When to Start Manufacturing Your Own Products [Dropshipping vs. Private Labeling]

Nicole Blanckenberg July 27, 2020

If you’re looking to grow your eCommerce business to the million-dollar level this year, this post is definitely for you! One of the most common questions we get about growing a successful online store is whether or when to move from print-on-demand (POD) and other dropshipping models and start manufacturing your own products.

Here’s the honest truth: dropshipping is a great way to start an online store with less budget, test new designs before going all-in with production costs, or run a very lean eCommerce business. But can it get you to your 7- and 8-figure business goals?

To help you decide when to start manufacturing your own products – and whether you should – let’s start with the pros and cons of each product sourcing and eCommerce business model type. We will also take you through when it is time to switch models based on your current eCommerce business and your ultimate business goals.

Different types of eCommerce Product Sourcing, their Pros and Cons for Business Growth, and When to Switch

1. Dropshipping

If you are currently running a dropshipping eCommerce business, you are probably working very hard to brand your products and store as unique. You also probably chose this business model when launching your site because you wanted to run as lean a business as possible. This is because dropshipping enables you to hand all your fulfillment and logistics over to a third party while also saving you time, effort, and valuable budget by reducing the need to coordinate manufacturing, storing, and fulfilling your products. But dropshipping can be very limiting in terms of eCommerce growth unless you’re using it strategically.

In short, if you work directly with a manufacturer who dropships for you, you are giving yourself a lot more room to create, market, and sell unique products – while skipping the ‘fulfillment’ middle-man. If you are working with a third-party dropshipping service selling the exact same as your competitors, growing your eCommerce business is going to be an uphill battle.

Let’s look at the pros and cons of eCommerce business growth with dropshipping in more detail.

Dropshipping Pros

The biggest reason eCommerce entrepreneurs opt for dropshipping is the ability to offer more products without having to pay for and store products upfront. This provides incentives such as wider product diversity, fewer start-up costs, and reduced inventory management needs. Here’s a breakdown of dropshipping’s biggest pros:

1. Dropshipping offers lower eCommerce risks as you don’t need to outlay upfront production costs before testing the market.
2. With a third party handling fulfillment, eCommerce dropshippers are able to concentrate on streamlining sales without the need for logistics experience.
3. For new online stores with a limited budget, dropshipping is a low start-up cost option without big inventory manufacturing and storing costs.
4. Dropshipping allows stores to more easily and affordably expand their product categories and widen product lists.

Dropshipping Cons

But alongside pros, dropshipping comes with its share of cons – the most significant of which is limited financial and branding growth potential, making it hard to compete in the PPC marketing space and build a robust, profitable brand. Let’s look at what these significant drawbacks are.

1. eCommerce dropshipping businesses enjoy lower profit margins than those self-manufacturing their own products. Lower profits mean less money to put into growing your business and less revenue for your effort, which means you need to sell in higher volumes to break even.
2. Because dropshipping is the easiest eCommerce business option with very low barriers to entry, competition is very high. Without finding ways to stand out from the crowd, it’s very easy to get lost in a saturated market.
3. Dropshipping also means you are handing over your inventory synching, logistics, and fulfillment to a third party. Although this limits hassle, this also means you are relying on them to ensure inventory synching is right and that fulfillment runs smoothly.
4. With dropshipping, brand loyalty is harder to build, especially if you’re selling products that look very similar to your competitors’. It also means you are less likely to be able to brand the entire sales journey and invest in the after-sales service you need to grow your loyal customer base.

When to Switch from Dropshipping

If you’re a new online seller, with limited experience and budget, dropshipping is a smart eCommerce choice. However, unless you are a whiz with positioning your products and brand as unique or can work your PPC marketing strategy like a pro to increase sales volume to mitigate lower margins, growth will be difficult. Not impossible, but difficult. This is something eCommerce entrepreneur and coach Sebastian Gomez understands well.

In the below video he highlights why you should move from a dropshipping to a branded eCommerce marketing mindset and what you will need to achieve it, including the difference between cold traffic and warm audiences.

With so many new fulfillment services out there, your decision about whether you will start manufacturing your own products or continue with dropshipping is based on three things alone: your growth goals, your budget, and the niche you’re selling in.

In short, if you are selling in a niche where manufacturing would be very costly and creating unique products very tricky – such as electronics – but you have found a way to manage your marketing and create good branding to increase sales volume, then you’re winning. However, for most other niches, to grow to a multimillion-dollar business, you will need to eventually find ways to manufacture your own unique products or uniquely brand your products.

