) and the timeline to develop a product. My advice as someone who does this process. Please don’t come to your Formulator with the attitude of “we need this yesterday.” It doesn’t realistically speed up the process a great deal and to some it it is a red flag that you will be a pain to work with. Also, it will force compromises that could cause you not to have the best product. Custom formulation is in involved process where if adequate thought is put into the Marketing and the Chemistry, a wonderful product will result. PRO: you get a customized product you will feel “ownership” over and if proper thought is put into the process you can get a product that meets the Chemistry and Marketing challenges. CON: More expensive, higher MOQ’s and much harder to offer a wider range of Products.

One last point in an already long winded reply. Be sure to put a great deal of thought into manufacturing yourself. It takes an honest personal inventory of your strengths. Are you a technical person who would realistically need a partner with Sales/Marketing skills? Or are you a Salesperson who needs Technical support? These roles can initially be met by one person, BUT if your line expands and grows as we all want them to, you will quickly outgrow this function. If Sales is your strength, it is generally more efficient to outsource the Formulation and Manufacturing. As many can attest and have stories to tell, getting the actual products in stock is a big task. However, once you have the product, what will make you successful is communicating the value and benefits ethically to your customers and communicating to them why they should buy YOUR product. This is Sales and Marketing. It is a basic rule; a middle of the road product with a great sales strategy will outsell the very best products with little to no marketing. As a Chemist I wish it weren’t so, but it is. In the end if you do the manufacturing it really should be your passion or the end result goal of your Business model. “Do I want to start a Cosmetic line or do I want to start a Contract Manufacturing facility?” In the end, you need to decide which goal you want. As such it behooves 95% of people to outsource their manufacturing. Manufacturers have specialized QA/QC programs that will ensure a consistent and safe product. Don’t under estimate the value of these programs and they really only come from experience in the field as well as specialized training. You wouldn’t go online, participate in a few social media sites and then go off and pry out your own appendix. In fact most of us would even hesitate to go online and do our own car repairs. DON’T OVERLY SIMPLIFY THIS PROCESS IN YOUR MINDS AS WELL.

As the owner of a contract manufacturing company it is my belief that either you are good at being a manufacturer or you are good at marketing.  Very, very few can do both.  As far as private label or your alternatives goes, if you can afford it, I think the best thing for the owner of any product would be to have a chemist develop formulas for you and then take your formulas to a manufacturer to be made and packaged.  And this is coming from a manufacturer who also does formula development.  You have many great formulators on here should you choose to go that route.  There is a section in the forum for choosing one.

Should you need any help or advice feel free to reach out.

These are all old postings. When you comment on a posting that is old and “hibernating” it pushes the newer posts back.