This post is by Andrew Tjernlund, Founder of Vigilante Products and Goat Consulting – an “Ask the Experts” service for Amazon sellers. Andrew has been selling online for ten years, and made $10M of sales in 2015. His brother Will was interviewed here in 2015.
The private labeling hype machine has been running hot for a couple of years now.
Just find a product that’s already selling well on Amazon. Then source a generic version from China. Slap a logo on it, and sell it using Amazon FBA. Boom! Riches are yours. Now just rinse and repeat.
But there’s something rotten in this private labeling utopia. Hordes of new sellers seeking their fortunes have descended, and they aren’t getting the easy success all the training courses promised them. Why not?
Well, finding a “perfect product” that will sell like hot cakes is hard. Really hard. Driven by all those online courses and schemes, competition from other sellers has become fierce. On the other side of the equation, buyers are starting to cry foul. Even these fly-by-night “brand names” bring certain expectations of quality and support, and many of them are just not living up to it.
So here’s the Amazon product sourcing strategy that I use. It doesn’t depend on importing, you don’t need to find perfect products, and I’ve made it hard to compete against. For me, it’s been hugely successful.
- Why Private Labeling is Flawed
- Focus on Suppliers and Build a Broad Catalog
- Finding Suppliers
- Selling the Products
- Developing the Supplier Relationship
- Management and Optimization
- In Closing
Why Private Labeling is Flawed
There’s a whole host of issues that make private labeling very difficult to do. In many cases, the business is certain to fail before it even gets off the ground.
Private labeling is about finding a “perfect product” – getting a home-run off-one shot. That’s more luck than skill. Good businesses aren’t based on gambling. When people go looking for the perfect product, they are going into an area where they already have competition – sometimes very stiff competition. There’s already an established player with months, if not years, of sales history that Amazon is going to reward in their search engine algorithm. You have to overcome that somehow.
Often it’s clear that a private labeler is selling a “me too” product, and at lower price points the difference in price can be very insignificant. If you sell for $22.95 and the established brand sells for $24.95, you are 8% cheaper. But realistically it’s just two bucks – not much of a competitive advantage. There’s often nowhere to go other than lowering the price further and further, cutting deep into your profit margin.
Private labeling almost always depends on buying from overseas factories. To do that affordably you need logistical scale and forward planning, so you can ship by sea rather than by air. Most sellers aren’t large or sophisticated enough to do that, so they have a lot of additional logistics costs.
You may also have quality issues because you haven’t been able to see the product beyond one sample. When things go badly they can go really badly, and you get unusable products with no recourse.
If you do manage to get established in private labeling, you can find other suppliers and sell wholesale. But you will have other issues getting the larger quantities you need, and handling much longer lead times. You’re damned if you do, and damned if you don’t – unless you can ride a perfect fine line where everything goes just right.
Focus on Suppliers and Build a Broad Catalog
I believe that you have to sell a large catalog of products to get enough revenue to make your business grow. The easiest way to grow a catalog with minimal use of capital is by using domestic suppliers. When you focus on suppliers in your own country, you avoid a lot of scaling and logistics issues you have with buying from China or elsewhere overseas.
Very few people even look at the opportunities out there for legitimate manufacturers or brand owners locally. You can easily talk and meet with them, make lower order quantities, have less risk and so on – pretty much the antithesis of buying from overseas.
When you go the private labeling route, and try to get your “perfect product” made, manufacturers might set a minimum order quantity of 3,000, or a minimum spend of $10,000. That’s a serious investment. Could you do better by spending the same amount of money on a range of products?
Often domestic suppliers have some products with a good sales history on Amazon, but a lot of other lines that haven’t proven themselves yet. Rather than buying 3,000 of one unit, you could spend your $10,000 with this company and buy many different SKUs in their catalog.
That allows you to grow inexpensively, but you’ve also varied your product offering and diminished the risk by spreading out your inventory. If the orange version of an item isn’t successful, you have only a few items to liquidate before moving on and putting more money towards the red and yellow versions that sell better.
Suppliers appreciate that you want to carry more of their catalog, and not just the bestsellers. One reason is that they can point customers to a retailer that carries their entire line, rather than sending them to shop around multiple places, or have them buy the main product from them but accessories from a competitor. Manufacturers truly appreciate it, and I have dealt with many who will vouch for that.
Manufacturers don’t need help selling their bestsellers, they need help selling their less established products. That’s where you can really add value. If you’re willing to take those on, and not just cherry-pick, they might be slow-moving products – but you’re still making money on every sale. You just buy more of the best-selling items and fewer of the worse-selling items. When you take on an entire product line there are benefits for you, and there are benefits for your relationship with that supplier moving forward.
