Private Label vs Contract Manufacturing: Key Differences

When businesses want to create products without handling production themselves, they often use private label or contract manufacturing. Both options involve working with external manufacturers, but they differ in important ways.

In this article, we’ll explore the key distinctions between private label vs. contract manufacturing, helping you determine which approach best suits your business needs.

What is Private Label Manufacturing?

Private label manufacturing refers to the process where a manufacturer produces products that are then branded and sold by another company under its own label or brand name. Essentially, a business (the "private labeler") sources a product from a manufacturer, but instead of the product being sold under the manufacturer's brand, it is rebranded and marketed under the private labeler's brand name.

Here's a breakdown of how it works:

1. Product Creation: A manufacturer produces the product, but it's not branded with their own company name. Instead, the product is sold without a brand (or a generic brand) until it is relabeled by the buyer.
2. Branding: The company that purchases the product can put their own branding on it (logo, packaging, design, etc.). This way, they can sell it as if it were their own creation.
3. Selling: The private labeler then markets and sells the product to consumers, and it appears to be a product created by their own brand, though it was actually manufactured by another company.

What Are Popular Private Label Products?

You might be surprised at how many consumer goods and national brands are produced by private-label manufacturers. The format is present in most categories, including:

Beauty products (skincare, cosmetics, hair care)

Most beauty stores collaborate with private label manufacturers in order to produce high-quality cosmetics and skincare with their own branding. This is how they manage to sell identical product formulations utilized by different companies, yet with different packaging and branding.

Household items (cleaning products, detergents)

Online stores and supermarkets often employ private label production of household staples. Through this, they are able to sell common products such as dishwashing soap and laundry detergent at affordable prices while retaining customers.

Grocery staples (snacks, drinks, packaged food)

Private label foods that resemble national brands but at lower prices are usually found in grocery chains. These include snacks, cereals, and frozen meals, providing consumers with cheaper choices and enhanced store margins.

Medical devices (wellness products)

Several healthcare brands count on private label manufacturers for devices such as blood pressure monitors, thermometers, and supplements. They are all industry standard, but they come under a retailer's brand to gain consumer confidence.

Apparel and accessories

Fashion stores employ private label production to create clothing and accessories without having to invest in their own manufacturing plants. This enables them to easily release new styles and maintain pace with shifting trends without incurring the expense of high manufacturing.

What is Contract Manufacturing?

Contract manufacturing is when a company contracts with another to make parts or products within a certain time period. This is manufacturer outsourcing, and similar to outsourcing workers, it allows businesses to compete in markets that were otherwise out of reach.

It's a business deal in which one firm pays another to supply the required parts to build finished products, or even produce the product entirely. Contact manufacturers are third-party suppliers, and most of them only operate as subcontractors or sell their products to other companies.

Usually, a business that requires a contract manufacturer will contact one with a design and request a quote for the process, labor, tooling, materials, and manufacturing capabilities. If the cost of doing business is lower than the cost of manufacturing, it's good to go.

What's the Difference Between Private Label and Contract Manufacturing?

In private label manufacturing, a company rebrands an existing product, while in contract manufacturing, a company hires a manufacturer to produce a custom product based on their specifications.

Let's look at the most important differences between a contract manufacturing and private label contract:

Brand Ownership

Private label items are marketed under the brand of the retailer, but the same product is manufactured by the same company for various firms. In contract manufacturing, the company that hires has complete ownership of the end product, which increases brand identity and differentiation.

Customization

Private label manufacturing is limited in terms of customization because retailers choose from established product lines. Contract manufacturing provides companies with the ability to formulate unique formulations, product specifications, and exact specifications that suit their requirements.

Control Over Production

A contract manufacturer handles it all when it comes to production, allowing the company hiring more control over research for products, quality control, and manufacturing ability. Private label and contract manufacturing have major differences here since private label manufacturers more or less command the manufacturing process with fewer retail input contributions.

