With the rapid development of e-commerce, delivering finished products directly to customers without relying on third-party suppliers is becoming the first choice for some companies. This strategy is known as D2C or DTC (Direct to Consumer). Brands that bring their products directly to the customer via DTC skip the middleman, for example the large retail chains in the food or electronics sector.
Direct-to-consumer businesses can manufacture the goods themselves or have them manufactured by a producer. Adhering to DTC gives the company an advantage as only they have full control and access to the product and its sales.
This is where private label and white label come into play. I would now like to explain what these are.
What is a private label?
A private label is a brand that belongs to the retailer. The packaging, sales, price and everything else is managed and controlled by the retailer, but the manufacturer is responsible for production.
The term private label is also known as a trademark in Germany. These have been around for many decades in Germany, but this concept only really became known in e-commerce under the term private label.
Below are some examples of sectors in which private labels are becoming increasingly dominant:
Everyone knows the own brands of Aldi and other discounters. They can be found on the shelves next to the branded products and are a cheaper alternative that most customers often reach for.
Google's smartphones are a good example of private label electronic devices. These have already been manufactured by LG, HTC and most recently Foxconn, but were marketed by Google under the brand name Nexus or Pixel.
Supplements such as protein powder are a classic. Manufacturers offer standard formulas or customizable supplements, which are then produced and shipped as private labels as required.
The advantages of private labels for sellers
In e-commerce in particular, there are more and more stores that sell their products as private labels and manufacturers, as well as logistics and fulfillment service providers that enable smooth distribution. This is also a necessity in some sectors due to the price pressure in e-commerce.
Here are some of the great benefits that come with private label:
1) Control and ownership of production
The main advantage of private label is the complete control over the production and ownership of the product. The retailer directs the manufacturer and defines the ingredients, components and even small details such as the shape, structure, texture and size of the product.
2) Adaptability and flexibility
The seller can react quickly to customer feedback and adapt or further develop their product. As there is no middleman, product cycles can be accelerated and the modified product can be offered directly in the seller's own store.
3) Increased margins
Private labels generally allow for larger margins. This creates the opportunity to lower the price or make more profit at the same price. For example, Aldi can sell its nut nougat cream more cheaply than Nutella, as Ferrero does not have to share in the sales revenue.
Consumer loyalty and popularity are driving factors for establishing a brand name in the market. Retailers selling third party brands do not gain a customer market as customers only engage with the products they sell. With private labels, the retailer is allowed to sell the products under their company's brand or brand name, thereby strengthening customer loyalty.
The disadvantages of private labels
There are two sides to every coin - and this is also the case here. Establishing a brand with customers is not easy: producing and labeling products under your own brand name is quite simple these days, but establishing a loyal customer base is not. It is a daunting and arduous task.
In short, the seller is now competing with big names or brands. These established brands have many advantages over a new private label. First of all, their products are available in a wide range in multiple online and offline stores with huge budgets for advertising the products. It is a cut-throat competition that requires patience, efforts, quality and a lot of creative advertising to stand out.
It helps to develop unique selling points in order to differentiate oneself from established brands or to use exclusive sales channels. For example, online stores are able to reach existing customers via email newsletters and explain the benefits of their own product. Modern marketing channels such as social media are also an option where the competition has not yet fully gained a foothold.
What is a white label?
White label products are sold to multiple retailers and are generic. This is a product that is developed and manufactured by and made available to partners with individual branding. In contrast to private label, this partner is not able to change the specifications of the product. They simply receive and distribute a standardized product under their own brand.
There are more and more examples of white label products. Here are some of them:
Digital services such as web development, SEO, social media marketing etc. can be offered as a white label service.
Software for agencies is often offered as a white label. Sendible, for example, enables agencies to present their services with their own branding and create individualized reports.
When it comes to cosmetics, the boundaries between private label and white label are blurred. However, cosmetics manufacturers often offer standard products that are then sold as white label, so that the seller only has to take care of the presentation.
How private label and white label differ
The difference between a private label and a white label can be confusing at first glance. Especially because both are often advertised as private labels or trade names in German, it is often difficult to distinguish between them. However, there are some points in which private label and white label clearly differ from each other.
Type of products
In contrast to white labels, private labels are usually of a physical nature. They are usually produced in large quantities.
On the other hand, white labels are often services or software, but not exclusively.
Reach or market
Private labels are exclusively for the retailer's own brand.
White label products are often generic and therefore designed for a broad market.
Privatization or customization of the product
The customization of products is very easy for the private label owner. The idea behind a private label is that the seller has control over the product, while the manufacturer works to take over production for the owner of the brand.
In the white label sector, products are already being developed and manufactured without having a customer for them. Therefore, these products are not initially designed according to the customer's wishes. On the contrary, the customer chooses their white label product according to their own ideas.
Return on capital
A private label is more expensive, at least initially, as the retailer has to bear all the costs from development and production to packaging and delivery of the end product. Advertising costs are also borne by the retailer. However, due to the exclusivity of the product, a better ROI can be expected.
White label products are available at a lower price in their final form. The biggest investment is the advertising costs, but as there are no development costs, the ROI is high right from the start.
Exclusivity or uniqueness
Since the owner of the brand is the intellectual creator of the product, he can give the products unique designs, details and identities.
White label products are non-exclusive and very generic. Therefore, they do not offer the company any unique features.
How DTC is also gaining a foothold in Germany
Easy access, exclusive products and secure payments with e-commerce websites are strong arguments in favor of the direct to consumer model for entrepreneurs. Traditional companies can offer their products via well-known retailers in order to benefit from the trust that customers place in the retailer. In most cases, however, start-ups and smaller companies do not have the budget to go down this route. They rely on lean sales structures, often outsource production completely and concentrate on what makes them strong: gaining a loyal customer base and serving them optimally.
Companies that rely on DTC often also support local, domestic markets and products. With online store software such as Shopify or WooCommerce, it is easy for a newcomer to set up a store. The integration of sales, marketing, production and fulfillment succeeds without a lot of know-how or a large budget.
DTC is not only an option for e-commerce, but also for offline retailers. However, with the increasingly digital market and door-to-door delivery services, a web store is a particularly good option. Many companies therefore link an offline service or product to an online store.
Cooking boxes such as HelloFresh are a good example of this. The brand itself relies on a simple online store and a strong social media presence that uses influencer and blogger marketing to appeal to the target group. There are different meal plans, such as classic or vegetarian, which are tailored to different customer profiles. There is also an Android and iOS app so that customers always know the status of their delivery. This allows HelloFresh to bypass the large retailers and the associated costs.
Due to the willingness to order goods and services online, the DTC market in Germany has developed rapidly. In many sectors, companies are emerging that are redesigning familiar products and making them accessible to specific target groups without relying on the large retail chains. Private label and white label help entrepreneurs to concentrate on marketing and sales, while specialists take care of production and logistics.