Local suppliers can also offer technical support and warranty services. It’s important to become a good customer of theirs. If you become a good customer, they’re more likely to work with you on those kinds of issues. They won’t want to upset you if you’re going from $5,000 a year, to $50,000 a year, to $500,000 a year with them. You will gain a lot of stature, and they will want to be in your good graces. Once you’ve reached that kind of level, you’ll be surprised at all the extra value that’s unlocked besides just better pricing. There’s a whole new relationship once you get to be one of their top ten customers.
The vast majority of sellers search on Amazon to find products first, and a supplier later. I do the opposite. I try to find a good supplier for products that I think might sell – because I know a specific space or industry, or I have a hobby so I understand the products and can scan through quickly.
Once I find a really good supplier, I try to figure out how to sell their products on Amazon. By taking this approach, I already know the strengths and weaknesses of the supplier and can find products they sell that are underexposed on Amazon. That’s where the best opportunities are. That’s where you’re not immediately running into instant established competition on Amazon. You have the opportunity to get in on the ground floor on what could be a quickly blossoming product.
What to look for
Let’s say you’re really into camping. You know what products you use. You know what brands you like, and you know what you would like to use but it’s more expensive, or more difficult to get hold of, or you just happen to use another brand. If you go to foreign suppliers, you can scan through lots of items that you know are generic versions of really established brands. You will also know which products are junk, not useful or not applicable to your part of the world.
If you’re looking domestically, look for companies that you can eventually become a big fish to. They should be established and have some distribution, so people in your interest group can relate to their products, but the company shouldn’t be huge. They should be established brands, but that’s “brand” with a lower-case B. They aren’t household names, and are only likely to be well known within a very, very small category. They’re not generic products either – there should be some meaning behind the brand name.
As an indication of size, the supplier might have one sales rep for one half of the country, and another sales rep for the other half of the country who you have to deal through. But they will work directly for the manufacturer – you don’t have to go through a distributor or wholesaler. Or you might talk directly with the owner or someone else high in the chain of command.
- If you’re planning to dropship, they should have a really good dropship program already in place.
- If you’re planning to use FBA, make sure you can get to really low pricing relatively quickly – if you’re willing to hold stock and put a few thousand dollars behind it.
It’s a big help that these brands are already established. There might already be reviews, and there might be clear sales, but maybe no one is using FBA. That’s one of the more obvious opportunities where you can say, “Wow, these items are big ticket items. They have 25 reviews and still no one’s using FBA, I can immediately scoot to the top as long as the pricing is reasonable,” and take over the vast majority of those sales.
How to approach them
If you go to the number one brand in any industry, and say you want to become a distributor, they’ll just blow you off and send you to someone else. Who are you? You’re Joe Shmoe working in his garage.
But for some of these smaller brands, if you’re willing to come out and talk to them, learn about the product and have confidence in it, and place a $4,000 stocking order, they’re not going to blow you off – they’re going to roll out the red carpet for you! They’ll be happy to give you the best price right away.
That might be a company that only sells two, five or ten million dollars a year. Their salesman is not going to turn up his nose at a few thousand dollars stocking order. If you’re able to sell more and more, buying say $250,000 of products a year from a company with sales of five million, you’ll be one of their top customers. You will be one of the first they tell about new products or discontinued products, and all of the other things you can get a market advantage from.
Try to focus on products that you have expertise in, even if it’s limited expertise. When you contact them initially make it clear that you understand their market, the quality differences between them and their competitor, and how neat their brand new product is. They will appreciate that, and know that they’re going to have fewer customer service calls if the person they’re selling to understands their product.
Once you have an established product, you can look at other companies in that industry. If you can say, “Hey, I’m a seller of brand A and brand B, and I want to carry your brand as well,” then you will have a lot of legitimacy. They’ll see that you already have customers for these products and they will want to be where their competitors are. It won’t feel like a guess for them – they’ll just want to jump on it.
Once you have one or two brands, even if it’s a private label brand that you own, you can show them that you already sell related products, and present them with the opportunity for you to sell theirs as well. It adds confidence that they’re not wasting their time with you. Private labeling can actually be helpful in getting to that point – to get a track record.
At some point someone will take a chance on you. It may not be the perfect brand, but if you put $2,000 in front of them they will start selling to you. It’s not as difficult to get that first brand as you might think. People overestimate the difficulty and the awkwardness of selling a brand that is legitimate and established. If you want to get into private label first, and then find domestic suppliers that can add to your line, that’s a good approach. But private labeling should not be the be-all and end-all.
