Why Razor Thin Margins Don’t Work for PL

I know we’ve talked many times about pricing, and the message has always been about value. I’ve always advocated paying more attention to the value you create than to your profit margin, and I’ve even advised private labelers to stop being so greedy, demanding 50 and 60% profit margins.

That said, now I want to address the other side of the coin. See, when getting into a deep discussion on margins and pricing, all too often someone will point out that wholesalers work with razor thin margins. They work with margins of 15 to 20% sometimes. I’ve even been guilty in the past of pointing that out. As if to illustrate that plenty of successful people make their business work without the astronomical margins many private labelers have been spoiled with.

The problem is, razor thin margins work for wholesalers, but they don’t work for private labelers.

How is that? You are simply buying at a low price and selling at a higher one. How are the rules different?

While it’s true you are buying low and selling high, there is more to it than that. Yes, that is what wholesalers do. They buy at one price, mark up the goods and then resell. But that, essentially, is all they do.  Most of the time they aren’t concerned about the listing or the brand, as they are really just a middleman.

For a private labeler, this is definitely not the case. Yes, you buy your goods at one price. Yes you sell at another. Yes, your cost of goods sold will include pick and pack, weight handling, shipping, customs, FBA fees and maybe sponsored product ads. But your expenditures don’t end there.

See, what you WON’T factor into your COGs as a private labeler is the cost of your website, or the graphic designer that made your banner, or the social media consultant that advised you on how to run profitable ads. All those extra steps that really aren’t intimately connected to a specific product or listing don’t get included in those costs. And if you are building a brand, those expenses will rack up.

So, if you are working with only 15% margins, while that may look like it works on the Amazon financials spreadsheet, you won’t realize you are losing money in your actual business. That is because you aren’t profiting enough to do all the extra stuff necessary to get a brand off the ground. These are things most wholesalers aren’t in the business to worry about.

That is the reason razor thin margins simply don’t work in private label.

What Margins DO Work Then?

This will definitely vary by person and their business goals, but in my experience I’ve seen PLers work with margins as low as 30% (though usually out of necessity). I think the goal of 40 to 50% is good to shoot for, because it gives you room to work in. Often times competition, seasonal fluctuations and other market trends will force your price down lower than you had anticipated. If you worked out a decent initial margin, then the wiggle room is there for you to still profit.

Overall it is just important for you to track your financials and be efficient. In the beginning it is really easy to simply throw money at whatever problems you end up facing (once you have it). But this isn’t efficient and can lead to challenges down the road. If you aren’t good with money or numbers, this may be the first place you decide to hire for when you get ready to build a team.

When figuring up pricing and considering margins on new products, just remember to leave room for ALL of the things your business will require. Not just the things that only pertain to that one product. And, as always, also remember to factor in promotional unit costs for your ZonBlasts.