Why I hate White Labeling for Startups

As an early stage investor, I meet MANY startups. Very often when I am talking to them about business model, growth plans, etc – they bring up white labeling. For many reasons, I think this is a bad idea for startups.

Other than a few select startups that start out with the sole intention of building a white label business (Cakemail has done this for email marketing software as one example), the vast majority of startups don’t think of white label on day one. They think about it when things are not going as well as planned in their core business and/ or they are approach and react to inbound interest vs looking for white label partners.

As a young startup, its tough to build market share and leveraging someone else’s customer base is tempting. But before wasting a bunch of time pursuing this strategy consider these points:

Likelihood of generating real revenue: If you’re a tiny startup with an unproven product and little cash in the bank, do you really think an established company is going to put their brand and reputation on the line and market your product?

It’s highly unlikely in my experience. You will get interest from less established companies or companies that have no technology expertise in house or other startups who like you have no customers. All of these scenarios are pretty much time sucks.

A layer between you and your users: When the customer or end user belongs to someone else it becomes really hard to make your product better. Will you get the feedback you need?

Custom requests: Every partner will have their customizations they want you to make. You don’t want this.

Exit complexity: This is a big one for me as an investor. Again, excluding pure white label businesses, if you run white label as one part of your business, it can really mess things up when it comes time to sell your business. Your direct customer relationships are easy for a buyer to understand and may be in fact what they are buying you for.

But if you have a bunch of custom white label deals, each with their own branches of software and service level agreements to maintain that can create a lot of friction for a buyer. In the worst case it can kill the deal if the buyer does not want to take on the obligations. ¬†At the least, you won’t get full value in the exit price from this business as they will likely be buying you for your direct business.

Also, what if your potential buyer competes with one of your white label partners?

There are only three scenarios for me where white labeling makes sense:

Pure white label – this is your business. Period.

Necessity – you are bootstrapping, with no intention to sell your business, no investors to manage, so you’re free to do whatever deals make sense (just remember the above caveats still apply).

To take advantage of markets that you will never enter directly. If you will never enter the Chinese market as an example, then having a partner white label your software there may be ok. You will still have issues to deal with in terms of distraction, custom requests and exit complexities.

If you’re struggling to generate revenues for your startup, please consider these points before going down the white label path.

  • Joshua Kara

    I can appreciate the information in article. Coming from nothing in my experience I would say that should I request an investor that they would be a fool for turning away if I offered a white label business plan. I took white labeling to a point where I white labeled nearly every product and service on the market in one way or another. I would say that the decision on investment would be better left on the merits a person offered in the marketing plan they proposed. I turn profits with white labels at higher margins then most of the sourced white label products themselves. To make a point I would go as far as to say that the appropriate strategy behind a white label plan can exceed by far nearly any business plan not labeled. But that’s just my experience in turning 4-5 digit profit margins

  • Lisa B

    What about the reverse scenario when others are asking to white label your own products for them?

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  • Brian Wrest

    Mark, we’ve a dog running business that is geographically limited; making it difficult to scale unless we can increase profit margins enough to hire a sales rep AND office manager in new locations/markets. So, for scalability and funds; we’re considering white labelling our business (including website, content, marketing materials, backend-payment, process documentation, etc). Would you recommend we avoid going down this road? We’ve been approached by three potential customers for such an idea in the past three months alone. We feel if someone had offered US such a product/deliverable…we’d have taken it. Pros? Cons? Many thanks in advance!

  • http://www.lunasoft.com/ Shad Vick

    Good read – I’m curious however your thoughts on private lable / or cobranding software. We have a party interested but they really want to follow our lead as they are not in the software business at all but have an audience that could use our product.

    • http://startupcfo.ca/ Mark MacLeod

      The issue is that if you’re supporting something under their brand as well as selling your own then you have a lot of complexity to manage. This will be compounded if they don’t really understand software. They will probably do a crap job selling it for you. How can you sell something you don’t understand?

      • http://www.lunasoft.com/ Shad Vick

        I see your point – they frankly are not interested in having sales reps on the brand. It’s looking more and more like a branding licensing agreement – which for us would be good either way since they have a very loyal following. We would hope for web sign-ups and would have to close any of the phone sales calls…

  • Jake

    Great read, I agree It can be risky to white label from the off. However it depends on the market ie if its a land grab product.

    Cheers – Jake at http://www.whoisvisiting.com

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  • John

    Mark, very good article. I would have to professionally disagree as I believe white labeling your services can be terrific depending on your market.

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  • Lucian Avadani

    Great Post Mark! We are currently exploring White Label opportunities for our Company/product which has passed the startup phase and established a leadership position in its core market.

    I think for entering the Chinese Market, for example, in the case of a UCG product (free website builder) this type of White Label Venture can actually work. But, more importantly, this has to be thought of as a long term partnership.

    Do you have any examples of successful long-term software/saas White Label partnerships in China? Or maybe in different markets? (We’re in the 3rd case scenario)

    Thanks in advance!

  • James

    Hi Mark,

    First of all great post.