Sell the whole product range
You might find that a supplier has a wide catalog, and a few of their items are on Amazon but many are not. That’s a situation where you can stock, and use FBA, for a few of their best selling products that are already on Amazon. Then do fulfilled by merchant (FBM) for their other listings and be the only seller on those items.
If a couple of those new-to-Amazon products become a hit, you’ll gain momentum with that supplier and become a bigger and bigger customer to them. You might be able to gain a logistics advantage, make bigger orders, and get special deals – so your cost per unit drops. If you don’t offer their whole product range, you wouldn’t find the potential top sellers that are not already on Amazon.
Brands that have some successful products, but not the full line on Amazon, can be a big opportunity. The products already selling will be your meat and potatoes, but the dessert will be all those other products you have access to that other sellers have ignored.
You might be able to have a dropship arrangement for the slow sellers. The supplier may have a small processing fee or percentage on top for dropship sales. Make sure you factor that into your selling price. For the vast majority of my dropships and FBM products, I make a much larger margin than my FBA items, because there’s little or no price competition. Sometimes I’m not only the sole seller of that product on Amazon, I’m also the only person selling it on the internet.
Selling the Products
The vast majority of my listings are not beautiful. They don’t have great pictures. They don’t have great bullet points. Some of them have terrible bullet points that are very generic – because I’ve used the same text for the entire line.
Private label sellers put a lot of effort into getting their listings perfect, so they can rank well against all their competitors. But when you have an established brand that you put on Amazon, there will already be people searching for that brand. As long as you have the best price for that item, they’re going to buy it regardless – because they’ve already decided that’s what they want to buy. They’re going to Amazon to buy, not to shop.
That’s the big difference with Amazon that people often don’t understand. A lot of times people who use Amazon have already made their decision. They just want to go to one place where they know they’re going to get a fair deal and quick delivery. When you work with established brands, you can spend more of your time sourcing and working with the supplier and less time prettying up the listings and images. It’s not a private label brand where you need to artificially create value – the value in the brand already exists.
Potential buyers just need to know that they are getting the correct item. If there’s any kind of technical information, make sure you include it because people use that to check it’s the right product. Images are the same – they’re important to show which product it is rather than to sell it to someone who’s just browsing. Making it clear exactly which model you are selling is 98% of the job. Other tweaks might bring some incremental sales, but most of it depends on the existing brand value – you’re essentially riding on the tail of it.
Developing the Supplier Relationship
As you develop the relationship with the brand you can go for exclusivity. I’m the exclusive Amazon dealer for many brands. I’m also the person that sells their brand exclusively to Amazon. Once you have a few of those, that’s again when you can reach out to other brands and say, “Listen, I’m the exclusive distributor on Amazon for these related brands. I think there’s some opportunity you’re missing. I can simplify everything so you don’t have to learn this whole sales channel if you can give me some kind of exclusivity or better pricing.”
There are plenty of opportunities for that, because there are a lot of brands out there where Amazon is not their main focus – whether it should be or not is a different story! If they can have someone who acts as their Amazon agent, they’re happy not to worry about that channel and gain exposure without the infrastructure and skills needed to learn it.
Once you know an industry a little bit and you find suppliers that aren’t on Amazon (or just barely on Amazon) you can sometimes hit it out of the park. One thing I do is go on Upwork.com, search for “Amazon” and find people looking for someone to manage their Amazon account. I’ll say to them, “Hey, rather than using this guy for $5 an hour on Upwork, I’ll buy and stock your items. I’m really good at Amazon, and I do this for a bunch of other brands. You don’t have to manage me, it’s just money in your pocket.”
That’s a very compelling pitch for brands who don’t really want to handle selling on Amazon themselves. It might sound intimidating, but it’s just an email. You send it and then move on. Not everybody will be interested. I sell a brand of bottled water exclusively on Amazon. Why am I their only seller? Because I asked!
If you can find a supplier that nicely fits with what you’re trying to do, and will support your needs, that’s when you can create a really excellent, mutually beneficial system. The nuts and bolts of how you manage the business, rather than making an Amazon listing prettier, is what makes it grow.
Management and Optimization
Once you have established your business it comes down to inventory and capital management. You will have a limited amount of capital that you are going to want to expand and use, either with a brand you already sell or outside to new brands. You don’t want a lot of dead inventory, and you have to be smart about the items that you stock and the items that you dropship.
You need to manage your inventory with specialist software. Early on you can probably use some of the replenishment reports directly in Seller Central, but they’re not very complex and don’t break down the data that well. I don’t have any financial interest in these guys but I use RestockPro from eComEngine – they also make FeedbackFive.
