When you’re looking for a new manufacturing vendor to formulate and package your new products, there are often points of confusion regarding the differences between private label and contract manufacturing. Both private label and contract manufacturers have the same goal of producing high-quality, safe products for consumers and end-users.
The difference is how they go about producing those same products and, more importantly, who owns the intellectual property of the product itself.
What is Private Label Manufacturing?
A private label product features the retailer’s brand name but is manufactured by a third party. In most cases, the manufacturer retains the rights to the product itself.
Let’s use dish detergent as an example and a retailer we’ve all heard of: Walmart. Let’s say that Walmart wants to white-label a dish detergent and sell it at a lower price point than a popular brand-name detergent.
Walmart’s team would reach out to a private label vendor with a request, and maybe some suggestions for bottle design, and so forth. The manufacturer would essentially use their internal formula and existing vendors for dish detergent, bottle it, and label it using Walmart’s branding and corporate information.
However, the IP for the bottle’s contents are owned outright by the private label bottler. Walmart can certainly make requests to alter some of the specifications (like the fragrance, color, and so forth). Even after those alterations are executed, the manufacturer still retains the exclusive right to the formula itself.
What is Contract Manufacturing?
Contract manufacturing is a collaborative process between the vendor and the client. The client/product owner provides some specifications to the manufacturer. That product is then made to spec by the manufacturer.
The manufacturer is under contract (hence the name) to execute the order for the client, has no rights to the product itself, and can’t legally change the product design or specifications.
The difference is that in example A, Walmart doesn’t own the product—the private label manufacturer does. In example B, a brand retains all ownership rights of the product and can tweak or change the product in the future as needed.
What are the advantages of each?
Pros and Cons of Contract and Private Label Manufacturing
When does a client benefit more from private label manufacturing? Let’s say that a small hair salon wants to carry a boutique line of shampoos or skin care products and can’t afford the economies of scale of a large contract manufacturing vendor. The salon owners work with a private label manufacturer, sample some of those available product lines, and make a one-time order to stock their store shelves. In that instance, the smaller scale a private label manufacturer can offer is likely a better fit for that customer.
Why? Because the main source of income for the salon isn’t bespoke hair care products—it’s the haircutting and styling services they provide to their clients. A private label manufacturer gives the salon an opportunity to experiment with an alternative/additional revenue stream. If it doesn’t work, the salon hasn’t invested nearly as much upfront cost and time.
Contract manufacturing is far more cost effective for companies that need the advantage of scale. The customers or brands that regularly collaborate with contract manufacturing facilities typically work in large, bulk orders.
Contract manufacturers are also highly specialized, with internal engineers, labs, and refined production processes to meet the needs of spec orders. The manufacturer can help build a brand-new product from scratch and has the resources to scale production of that new product quickly. That level of flexibility is paramount for a brand or company looking to design a new product or product line.
Other benefits of contract manufacturing include:
- Lower margins. Because of the benefits of scale, the price per unit is far less with contract manufacturing than with private label manufacturing.
- IP ownership. The contract manufacturer has the resources to facilitate the formulation and design of a product but does not own the final product.
- Future proof. If the private label manufacturer, for any reason, discontinues that product line, it could impact the client’s ability to sell it indefinitely. The contract manufacturer helps build long-term value and customer loyalty.
- Agility. A contract manufacturer can design a product and scale to meet the production demands based on what the client needs at that time.
- Expertise and consistency. A custom contract manufacturing vendor has the in-house expertise to advise the client on ingredients, efficacy, and other design elements, like bottling and labeling. No matter how much (or little) the product scales, each order will have consistent quality.
Contract manufacturing companies are also inherently more collaborative when it comes to the final execution of your product. You have much more freedom to design the packaging and flexibility to include or omit certain ingredients.
Ultimately, you have far more control over your final product. The vendor has the resources for prototyping and testing, allowing you to focus on product quality and features.
Working with the Right Vendor Matters
Based in St. Louis for over 25 years, PCI provides specialty formulating, blending and packaging services for liquid chemical products. Since our founding, PCI has grown to provide service to both large and small companies across the United States.
Your product quality is as important to us as it is to you. We maintain high safety standards at our 42,000-square-foot, EPA-registered manufacturing facility. If you want to offer greener options for your customers, our engineers can reformulate your products to make them more eco-friendly.
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