Private Label vs Dropshipping - Which One You Should Go For and Why

Already decided to sell on Amazon? Excellent!

The next step is to choose a suitable selling model. To put it into simple terms, a selling model is how you plan to sell your products online. 

Out of the numerous ways to sell on Amazon, two, in particular, remain seller favorites all year round: private label and dropshipping. 

The question then is: why are private labeling and dropshipping so popular? Well, for several reasons. But before we get into these reasons,  we want to highlight that both selling models have their pros and cons—there is no ‘get rich quick’ scheme on Amazon and anyone that tries to convince you otherwise shouldn’t be taken seriously.

In this blog post, you’re going to learn about private label, dropshipping, white label, private label dropshipping (including the pros and cons), and also find out which selling model in the private label vs dropshipping debate comes out on top!

What is Private Labeling and How Does it Work?

Private label selling is when you create a unique brand, purchase products manufactured by a third party, and sell them online. The product created is according to your (i.e. the private label seller) specifications, including the packaging, logo, and overall design.

The most significant upside of the private label business model is outsourcing the manufacturing process. You—the private label seller—do not need to purchase land and expensive machinery to create products. Instead, simply buy them in bulk at discounted prices (usually from manufacturing hubs located in China), and have them shipped to your local marketplace!

In terms of the potential to create a massive and ever-growing brand, Amazon’s private label has no equal. However, like all business models, it has its share of pros and cons. Let’s analyze the main ones to see whether private label selling is your cup of tea (or coffee).

Pros of Private Labeling

When done right, private label selling can set you on course to create and own a million-dollar eCommerce brand. The biggest advantages of private label include:

Greater Control over your Products

Private labeling gives you total control over the manufacturing process i.e. how your product and product packaging are designed and your brand and store aesthetics. This is not possible with other business models like dropshipping. You’re also not at the mercy of your supplier when it comes to quality control. Since you’re a valuable client, the manufacturer must adhere to your standards and not vice-versa. 

Incorporate best business practices like routine product inspection and open communication to maintain product quality which, in turn, lead to increased sales and positive customer feedback.

Potential for Bigger Profit Margins

It’s not uncommon for private label sellers to generate anywhere from a 20 to 35% profit per sale (and higher in some cases). The two main reasons for such significant profit margins are:

1. Private label sellers purchase products in bulk (similar to wholesale) which brings down the procurement costs
2. Private label sellers charge higher prices because of the perceived brand value and the unique nature of their products.

The option to protect your product with trademarks, Amazon brand registry, and the Transparency program deters other, not-so-nice sellers from leeching sales off your product listings. Fewer competitors and an absence of price wars also contribute to stable profits all year round.

Opportunity to Build a Strong Brand 

Investing time, effort, and finances create positive customer experiences which eventually leads to increased brand loyalty. Add higher-quality products to the mix and soon your small-time Amazon brands will start generating serious revenue. 

Private labeling also lets you scale and grow your business. After one or two successful private label product launches, intelligent sellers invest their energies into building a store. Then, they enter related product niches and rely on their past experiences to replicate the same success. 

Take the Anker brand, for example, which started its business on Amazon. Today, it’s a household name for all types of charging technologies with an estimated worth of around $1.1 billion—an ideal showcase of the business potential Amazon private labeling holds.

Cons of Private Labeling

Here are a few things about private labeling you should keep in mind:

Upfront Invest 

Private label products can sell well and make you a lot of money, but the business model requires upfront financial investment. Things that you will need to spend money on include:

• The first batch of inventory and shipping costs (usually from AliExpress or Alibaba.com)
• Creating an eCommerce store and applying for trademarks, checking for patents, and obtaining brand registry all to protect your intellectual property
• Running and managing advertising campaigns (mainly PPC) 
• Onboarding employees if needed 
• Paying for seller toolkits that increase your chances of success

Of course, the costs can significantly vary depending on the type of product you wish to sell and the level of competition within your targeted niche.