That’s not to say there aren’t stores making bank with dropshipping; the trick is creating unique products. Enter print-on-demand!

2. Print-on-Demand

Very popular in the apparel and accessory and poster niches, if you’re a print-on-demand (POD) eCommerce brand, you probably chose it because it allows you to customize your products without a massive investment in big quantities of products and manufacturing infrastructure. POD offers a lot of the pros of dropshipping, with a lot fewer of the cons. If you are dropshipping, print-on-demand is often the next step you would take in growing your business.

In a nutshell, POD eCommerce business model allows new eCommerce entrepreneurs a way to build a new business with less investment and risk, while also allowing more established stores to use it to test products before going all-in on a new design. In fact, print-on-demand has become so mainstream that the list of niches it caters to and the number of services are growing exponentially – with a lot of big brands being able to grow without expanding to self-manufacturing. However, POD is not without its growth drawbacks. It all depends on your goals, niche, and budget.

Let’s take a closer look at these advantages and drawbacks.

Print-on-Demand Pros

If you’re running a successful print-on-demand online store, you’re probably already aware that the biggest advantage of this business model is that it offers higher profits and much more personalization than traditional dropshipping – with all of those dropshipping pros. Add that to the fact that it is a highly popular (and growing) eCommerce business model, more and more product options are being added daily. As is the potential for profit as more services become available. Here’s a summary of POD’s most significant advantages.

1. POD offers far more scalability for new and growing businesses. Being able to start without big inventory stocks means the more you market and sell, your ‘stock’ grows with you.
2. Another big pro is that print-on-demand offers sellers more product category variety as many POD services include anything from t-shirts to pet bandanas. In short, this means you can more easily expand your niches and grow your eCommerce business using your already established, unique designs on a variety of product categories.
3. For newer online sellers, POD offers the same appealing benefits of lower risk of failure and less start-up investment than dropshipping. It’s also exceptionally easy to set up, meaning less of a learning curve.
4. With no minimum orders, print-on-demand also helps established store owners test new designs without big manufacturing investment. It also means businesses can quickly pivot if a product isn’t selling, while helping to maintain profitability.

Print-on-Demand Cons

The most significant con of running a print-on-demand-only eCommerce business model is the slower fulfillment times. Because items are made to order, your customers wait much longer for products than a store that holds inventory. That’s not to say that customers will not be willing to wait for a unique product; it’s all about how you position your brand. In other words, cons can be mitigated with the right expert approach. But that’s not the only disadvantage you should plan for if you want to grow a successful eCommerce brand. Here’s a list of the top cons of print-on-demand business models.

1. As we mentioned, you will need to work hard to mitigate longer wait times for products, in an age where people are used to same-day delivery. This means positioning your brand as made-to-order, quality products and working hard on your shopper journey to keep customers engaged and happy.
2. Although POD offers more profit than traditional dropshipping, your margin potential is less than private labeling or self-manufacturing. This means that to compete in the million-dollar revenue bracket, you will need to sell a lot more than competitors who are manufacturing their own products.
3. Although print-on-demand is growing in popularity, services, and product availability, there are still fewer design variation options than when manufacturing yourself. If you are printing t-shirts, for example, POD services may only offer certain materials or printing areas based on popularity, which means you’re still limited in design creativity.
4. With print-on-demand business models, product quality isn’t always within your control. A third party is printing, inspecting, and sending your products for you, so you cannot set your own standards. This makes the service provider you choose very, very important.

When to Switch To or From Print-on-Demand

As we mentioned, the wait times for print-on-demand products are much longer, but if you can offer unique designs that appeal to your target audience, your customers will be willing to wait. Ultimately, deciding to upgrade from POD to private labeling or self-manufacturing will very much depend on four questions:

1. Growth goals: Do you have design and profit goals beyond the limitations of POD?
2. Niche: Is there room in your niche for more originality than POD is offering you?
3. Budget: Do you have the budget to invest in self-manufacturing?
4. Risk: Are you an established brand with good customer loyalty, to mitigate the significant investment risk of manufacturing?

As you can see, there is a lot of potential for growth in POD business models, without the need to switch. But if your financial and design goals exceed POD limitations, it’s time to think bigger and start manufacturing your own products.

If you are dropshipping in apparel and accessory, pet, poster, home, and even jewelry niches, POD allows you to design products without losing the benefits of dropshipping.

If you’re self-manufacturing, introducing print-on-demand to your business model can be a cost-effective way to test new designs before investing in development and inventory.

3. Private Labeling

A step up from dropshipping in terms of branding products, private labeling is a popular choice for eCommerce brands wanting to maximize growth.

