I own a company that manufactures and sells high-performance aftermarket automotive parts. About 80 percent of our sales are retail, primarily through our website; most of the rest are wholesale to other retailers, but we also design and manufacture some specialized products for larger companies. Recently, some of these companies have approached us about private labeling a few of our products. My concern is that if we do it, we may end up competing with ourselves and hurting and diluting our brand while reducing our profit margins. On the other hand, these companies have much larger customer bases and would be able to sell much larger volumes of our products. My question is this: When is it appropriate to private label your products?
--Michael Ihns, owner, Improved Racing, Orlando
When you have a fairly new business that is growing rapidly, opportunities open up in front of you, and you have to decide what to pursue and what to ignore. That can pose quite a dilemma, as it has for Michael Ihns and Improved Racing. The company has doubled its revenue every year since launching in 2008, and it is poised to double revenue again in 2014. But Michael can't help being tempted by private-label opportunities, which could bring in a large volume of new sales. Even though his gross margins would shrink, the greater volume could provide a substantial boost to Improved Racing's bottom line.
It's at moments like those that entrepreneurs need to ask themselves: "What business am I really in? Where do I want to wind up?"
I asked Michael to tell me more about his business. He said his products cost, on average, about 30 percent more than those of his competitors. Customers, however, are willing to pay the premium because of Improved Racing's superior quality and performance. Nearly all of those customers are owners, developers, or manufacturers of high-performance automobiles used in various types of road and off-road racing. It is, in other words, a relatively small market. Michael's goal is for Improved Racing to become a recognized and admired brand within that market.
Given all that, the answer to Michael's dilemma seems obvious to me: He should not do any private labeling. In fact, I cautioned him about selling his products wholesale to other retailers as well.
If Michael wants to build his brand, he needs to drive traffic to his website, which accounts for 90 percent of his retail sales. Most of his new customers, I suspect, come to his site after they've gone first to other sites that probably have a larger selection of products. If those customers can find Improved Racing's products at those destinations for the same price--either under a different brand or under his own brand--they'll never get to the Improved Racing site. Why would they bother?
It is important to understand that I would have given him a different answer if he had had a different goal for his company--say, to become a major manufacturer of aftermarket automotive products. As a manufacturer, Michael would want as much volume as possible, and doing private-label manufacturing could be a great opportunity. But that's not the business Michael wants to be in. He wants to develop a brand that is well known and respected. Not only would private-label manufacturing distract him from that goal, but it would lead somewhere he doesn't want to wind up.