“One of my distributors asked us to manufacturer product under their private label brand. Should we do it?”
At some point, many industrial manufacturers will be faced with this decision. And, unfortunately, there is no one-size-fits all answer. It depends on the situation. Private label can improve asset utilization for manufacturers (e.g., keeping plants busier) and create additional revenue without incurring customer support costs (i.e., the owner of the brand provides support). But producing product for someone else comes with risk, primarily that you erode the brand equity you have worked so hard to create.
So how do you decide?
If you are purely a low-cost producer of commodity products, private label may be an excellent way to increase utilization of your asset base at acceptable margins. If you are purely an innovator of high-end product, private labeling is likely to be a disaster for you.
The unfortunate reality is that many manufacturing companies play both ends of the performance spectrum and are, therefore, forced to make a private label judgment call. If, like most, your company spans that spectrum, you can entertain private label deals by following four rules:
- Never let your best product have any brand name on it except for yours.
- Don’t enter into arrangements in which it is obvious to customers that the private label product is really made by your company. This scenario can devalue your brand, especially if it is sold at a better value under the private label.
- Innovate continually. You can entertain private labeling what was your best product a few years ago, as long as you have something better now that only has your brand name on it.
- Enter into private label deals that also build your own brand. For example, you might agree to provide private label product in the commodity space in exchange for the distributor showcasing your high-end branded product at the expense of your high-end competitors.
If you can’t follow these rules, you should not private label.
If your high-performance industrial products company has a significant amount of excess production capacity, a private label deal that doesn’t meet the above rules can be a tempting way to better utilize your assets. Don’t be tempted. Find another use for the assets. Better yet, sell them off and invest the proceeds in innovation. That’s a better recipe for long-term prosperity.
Bart Schwartz, President / ICR / 630.503.6093 / firstname.lastname@example.org