RestockPro is a software program that allows you to set replenishment alerts specific to your needs – based on sales in the last year, two days, seven days, 30 days and so on, and also set different order thresholds and lead times for different suppliers. Then you can filter by supplier and say, “I should place an order with this company soon, but I need to spend $10,000 to get the price point I want. Do I wait another week or do I add a few other products to round out the order?” You can really be smart about how you’re managing your dollars, to get the best combination of price point and capital investment.
Focus on buying
Once you have your suppliers on board, the business becomes much less about selling on Amazon and more about buying from your suppliers. Amazon brings the customers, and the existing brand name gets interest in your products, so there’s not a whole lot you can do to sell better – all you can do is buy better. It becomes a totally back-end focused business, and there’s much more certainty in that because you have a direct relationship with your suppliers (unlike your customers) and can work with them to solve your pain points.
It’s a systematized business, not something where you’re speculating on random products and buying 500 units to take a chance on. That’s not a systematic approach – that’s just trying your luck. With my approach you can just calculate the price you need to buy at, then very predictably say, “I’m going to make $40,000 from this line if I just keep buying this quantity every two months for the next six months.”
Pricing is not straightforward on Amazon. I highly encourage people to use a repricing program. The one I use, Feedvisor, is expensive but I believe it’s the best option if you are at a certain scale. It is about algorithmic pricing versus just having the lowest price.
Repricing is a huge deal when you’re selling against multiple other sellers. It isn’t always a race to the bottom. If I’m the only Prime seller or have a better seller rating, Feedvisor actually prices many of my items higher than I would normally sell them at. You just have to trust the algorithm to figure it out. There are some items I can sell for $18 more than the next guy and still get the Buy Box 90% of the time.
I don’t have competition for many of my goods so I don’t use Feedvisor on those. Instead I have a standard mark-up and some specific adjustments. I make it worth my time if I’m going to sell a low ticket item that only sells every once in a while.
For most of the products that I dropship I have no competition. The customers that buy those products are either determined to buy from Amazon, or the product isn’t available anywhere else on the internet. In those two situations you have a lot of pricing power. I’m not really interested in monitoring prices across the whole internet, and I’ll sell fewer to people who shop from other websites. Amazon is focusing more and more on keeping customers loyal, so it’s those buyers that won’t go elsewhere that I focus on.
If sales are good and you want to make a transition from say, dropshipping to stocking, you have to keep track of capital, inventory and price structure. Ask yourself three questions:
- If you are willing to buy a larger quantity, will your supplier give you a better price?
- What payment terms can they offer you?
- What does that mean for your margins?
If you have limited cash, say only $10,000 to start with, and you’re dealing with some higher ticket items, you’ve got to be very mindful of what is realistic. If you see some really awesome opportunities, you may have to find extra cash to make those happen.
But you don’t want to get in a situation where you’ve invested all your money into slow-moving inventory, and your bestselling products sell out and you can’t replenish them. When you’re going through a growth spurt, you are almost certainly going to be cash-poor, because everything’s going faster than you realize. That’s when you’ve got to be extra diligent with counting the pennies.
It’s a lot easier for people to understand that a product failure is not your fault as a seller, when you’re selling an established brand. With private labeling, if you sell XYZ products and your business name is XYZ, then they’re going to associate that failure in the product with you as a seller.
The brands I sell tend not to have many quality problems. An established brand that’s been around for 30 years hasn’t stayed in business that long by ripping people off, they’ve stayed in business by offering good products. Selling brands can even help balance out the quality issues you often get selling private label products.
I started this post by talking about the shortcomings of private labeling. But private labeling isn’t fundamentally flawed, it’s just not used strategically. You can actually approach private labeling with the same supplier-driven thinking as you can for branded products. Instead of looking for a single perfect product, look for a supplier of generic products who has a whole product line that you can grow into. There are a lot of opportunities for that.
I’ve focused here on working with domestic suppliers, as it’s a source that is often overlooked. But the scale and experience you gain from working with domestic suppliers translates directly to working with overseas suppliers. Scale is particularly important when you’re ordering from overseas, so you can order container quantities rather than small packages. There’s nothing intrinsically wrong about working with foreign companies, but choose them for their overall product line, not just a single product.
You can also use private labeling very well alongside branded products. When a particular brand model sells well, we’ll often go out and private label a similar product. Why would we compete with ourselves? From selling the branded version, we can see where a private label product would fill a gap in the product line-up. Then when someone searches for that category of product, instead of having four listings in the top ten, we might control eight out of ten. We even have situations where all of the top ten search results are our listings. Unless they go to page two, we’re going to make a sale!
Any questions? Fire away in the comments below.