At Ease, Private! Private labeling offers an end to all the woes of dealing with retailers.

Private labeling wasn't part of Michael Levin's initialgame plan. The idea for his innovation, a clear plastic overlay forbroken fingernails that adheres with a nail-friendly adhesive,first struck Levin back in 1989, when his then-girlfriend cracked anail. At the time, she couldn't find a product to repair thenail-and she complained to Levin that cracked nails were a commonproblem among all women. Levin, sensing an opportunity, decided tohire a market research firm to evaluate the market. The resultswere staggering. Levin, now 42, reports that "60 percent ofthe women [surveyed] broke a nail once a month, and 35 percentbroke a nail once a week."

Levin perfected his clear plastic overlay design in 1992, aftersearching for and experimenting with dozens of plastics andadhesives. But when Levin tried selling the product directly toretailers, he was in for quite a reality check. With the productretailing for just $3 to $4, Levin found that "drug storechains weren't willing to add a low-priced, low-volume itemfrom a one-product vendor."

That's when Levin considered all his options and decided toprivate label. "Lots of nickels are better than a fewdimes," Levin reasons. The most consistent of the threeprivate label customers he's worked with, ProfessionalSolutions, signed on in 1994 and has since sold Levin's productunder the name Instant Nail Repair. The decision proved to be asmart one for Levin: Since 1995, his Danville, California, company,Custom Solutions, has been selling about 1.5 million units of theinstant nail-repair product per year.

Making the Choice

Is private labeling right for you? Before making any finaldecisions, consider the following pros and cons:

Pro: You have very low salesand administrative expenses.

Pro: The risks are lowerbecause you don't have to invest heavily in a product withuncertain sales potential.

Pro: You get an establishedsales force and distribution system.

Pro: You get better upfrontinput about how your product can be improved to increase sales.

Con: If you lose a privatelabel customer, it will have a dramatic impact on yourbusiness.

Con: You have no controlover how the private label partner sells your product. Says Levin,"One private label agreement we had was with a company thatput too much of the product in each set and sold it in massmerchandisers for $5. We told the company the price was too high,but they went ahead with their plan. Sales didn't materialize,and the company then cancelled the agreement."

Con: You can't make thecompany promote your product. According to Levin, "We couldhave dramatically higher sales if our customers would spend moremoney letting people know the product is available."

Despite the disadvantages, Levin feels that private labelingstill turned out to be the best choice for his product: "Ijust don't see any other way that we would have been able toget by the resistance of stores to carry a cheap, relativelylow-volume product from a one-product supplier."

Striking the Deal

To find the right company to work with, Levin started bycollecting the names of the vendors that sold the products in drugstore nail departments, mass merchandisers like Kmart and nailsalons. He then contacted the president of each company. "Ifound quickly that I always got the best response from thepresident, even if I had to contact him or her repeatedly,"Levin says. Sometimes he was shuffled off to someone else in thecompany, but that person was, according to Levin, "always morereceptive when I was referred by the president."

Private label deals don't have standard terms. InLevin's case, he provides his product to his customers, whothen package and sell the product themselves--with Levin receivinga percentage of each sale. Other private label sellers get a fixedprice.

The goal of any private label agreement is for both parties tomake money. Typically, companies marketing private label productshave a 25 to 30 percent cost markup (see "M&Ms"), andif retailers are involved, they will mark the product up another 50to 100 percent. The kinds of products most likely to succeed atprivate labeling are therefore those that feature a sizeablepercentage difference between what they cost to produce and whatthey end up selling for. One unit of Levin's nail-repairproduct, for instance, costs less than 20 cents to make and iseventually sold for $2 to $3.

The other big concern in private label sales is exclusivity.Inventors don't want any exclusive contracts that would preventthem from selling either to other private label customers ordirectly to consumers on their own. But often, the private labelcustomer wants an exclusive deal in order to avoid competition.Most inventors agree to an exclusive contract only when the privatelabel customer agrees to a minimum (usually a high minimum) yearlypurchase that makes it worthwhile for the inventor to go with justone customer. Levin doesn't have an exclusive agreement, and heis free to sell the product himself or to other private labelcustomers. He has had two other private label customers over theyears, but they didn't keep selling the product. Levin is alsofree to try to market the nail-repair kit on his own. He has chosennot to do so because his experience has been that retailersaren't receptive to one-line companies. But he's working onexpanding his product line so that one day he might be in aposition to sell his own product line under his company's ownname.

Going Private?

Private label sales are a great option when you run into marketobstacles. But they're also an ideal choice if you'd preferyour product be a part-time venture, or if you can't properlyfund the product yourself. A part-time effort works well withprivate label sales because you have just a handful of customerswho purchase your product. Your customer takes care ofdistribution, marketing and invoicing--and, as a result, the onlyrole for you to play is providing the product.

If you lack funding, you can use a private label sales agreementto get a manufacturer to make the product for you without anupfront investment on your part. Or you may be able to persuade amanufacturer to wait for payment until the private label customerpays you. With a deal like that, you can sell your product withvirtually no investment.

Despite the drawbacks to private label sales--lower profits andless control over how the product is sold--these agreements offermany advantages, especially for those who lack the experience,funding or time to market their products. Private label sales arean option worth investigating for every new product.

Don Debelak is anew-business marketing consultant and author of Think Big: MakeMillions From Your Ideas.

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