Private Labeling vs. Drop Shipping: How to Use Both to Make More Money

I love checking the comments and questions people leave on our YouTube channel and blog. They’re a great way to keep up with you all, answer any questions, and share with you my strategies.

I really do check the comments myself. So if enough people want to here about one specific thing, then there is a very good chance that I will answer it for them in a blog post or Drop Ship Weekly video.

And that’s where the topic for this video and blog post came from. I was recently asked, “How do you feel about getting products manufactured to sell on Shopify?”

​Now this discussion of should you manufacture (also called private labeling) or drop ship has come up before on this blog– more than two years ago. ​It's been a while and obviously things have changed in eCommerce. So now it’s time again to tackle these questions and share my ​recommendations ​with you.

​When Does Private Labeling Make Sense?

Okay, so I think the first question that's important to ask yourself if you're debating on which to do is, why? Why would you want to manufacture products, when you could just drop ship them?

And I think there's two common reasons that pop into people's heads. Typically, the first reason is they think they will have higher net profits with ​private labeling.

As you know, there are tons of different ways to drop ship. Basically, drop shipping is a ​​method of ​order fulfillment. Typically with a drop shipping store, when using my favorite lead value optimization techniques, the goal is to have a 30% net margin.

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So, let's just say, you build a drop ship store, and you’re selling office desks for $1,000. Your goal should then be to make $300 for each sale.

That means every time you get an order, after you pay for cost of goods (COGs), shipping, traffic, merchant fees, and other standard business costs, you’re left with $300 net profit.

How Do You Make Money With ​Private Labeling vs. Drop Shipping?

Again, the first common reason why people think they should private label vs. drop shipping is because​ of higher net profits. However, you really need to address this line of thinking from multiple different angles.

  • ​​​Imagine that you have a desk in your drop shipping store that costs $1,000.​
  • ​​Your drop shipping supplier sells it to you for $500.
  • ​With 30% net margin, you earn $300 profit each sale.
  • ​Which still ​gives you $200 to 'play' with on advertising, optimizations, etc.

​So, what you'd be looking for if you wanted to manufacture, ​is getting your expenses lower since the cost of advertising may go up.

With private labeling the same desk or something similar, you could realistically expect to get them for $300, instead of $500 from a supplier. If that was the case, you would now be making $500 per sale.

That's the typical thought process people have with private labeling items to sell. ​

When comparing drop shipping with private labeling, considering these two paths:​

​You can drop ship ​and  process the orders, ​take the orders, ​get the traffic, ​and make that $300 net profit.

Or– You could just find the person that's actually making these desks. ​You could buy desks in bulk. You could bring them in​ and get ​a warehouse, and then you could ship directly to ​your customer. Instead of making $300,​ you'll make $500.

Don’t Forget to Factor in Private Labeling Business Expenses

Now, here's the thing, it's not that easy. As I'm sure you know, if you're reading this and you've ever thought about manufacturing, or even private labeling your own brands– there are more expenses to handle.

That's the biggest thing to realize. That extra $200 profit from the earlier scenario would be going to different business expenses than drop shipping the same desks. Here’s what kind of expenses I’m talking about:

  • ​Shipping Container Costs

​You’ll need to ship the items wherever you're getting them from (China, most likely) to the states. So you need to automatically factor in “X Amount of Dollars per Unit” for a shipping container that you’re going to ship them in.

  • ​​Shipping by Ocean or Air

And of course you have to pay to ship that container. You’ll have to pay for the ocean freight charge for each container. You can save time and ship via air, but that’s more expensive. 

  • ​Transportation From Port to a Fulfillment Center or Warehouse

​Once your container gets to whatever port you're shipping it to, it has to be unpacked, it has to be taken off the truck. It has to be moved to a fulfillment center, or into a warehouse that you're going to have to rent.

  • ​Warehouse Costs

​Now after that, you have to factor in the costs of actually having a place that these items are going to go. So, if you have to rent a warehouse, then obviously, you have that cost.

  • Fulfillment Center Costs

​If you’re private labeling items to go to a fulfillment center, you need to pay them for their space. You need to pay them per employee's time. You need to pay them per shipping fee, per package that's going out. That's how they make their money.

Private labeling doesn’t automatically mean you’re going to make more money.