Below-Par Suppliers and Manufacturers

Outsourcing product manufacturing to third parties is convenient; however, you’re still depending on your supplier to produce quality goods (according to your desired specifications) and do so on time, every time. The risk increases if your supplier also happens to be the one responsible for shipping products to your local marketplace (going with freight forwarders mitigates this risk).

You’re also relying on the manufacturers to up their game during peak holiday seasons like Black Friday and Christmas. Also, disruptions and unforeseen events such as the pandemic or trade restrictions due to global politics can hamper product supply. 

That’s precisely why you should spend time researching quality suppliers and manufacturers from platforms like Alibaba.com. One way to circumvent this problem is to work alongside established names in the industry. Here’s a helpful product sourcing tool that connects you with reputable suppliers on Alibaba.com.

With the private label business model now clear, it’s time to see what a dropshipping eCommerce business is all about.

How Do I Start Dropshipping for Beginners?

In the dropshipping realm, you advertise and sell products to customers through your eCommerce store without having to maintain, purchase, or store inventory. Instead, all of those aspects of your business get outsourced to a third party, making dropshipping the most ‘convenient’ way to sell products online. 

How the business model works is, you first set up a dropshipping store and enter into a partnership with a product supplier (which could be an agency or service provider) or a manufacturer. Your partner is responsible for handling product manufacturing, storage, and fulfillment while you handle marketing and customer support. 

The finer details of each contract vary from one company to another, but the usual way dropshipping works is:

• The supplier sources or manufactures the product 
• The supplier also stores the goods
• Dropshippers receive orders on their eCommerce website or Amazon store
• The payment is processed and forwarded to the dropshipping suppliers
• The supplier ships the order

In a nutshell, this is how you would dropship products. Now let’s go over some advantages and disadvantages of dropshipping products on your website and Amazon store.

Pros of Dropshipping

A few reasons why sellers would prefer dropshipping over vs private labeling or white labeling include:

Low Startup Costs

Dropshipping products involves virtually zero overhead and startup costs. You don’t have to pay for storage, shipping, facility maintenance, rent, or the resources needed to process orders. Almost anyone can start a dropshipping business due to the low barriers to entry.

Minimal Expertise Required

Deep knowledge about logistics and product research is not a prerequisite to dropshipping products online. That’s another reason why people eventually expand their product categories and dropship dozens of products simultaneously.

Multi-Channel Fulfillment 

There are more ways to dropship products than private labeling—you can sell them via your eCommerce website, Amazon store, or leverage social media platforms if that’s your thing. Dropshipping doesn’t require a seller to be a jack-of-all-trades. As long as you can market products well enough and bring in sales, the chances of you doing good business are high.

Now, onto the not-so-desirable side of dropshipping products on or off Amazon.

Cons of Dropshipping

There are quite a few significant downsides to dropshipping.

Increased Competition

The low barriers to entry tempt sellers to try their hand at dropshipping before private label selling. The low investment required makes dropshipping highly competitive—but that’s not the only thing you have to worry about.

An abundance of dropshippers can result in continual price wars, especially for high-demand products. Engaging in these wars can cut deep into your profits, making the entire ordeal not worth the effort. 

Little to No Control over Your Offerings

Since you’re not involved in the manufacturing process, you don’t have much say in the final product. Sure, based on the feedback you get, you can make suggestions on improving the product your dropshipping. 

Ultimately, the final say on the end product turns out (including the packaging) are matters outside of your control, which isn’t the case with private labeling.

Third-Party Shipping May Get You in Trouble

Similar to the last point, shipping products to customers is also something you have no control over. Irrespective of whether the manufacturer fulfills orders or a third-party service provider, any mistake on their part damages your reputation. 

Things get harder if you decide to dropship on Amazon as you’ll have to adhere to strict rules and regulations or risk not only losing out on customers, but also possible account suspensions, effectively bringing your (perhaps only) source of income to an abrupt halt. 

You also have your hands tied when running promotions and special offers like free shipping or bundle packs, especially during the holiday seasons.