Newbie Note: If you’re new to eCommerce, private labeling is where you design a product but send the specifications to a third-party manufacturer. Or, you take an already developed product and then outsource manufacturing it with your branding. In other words, you get all the benefits of self-manufacturing without big financial investment in the manufacturing equipment and space needed to manufacture products in-house.

If you are currently private labeling your products, it means you are outsourcing your manufacturing to a third party that then ships inventory to either your warehouses or your third-party fulfillment service, or in some cases will fulfill orders for you as well. Alternatively, you could be ordering products from a third-party manufacturer and then branding it in-house before selling on your store.

Like with any eCommerce model, it has pros and cons, and you will need to do a lot of research before you change from private labeling to self-manufacturing. Let’s look at these top private leveling pros and cons.

Private Labeling Pros

The biggest advantage of private labeling products is that your product margins are much higher than those of dropshipping and print-on-demand business models. Add this to the fact that you have more design and variant flexibility, and you’re well on your way to growing a million-dollar eCommerce brand. Here are the top advantages of private labeling:

1. Private labeling gives you far more control over production quality and design than dropshipping or POD.
2. Unlike other eCommerce business models we have mentioned, private labeling offers eCommerce sellers much more competitive rates per product, as they are made and ordered in bulk. Lower product unit costs mean higher profit margins.
3. Third-party manufacturers make products to your exact specifications or brand them under your eCommerce business – making them 100 percent unique.
4. Ultimately, private labeling leads to more eCommerce brand loyalty due to design flexibility and branding.
5. Because you are not investing in your own equipment, you are able to adapt to market changes quickly and can scale up or down more easily.

Private Labeling Cons

Although private labeling allows you to run a lean business in terms of staff, the most significant disadvantage of this model is that it isn’t lean in terms of product investment. Almost every manufacturer will require minimum orders, and making a mistake on the wrong third-party manufacturer can be very costly. Here are the leading disadvantages of private labeling eCommerce products:

1. With private labeling, you are very dependent on a third-party business. Choosing the wrong one, or having one drop the ball in terms of production times, can harm your branding in a big way.
2. As we mentioned, minimum order quantities could be costly for new business owners or those upgrading to private label manufacturing for the first time.
3. Finding the right manufacturer is very important but also incredibly challenging. In fact, it’s advised that you don’t put all your eggs in one basket; meaning, finding a few manufacturers is optimum. Something eCommerce entrepreneurs can find daunting and time-consuming.
4. Private labeling requires a substantial financial investment. Unless you have a big start-up budget, private labeling is only recommended for established eCommerce entrepreneurs with products that have already proven themselves, or those looking to scale up while increasing product margins.

When to Switch To or From Private Labeling

If you are dropshipping products or using a print-on-demand business model, changing to private labeling will offer a lot of advantages in terms of business growth. This is something eCommerce entrepreneur Zach Inman is adamant about. In fact, he goes so far as to say that once you reach a certain point in your business, the move into private labeling is imperative for long-term success and you won’t be able to grow without it. Here’s his story on how and why he moved from dropshipping to private labeling.

As you see, this switch will, of course, require a much bigger financial commitment to your business, but it’s a lot less risky than self-manufacturing.

Pro Tip: Here’s the thing: a lot of top POD services, such as Printful, also offer warehousing and fulfillment services and some of them will also offer bulk ordering options to bigger sellers. What does this mean for print-on-demand businesses wanting to grow beyond the limitations of POD? Well, there are options where you could negotiate with services you are already using to expand product designs, print in bulk and then fulfill your products from their centers. The advantage of doing this before you go into private labeling is that you could then keep some POD products on your store, and you’re using their fulfillment services for all.

For some niches – electronics and tech gear, for example – there is a way you can create a hybrid model of private labeling, where you are able to still dropship your products from your suppliers. eCommerce entrepreneur Dan Dasilva coined the term ‘the Dropshipping Agent Model’ and it looks a little something like this:

In a nutshell, this is where you broker deals with manufacturers directly, bypassing middlemen suppliers such as those you would find on sites like AliExpress, and negotiate a deal where you brand the products (private labeling) and packaging but also get all the benefits of dropshipping in terms of logistics.

Here’s Dan explaining the concept in full detail as well as taking you through how to turn your dropshipping store into a private label brand.

For those who are private labeling, switching to self-manufacturing isn’t naturally the next step for eCommerce growth. You will want to weigh your growth potential as it stands with private labeling, against the profit and flexibility of self-manufacturing. You will then need to assess whether the financial investment that comes with self-manufacturing will pay off in terms of profits. Once you have done that, the real work begins!