Now that $200 extra that you were going to make, because of your difference in cost of goods sold, really isn't there anymore....

Now, I'm not saying that you can’t make private labeling work. Trust me, the goal of this blog isn’t to make you all think that you should never manufacture or private label your own products. I definitely think there’s a time and a place to do so, but you have to keep a few things in mind.

Along with the business expenses listed earlier, you're also gonna have to deal with things like returns yourself. Overall, there's more hands-on work that makes this all happens.

Now, let’s talk about the other reason that people would want to do this. And this one, I agree with, and this is why I think it does make sense.

The second reason why you might want to private label your own items instead of drop shipping is because, honestly, it’s unique. And that's how you make money private labeling.

How to Make Money Drop Shipping Private Labeled Products

With the first example I laid our earlier it doesn’t make much since, from a profit standpoint, to develop your own privately labeled product line.

Again, let's say you're selling desks, and you come up with a brand new spin on things. Maybe something's unique about the look, style, or how it's assembled. Well, then that's good, because you can stand out from your competitors.

In this scenario, I would still recommend you drop ship everybody else's products as normal. I would still recommend you make money with a Shopify store. Then you introduce your own product line, your own physical products or brands into your existing store.

Now, ​that allows you to make the same money per sale from ​your suppliers' inventory as well as a bit more from your own private labeled product.

Even if you make the same ​profits with your brand​ you can then take your unique brand and you could have all of your competitors sell it. How ​great would that be?

Let's say your store has ​ten competitors ​all ​selling in the same niche as you. Well, if you have a unique, private labeled brand, your competition ​can start selling your product in their store.

Now, what's awesome about that is you're making more money, straight up. You have more sales coming through your business and another stream of income. Not only that, and this is kind of the biggest reason, but you also have a new asset.

You know, a big part of what I love about building these drop shipping stores is that you can build them out and sell them for a lot of money. And that doesn’t include attaching an unique brand to it.

If you do want to go this route and drop ship your private label, you now have two huge (and seperate) assets that you could cash in on:

  • ​Your drop shipping Shopify store,
  • ​And your private labeled product brand.

Final Thoughts on Private Labeling Products

Even though a lot of the same fundamentals and foundations are there, manufacturing products for Shopify is a totally different business model than drop shipping.

While there is a lot of overlap on both sides on the actual business behind it, private labeling one product is really its own business. It's basically a spin off off something else. Dealing with importing, warehousing, and fulfillment centers is a whole ​other monster.

And, I'm not just saying this because this is a personal opinion. In fact, before Drop Ship Lifestyle, I was private labeling. I've brought in dozens, and dozens, and dozens of 40-foot ​shipping containers from China, to all different ports in the United States. I know firsthand what this model looks like.

Again, I think that there's a time and a place for ​private labeling, but if you're reading this right now, and you're like, "Okay, I want to get started with eCommerce, and I think I want to do drop shipping​. Maybe I ​can invest some money to put ​into manufacturing..."

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I would still tell you that private labeling isn’t your first step. Doesn't matter how much money you have in the bank, or what you want to throw into ​starting. 

My advice ​for private labeling is this:

  1. Build a drop shipping store using the Drop Ship Lifestyle model,
  2. Make your money and grow your profits,
  3. Then, when you know what it’s like running and operating a business, consider the commitment.
  4. Once you’ve decided you want to commit, then it’s time to start manufacturing your own product lines.
  5. From there, along with listing the product in your own store, your competitors will sell for you.
  6. And now, you have a whole new asset, a new revenue of income, and a new business that you could sell one day… should you ever want to. 😉

To wrap up, those are my thoughts on manufacturing and private labeling products for Shopify. Again, it makes sense once it’s explained, but successfully private labeling is kind of a right time, right place scenario. Definitely not for everybody, but something that hey, if you want do it, ​the path above is the way to go.

Again, I hope you enjoyed my updated explanation on private labeling. If you have any questions on this, just let me know below this post. You know I’m more than happy to help you if you’re stuck or still have questions!

Anton Kraly
 

Anton is a the Founder & CEO of Drop Ship Lifestyle - an online coaching program for eCommerce entrepreneurs. He began selling online in 2007 and has built and sold multiple seven-figure businesses while leveraging the power of drop shipping.

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