You’re in the grocery store shopping for cereal.  Your 8-year old boy is talking about how excited he is to have a bowl of Lucky Charms when he gets home.  To his disgust, your throw a bag of “Marshmallow Mateys” into the cart.  He starts crying because it’s not Lucky Charms but you tell him it’s just like Lucky Charms only cheaper.  He’s not buying it, so you end up buying Lucky Charms.  But why was the private label brand so much cheaper?

First of all, we must learn what a private label brand is.  The name is deceptive.  Cinnamon Toast Crunch is just as private as “Cinnamon Toasters”.  A private label product is a product meant to compete with an established brand.  Often, this product is the result of a company in the supply chain of the established brand trying to compete with the brand.  It’s of course best illustrated with an example.

Let’s say I’m General Mills and you’re Wal-Mart.  I love selling my cereals to you and you love buying them from me.  We are a part of the same supply chain and we both make a buck off the cereal.  But, as Wal-Mart, you want to also offer an “off brand” cereal that is 99% the same as my General Mills stuff, only for cheaper.  In order to meet demand for our cereals, we sometimes contract out the manufacturing to other companies capable of making our cereal.  These facilities aren’t always running at 100% capacity, and so you ask the company to make the same cereal for Wal-Mart when I, as General Mills, am not using them.  Depending on the product you might use the exact same ingredients or switch it up just a little bit to avoid being sued by me.  At Wal-Mart, you sell your cereal under the brand “Great Value”.

So why am I selling my cereal at $4 a pop while you can sell at $2.50?  Well for one thing you might be making the product for cheaper.  Perhaps you used cheaper ingredients.  But for the most part I am an established brand.  I do marketing, advertising, and throw a free toy in the box.  This branding exudes an aura of quality, which sometimes is true, and sometimes not.

Ultimately, I charge $4 because people will still buy my product at $4.  Your product is just copying mine and in a brand conscious market such as cereal, I’m able to command a premium because of this.

The private label brands vary greatly in quality and price.  You can find some private labels that charge very close to the established brand’s price and other products sold for less than 50% of the price.  How do you know when to get private label or not?  Well I own tons of off-brand and name-brand things and can tell you the difference is sometimes hard to tell.  Sometimes it’s obvious, Frosted Mini-Wheats makes the best of its kind.  Other times it’s not, Great Value window cleaner works just as good as Windex.  Because of the pricing it’s worth it to try the private label stuff at least once to see if it works for you.

The most revealing thing about private labels is that they are so frequently made by the same company that makes the stuff for the name brand folks.  In 2007, there was a massive pet food recall by a company called Menu Foods.  Do you know how many different brands had to be recalled?  Over 100.

So give private label a shot, most of the time it’s worth it.  But don’t try to convince your 8 year old of that.  As a former 8 year old, we don’t understand.

Photo: nightmare

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics.

categories: business