Fewer Opportunities to Build a Brand

We read about the power of brand building when discussing the advantages of private labeling. Unfortunately, when dropshipping products, you’re basically selling similar or the same products as your competitors, making it almost impossible to stand out from the pack. 

Even if your business is booming, it isn’t easy to differentiate your offerings from the rest. On the other hand, the value of a private label brand only increases with time (provided your business continues to grow); this is not the case with dropshipping.

Dropshipping vs Private Label 

The positives of selling private label products make it an ideal business venture for those serious about selling products online. Dropshipping may be more beginner-friendly; however, you’re not building a business—there’s no brand building or asset creation. 

Recently, a new type of business emerged known as private label dropshipping. It claims to combine the strengths of both while discarding the disadvantages, but is that factually true?

Private Label Dropshipping - The Best of Both Worlds? 

The process of dropshipping private label products begins with identifying a high-demand product. Some sellers rely on software to validate their product ideas, whereas others prefer to use manual methods. 

Once a product is identified, the next step is to get in touch with third-party manufacturers willing to sell you such products at the desired price point. You then create your brand and apply your label to these products. The final step is listing your product on your eCommerce store or website and start advertising to bring in traffic and sales.

Although private label dropshipping claims to cherry-pick the advantages of both dropshipping and private labeling, in reality, there are cons to dropshipping private label products as well. 

Note: When dropshipping a private label product, you decide how the product is made and not the manufacturer. Simply applying your brand label to generic products is known as white labeling, as we’ll find out later on. 

The Advantages of Dropshipping Private Label Products

Combining dropshipping with private label gives you the following benefits:

• Product design: After selecting a product, communicate with your manufacturer regarding product and packaging design. Because you’re still technically private labeling, you get to decide what the end product looks like. 
• No inventory hassle: Like the basic dropshipping model, you don’t have to maintain or fulfill inventory. 
• Larger profit margins compared to dropshipping: If you have an online store, you can directly sell to your customers without incurring referral fees. Since you’re also operating under a unique brand name, you can list products at a higher price.

Private label dropshipping has its share of drawbacks. 

Reasons to Not Dropship Private Label Goods

A few reasons not to dropship private label goods:

• The first batch of inventory: If you’re going to private label dropship a product, manufacturers will state an MOQ or minimum order quantity (the minimum number of products they’re willing to manufacture). To start the business, you’ll need to have some cash in hand, at least enough to purchase the first badge of inventory.
• Biting on more than you can chew: Sellers may choose private label dropshipping thinking it has a few barriers to entry like dropshipping, but that isn’t true. Since you’re technically still private labeling, you need to conduct product research and source quality suppliers.
  
  Moreover, given the logistics involved, you’ll more likely need to work alongside a sourcing agent or private label dropshipping service provider, which further adds to your already mounting costs.
• Reliance on suppliers: Even if your seller performance is stellar, you still rely on your supplier or manufacturer to meet shipping deadlines. Underperformance on their part ends up negatively affecting your business.

To circumvent the negatives associated with private label dropshipping, sellers turn to what’s known as white label dropshipping.

What is White Label Dropshipping?

White label is pretty much the same as private label dropshipping. The only exception is that you purchase generic products (as you would in dropshipping) and apply your brand to it and sell it online. Multiple sellers may offer the same white label products but set drastically different prices due to each brand’s perceived value.

Conclusion – Why Building a Private Label Brand Makes the Most Sense

After going through each business model, it’s safe to conclude that private labeling is:

1. Better suited for sellers who want to create their own brand 
2. For sellers who are committed to learning the ropes and want to focus on Amazon selling
3. For sellers who are serious about establishing an online business and want to sell products that they own. 

On the other hand, dropshipping makes sense if:

1. You’re more inclined towards selling products through an eCommerce website or online store
2. Don’t mind the risk associated with dropshipping products
3. You can dropship dozens of products to remain profitable (due to the relatively low-profit margins).

Our recommendation is to go for private labeling (not private label dropshipping) over other selling models, including wholesale, arbitrage, and handmade. You’ve already gone over some of the reasons why private labeling is the right way to sell online. 

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