4. Self-Manufacturing

Last but not least, let’s take a deep look into what’s involved in manufacturing your own products. Simply put, in terms of eCommerce growth and profit, self-manufacturing is the holy grail of business models. But it is not for everyone and doesn’t suit every niche.

If you’re dropshipping or running a POD store, self-manufacturing will be a colossal jump in terms of investment.

For those of you who have been creating your products from the get-go, choosing between third-party manufacturers or upping your own production to scale your eCommerce business will be based on three things:

• How much budget you have
• The amount of quality control you wish to maintain
• Your current and goal production capabilities

To answer the question of whether you should manufacture and when to do it, let’s look at the advantages and disadvantages that come with self-manufacturing products for eCommerce.

Self-Manufacturing Pros

In a nutshell, manufacturing your own products will result in the lowest cost per unit and design control, both of which mean strong growth potential and huge profit potential. Add that to the fact that you don’t have minimum order requirements and aren’t dependent on third parties, self-manufacturing is the ultimate eCommerce model. Here are the top pros of manufacturing your own products.

1. As you are not dependent on third-party manufacturers, you have complete control overproduction. This means you decide what to produce, how much to make, and when to manufacture.
2. As mentioned, self-manufacturing your own products will give you the lowest cost per unit and the highest profit potential. You will also have full control over your prices, without being affected by increases from outside companies.
3. By being in charge of your whole process from production to delivery, you can create a solid brand and good customer journey, which will push brand loyalty.
4. Manufacturing your own products also eliminates a lot of management issues that come with outside services and companies. Additionally, all of these will help you build a very strong brand that will help you grow your eCommerce business.

Self-Manufacturing Cons

Yes, self-manufacturing comes with a lot more profit potential, but initially there will be a lot of additional expenses and reaping these profit rewards won’t be immediate. Not only do you need the expertise to produce products, but you will need to invest a lot more time and money into growing your business.

Let’s take a closer look at the drawbacks of manufacturing your own products.

1. The initial investment in equipment, space, warehousing, raw materials, and management will be a lot higher than any other eCommerce business model. You will also need to understand that your eCommerce business won’t be lean and that you may need to outsource other areas such as online marketing or fulfillment to keep your labor costs down.
2. Manufacturing your own products takes a lot more of your time. You will need to invest time in ensuring you not only have the right manufacturing knowledge but that you have done your homework on sourcing quality raw materials at the best price possible.
3. Unless you are an established brand already making sales before you start manufacturing your own products, it could take a long time to iron everything out before you can make your first sale. This includes setup, designs, and samples and setting up a winning marketing strategy.
4. Self-manufacturing is a very risky option for those who don’t already have an established brand that they are looking to grow. In fact, unless you have substantial start-up funds, this is not recommended for newbie eCommerce businesses. Unless the brand is going to be built around something you are already producing, such as an artist starting a poster business, a designer starting an online fashion brand, or fitness trainer creating an online fitness membership eCommerce site.

When to Start Manufacturing Your Own Products

As we mentioned, it’s not just a matter of when to start manufacturing your own products, but whether you should. Manufacturing your own products does offer most profit and brand growth for eCommerce brands, but it takes big time and money investments to be able to draw profits from your business. Therefore, you would only do this if you have weighed all the options clearly, tested or researched your market, and are offering something very unique to the market.

In short, you should only opt for self-manufacturing if:

• Your designs are unique
• You have the budget to set yourself up
• It will help you reach your growth goals
• You need far more product flexibility than other options offer
• To ensure your business and product design are 100% independent of any service

Newbie Tips for Product Creators: If you are already creating unique products, self-manufacturing doesn’t mean you have to start big when you launch your online store brand! There is a relatively new concept called small-scale manufacturing. Here are 7 tips on how to start small-scale manufacturing from the EvanAndKatelyn YouTube channel, which is all about making things.

—

The Bottom Line: If It Ain’t Broke, Don’t Fix It

Here’s the thing: just because you can change models, doesn’t mean you should. As you have seen, each of these will offer its own set of pros and cons and you will need to look at your own set of circumstances to see whether and when you should start manufacturing your own products or upgrade to another eCommerce business model.

If your business is meeting your own growth goals within the budgets you have set, then why change it? If you want to move the goal post and reach for the millions in revenue, you will need to ascertain whether your current model allows you to grow your business and profits, or whether the investment for moving your manufacturing in-house is needed to soar.

Business & Finance Articles on Business 2 Community

(23)