Costs and Flexibility

Private label manufacturing is less expensive with minimal startup expense and smaller capital investment. Contract manufacturing arrangement relies on sophisticated skill, proprietary information, and customized equipment, which suits companies who can afford long-term product refinement.

Contract Manufacturing Advantages

For companies requiring high levels of customization and control, contract manufacturing has numerous benefits:

Increased Product Control

Perhaps the greatest benefit of contract manufacturing is the capability for companies to control every aspect of the production process. From research and development of the product to final assembly, companies can determine product design, material choice, and quality requirements. This just guarantees high-quality products which the company's brand image is all about.

As an example, within the medical device market, companies have to comply with stringent FDA guidelines and ISO requirements, which makes contract manufacturing an ideal option for compliance and accuracy.

Higher Level of Customization

Contract manufacturing is different from private label manufacturing, which uses existing product formulas. It allows companies to formulate unique products based on customer-specific requirements. This is mostly useful in some cases like the cosmetic industry because companies have to have special ingredient mixes to make their products stand out in the market.

As per a 2022 report by Grand View Research, the worldwide contract manufacturing market in the personal care sector is anticipated to expand considerably owing to rising demand for personalized skincare and hair care products.

Ideal for Unique or Complex Products

Contract manufacturing is the most suitable for companies that need specialized production abilities or superior technical expertise. For instance, firms in the aerospace and auto industries trust contract producers to make highly accurate parts with the latest technologies like CNC machining and additive manufacturing.

Also, proprietary products in the pharmaceutical sector, where firms create and patent novel drug compositions, are best suited for contract manufacturing because it can keep such information confidential and comply with regulatory standards.

Private Label Manufacturing Advantages

For companies seeking to introduce products rapidly and at a minimal cost, private label manufacturing offers several benefits:

Lower Initial Costs

Private label manufacturing needs little capital investment, as factories already have production capacity and equipment costs factored in. This helps businesses save money on production infrastructure and concentrate on marketing and distribution.

In accordance with IBISWorld, the private label industry keeps increasing its growth because of its cost-effectiveness and lower overhead expenses, thus proving to be a viable mode of market entry for companies seeking low-risk foray into the market.

Easier Processes

As companies deal with established products, there is no requirement for huge product research, and hence, the process is quicker and more efficient. Usually, private label manufacturers produce a catalog of pre-made products with defined product specifications that stores can have their own brand on.

This concise strategy is best suited to beauty brands and grocery chains seeking rapid expansion of products without investing extensive R&D cycles. A Nielsen study says private label brands have picked up big momentum owing to their quick manufacture and speedy time-to-market.

Brand Ownership Without Manufacturing Responsibility

Retailers are able to create brand recognition and distribute with their own products without the nuisance of dealing directly with manufacturing operations. This benefits companies wishing to create a great brand name with third-party manufacture outsourcing to third-party manufacturers familiar with the field.

To give you example, chain retailers like Costco and Walmart effectively sell their private label lines, including Kirkland Signature and Great Value, without having manufacturing plants. An article by McKinsey & Company points out how private label strategies allow retailers to keep control over pricing and branding while making use of the knowledge of established manufacturers.

Private Label vs Contract Manufacturing: Which One Is for You?

Whether to use contract manufacturing or private label depends on your business objectives. If speed, low initial investment, and simplicity of entry are important, private label manufacturing is the best choice. But if you need total control over product design, quality, and customization, a contract manufacturing setup is the way to go.

So let's say, a brand of cosmetics which seeks to introduce a new skincare product and oversee the entire production process would find contract manufacturing services more useful, whereas a supermarket chain that wants to build up its store brands and simplify the manufacturing process would seek private label manufacturing.

Conclusion

Both contract manufacturing and private label provide useful information about the optimal manufacturing method for companies. Knowing the distinction between private label and contract manufacturing enables businesses to save costs, simplify operations, and enjoy high profit margins. Whether searching for private label meaning or the advantages of a contract manufacturer, selecting the proper business model guarantees long-term success across various industries.