Side Hustle Showdown: Private Labeling on Amazon vs. Product Licensing

In the e-commerce space, selling private label products on Amazon has been a popular side hustle for the last several years.

But is it still the best way to go?

Or is there a lower risk, higher reward way to turn your ideas into profits?

In this episode, which is the second episode of our Showdown series this month, we’re comparing two ways you can capitalize on opportunities in the market; selling private label products and product licensing.

For this debate, I’ve sourced two guests who have appeared on the Side Hustle Show before:

Greg Mercer of JungleScout.com, creator of the popular Jungle Scout product research and amazon analytics software. We last from Greg on episode 263, when he talked about how to find your first Amazon FBA private label product. (Try Jungle Scout for half off your first month with my referral link.)
Stephen Key of, InventRight.com and author of the One Simple Idea: Turn Your Dreams into a Licensing Goldmine While Letting Others Do the Work. We last heard from Stephen on episode 113, when he talked about how you can turn your ideas into recurring revenue.

Both business models allow you to exercise our creative muscles. But, as you’ll find out, each model is suited to a different personality type and has a different balance of risk and reward.

Tune in to hear both Greg and Stephen dig into the different strategies behind:

Getting started
Marketing and discoverability
Start-up costs
Beating the competition
Monetization
And more

There is some interesting insight into these business models. By the end of the episode, you’ll have a clearer idea of which business model is best for you.

Round 1 – Getting Started With Private Labeling or Product Licensing

Selling Private Label Products on Amazon

“I’m looking for opportunities that essentially have the largest differential of how much demand there is versus how much competition there is,” Greg told me.

Do these “unicorns” still exist?

Greg said they do. You just need to know how to find them.

As Amazon has grown and more sellers have entered the marketplace, “unicorn” products have become more obscure.

For more on finding profitable products, definitely check out our last episode with Greg.

A more recent trend Greg’s noticed is a 40% increase in sales across the board on Amazon due to COVID.

He doesn’t think this is going to drop back down post-COVID either. Greg said the pandemic accelerated e-commerce, so now is a great time to start selling private label goods via Amazon FBA.

Related:

Product Licensing

Product licensing also starts by finding a gap in the market. “You’re always looking for opportunity,” Stephen told me.

If you’re a creative person, for example, you might start by looking at a company’s product line to see if they’re missing something. Or, ways you can make an improvement to one of their products, add some value to what they’re offering, and so on.

If they like what you’ve come up with and see the value in adding it to their product line, they’ll license it from you and pay you a royalty on each sale.

Stephen said most inventors do this by observing a problem and coming up with a solution.

But what he recommends is to really look at a company’s product line. A lot of product designers working for companies don’t have their “heart and soul” in their work and aren’t as motivated as you are.

If you’re a creative individual you can “basically out design the designers in the company,” Stephen explained.

It’s due to this reason that companies are embracing open innovation, essentially inviting anyone to present an idea or an invention to them.

Startup Costs for a Private Label Business

Greg said the amount of capital you need to start selling private label products really depends on how much money you want to make each month.

To give you an idea, he ran some rough numbers past me based on selling a product for $20-$30 with an estimated sales volume of 100 units per month.

Costs to produce and ship to the U.S. – $10 per unit
Costs of 3 months worth of inventory – $3,000
Additional costs, such as product images, packaging design, etc – $1,000

“If you don’t have a few thousand dollars to get started it’s going to be pretty tough to launch a private label product,” Greg said.

If you have a product in mind and what an estimate on how much capital you’ll need to get started, Greg has handy tool at JungleScount/estimator to help you out.

(You can also get half off your first month of the full-fledged Jungle Scout software through my referral link.)

Start-up Costs for Private Licensing

Private licensing wins hands down when it comes to start-up costs.

“What I like for people to do is realize, you’re selling the benefit of your idea,” Stephen explained.

You don’t even need to build a prototype of your idea — a 3D computer-generated model will suffice.

Stephen said all you need is a 1-page sell sheet, which will cost around $200 to be professionally written up. Some people also like to file for a provisional patent application to protect their idea, which costs around $70.

“$500 and you’re in the game,” Stephen said.

Round 3 – Marketing and Discovery

Marketing a Private Label Product

The benefit of selling on Amazon is that you’re using a marketplace that already gets lots of traffic and brand loyalty.