    I would love to get your personal advice on my situation. I have launched an online marketing SaaS which is unique and the revenues/feedback has been very positive. However, its an easy product to make and I am worried about a competitor launching a white label solution and flooding the market (at the moment the market is very open). Would you advise doing a white label solution? The customer support is minimal and there are no additional custom features needed by white label buyers.
    Also are there any successful SaaS white label programs that I should look at ? Thank you in advance for your time.

    • http://startupcfo.ca/ Mark MacLeod

      Hi James,

      Hard to give you useful advice without knowing more. If you are interested, feel free to call me on clarity https://clarity.fm/#/markmacleod

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  • Mo

    Hi Mark,

    Are you saying one should not use white labels from others to enter into an existing market?
    Lots of Banks use white label products re-branded to their like to offer various services for many reasons. (speed to market, resources, knowledge gap, proprietary reasons, etc…)
    Are you saying it’s better to license a white label for re-branding, but not build white labels to sell?
    Please clarify.

    Thanks.

    • http://startupcfo.ca/ Mark MacLeod

      I’m only talking about a startup going to market selling white label software to its customers.

      • mo

        Thanks for the clarification.

  • http://breezi.com Chris Anderson

    Thanks for posting this Mark…very helpful as I'm in a position now where we're targeting partnerships, some of whom want a white label version of our product.

    The other big consideration is your pace of product development. In my company (Breezi.com), we're pushing small new features, fixes, and enhancements on a weekly (if not daily) basis, with bigger releases spaced out a bit more. If you have a lot of white labeled versions floating around, chances are you can't cleanly deploy new features very easily, and you may have lots of special terms with your white label partners to review/consider constantly. That burdens both you and your partners, and end users don't benefit from your speed of innovation (or lack thereof if you're slowed down too much).

    Related to this is support. In a white label scenario, the partner assumes the burden of technical support usually (unless you offer a white label support system too, which is yet another messy area to deal with). Which means they need to know your product inside and out, and in most cases that's going to be an ongoing time suck too because they'll regularly come back to you to check in with your internal support team on customer questions/bugs/etc. and you have to work through a middle man to identify, replicate, report and resolve bugs if that's part of your SLA.

    Thanks again, great post and discussion!

    • http://startupcfo.ca Mark MacLeod

      Hey Chris,

      Those are great points. Last thing you need is updating lots of white label partners. That's like being back in the desktop software, perpetual license days. And the support point is huge. No one can support the product better than the people who built it.

      Mark

  • http://www.yishaiknobel.com Yishai

    (1) Sometimes you don't have a choice.
    In complex industries (e.g. healthcare) where there are too many gatekeepers blocking new entrants (doctors, pharmacies, insurers), private-labeling can be just about the only channel to the customer.

    (2) If done right (including resourcing the servicing component), private labeling can be a flourishing channel. My favorite example is an unnamed startup that created private label mobile apps for middle-tier retailers for rev-share. They took into account the servicing overhead and managed to tie themselves non-exclusively to multiple revenue streams.

    • http://startupcfo.ca Mark MacLeod

      Those are both good examples IF that's your only goto market. If you go into health care with the same or similar product both direct and through OEMs it can be very messy

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  • Grant

    Agreed, but I would add that other challenges include the cost of capital and time for legal to strike the right agreement.
    The value of the channel will tend to be inflated.
    Risk > Reward

  • http://www.luclevesque.com Luc Levesque

    Good post Mark. I agree 100% and can speak from personal experience on this one. Early on, based on many member requests, I white labeled TravelPod for a dozen or so other companies.

    In the end, it added little value to our growth and more importantly, it slowed us down because we now had to deal with the overhead of managing these white label partners and the code required to support them.

    Overall a bad call on my part.

    • http://startupcfo.ca Mark MacLeod

      Thanks Luc. You're not alone in making that call. Unfortunately, I see it all too often

  • http://twitter.com/cspritch76 @cspritch76

    These are very relevant thoughts for me, Mark. I'm a co-founder with http://www.timegears.com, and we actually have a mention of a white label product "coming soon." I'm certainly rethinking that now.

    It looks like the biggest loss for a startup would be the crucial interaction with early END USERS (not always the customer). They are the ones that really determine the success or failure of a tool.

    Thanks!

    • http://startupcfo.ca Mark MacLeod

      Exactly! Early on you need to be so close to your users.

  • http://twitter.com/HowieSJ @HowieSJ

    Good points Mark, I have faced the temptations myself, and work with a lot of early stage SW COs that are in constant debate around White Label. Think your caveats cover the major exceptions well.The critical point to reinforce with companies working to develop traction, is the customer feedback loop & validation that you can only get direct. The indirect / white label model creates a filter and bias in any data or information you collect on customers / users because the real customer is the partner. Companies need to understand their customer intimately, otherwise you will die, or worse get stuck in a low growth situation (if your goal is scale). Understand the customer problem you solve, and your product's role in the solution, that is the art of business, the rest, other than people management, is academic.

    • http://startupcfo.ca Mark MacLeod

      Great comments Scott. Thanks!