Your challenge is how to get your product in front of the right shoppers on Amazon. Greg said there are two main ways to do this:

Using Amazon’s paid ads – Greg doesn’t recommend this until you have some positive reviews, and obviously this will put a dent into your margins.
Organic search – Ideally this is how you want to be found. With a combination of positive reviews, a good conversion rate, and high sales volume you’ll appear higher in the search results.

Reviews, more so good reviews, are an important part of Amazon’s algorithm. Greg said in early 2020 Amazon opened up their Vine Program to everyone and made it easier to get your first 10-25 reviews.

The Vine Program gives you access to a pool of chosen Amazon shoppers that will usually leave an unbiased review of your product if you send them a free sample.

Pitching a Product Licensing Idea

Stephen likes using LinkedIn because he says you don’t have to be a salesperson to use this platform. It’s also an easy way to find the right people as it’s essentially a large database of company owners.

He recommends his students find 10-30 people who are in charge of making decisions within their company. Stephen tells them to aim for Product Managers or the Sales Teams, not necessarily VPs or executives unless it’s a very small company.

He also said to not reach out to large companies, as they tend not to license much. Mid-sized companies that want to be the big players are hungrier for ideas and faster to adapt.

Stephen then tells his students to “Start to fish, but don’t pitch. Ask them about their processes and if they’re willing to work with inventors.”

When you find the right person to talk to about your idea, you can send them your sell sheet.

Be prepared for a lot of “no’s”, with a “yes” in there somewhere. Stephen said if you’re in the game long enough, you’ll build up relationships with some companies, and eventually they’ll give you a target to hit.

Taking the Next Steps When a Company Is Interested

Most ideas will not require a physical prototype, but some will.

Stephen said, if a company needs to see a working prototype, he recommends you get it built and make a video of yourself using the product.

You don’t want to risk damaging your product in shipping or having the prospective licenser damaging it because they don’t know how to use it.

Protecting Your Idea?

Stephen said we’re all sold on the fear that any ideas we come up with will be copied or stolen. And to be sure, some will be.

However, Stephen said that “99% of all products we see get licensed, there’s no patent, and there never will be.” He also said that 97% of all patients filed never make a dime.

You’re better off focusing on creating a product companies need and demonstrating your worth and value.

Companies know that if they steal your idea, that door’s going to close and they will not be approached with future ideas.

Round 4 – Monetization

Target Profit Margin on a Private Label Product

“It’s typically around 30%”, Greg told me when I asked him what profit margin he aims for.

That’s gross margin after the cost of goods sold and other overheads are taken out of the sales price.

Looking back at last year, his actual profit margin was between 20-25%, but he shoots for 30%.

Target Profit Margin on a Product Licensing Deal

The target profit margin on a product licensing deal is as high as 10%, but typically in the 5-7% range.

Stephen points out that there’s virtually no risk involved though. The profit margin is lower, but you’re not putting up a large amount of capital to get started.

Round 5 – Risks and Threats

Risks Involved in Private Label Products

The Amazon marketplace can be ruthless. (Recommended reading: The Everything Store)

With new sellers entering daily and Amazon building out their private label lines, there’s always going to be competition.

Greg said the AmazonBasics line doesn’t get treated any differently from the other sellers, so he just sees it as one more competitor.

Copycats are a real problem though. Greg said all you can really do is try to beat them by gaining more 5-star reviews or having a faster sales velocity. This will put you ahead of them in the algorithm, but for the most part, you can’t stop copycats.

Risks Involved in Product Licensing

“The best protection for an inventor is finding that licensee that’s got great distribution and great customer service,” Stephen told me.

He does admit, as with private labeling, it’s hard to protect your idea. Stephen recommended inventors share their stories across social media and try to use news outlets to tell their stories to gain some social proof.

He’s even seen cases where members of the community have reached out to stores to let them know they’re selling copycat goods. The stores then stopped buying those goods, and in some instances started selling the inventor’s products.

Closing Arguments: Should You Start Selling Private Labeled Goods or Try Product Licensing

Greg acknowledged that there is no “one size fits all” when it comes to starting a business. He said selling private label products is best suited to operationally-minded people.

If you like following steps, building processes, and have some startup capital, he recommends trying out private labeling.

Stephen said if you’re creative-minded and don’t want to take on the risk that comes with inventory, branding, shipping, and other considerations, then product licensing is the choice for you.

The main differentiator is that licensing is about forming partnerships and working with a company that’ll do all the things you don’t want to do. While selling private label goods involves you doing almost everything yourself.

Links and Resources from this Episode

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Nick Loper

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Side Hustle Showdown: Private Labeling on Amazon vs. Product Licensing