Q: How Does White Label Work?

When a firm has a white label relationship they license your product under a different name and provide first-level support.

Q: How Does White Label Work?

Q: We developed a B2B product several years ago and have been successfully licensing it at $100 per month per seat. We have been approached by a company that wants to “white label” it and license it as part of the professional services packages they offer to the same industry we serve. They plan to do the selling and provide first-level support. How should we evaluate the best way to proceed?

A: Normally, a white label / OEM agreement offers a 60-75% discount and has the following elements as part of your business relationship:

  • They give the product a new name, and it’s marketed as their product.
  • They price it as they see fit (it’s their product and  does not compete directly with yours)
  • They agree to a minimum royalty structure that they pay regardless of how few they sell. Once they exceed their forecast, they pay incrementally for each license over.
  • You agree to allow for a certain number of demo and trial licenses as part of their forecast payment to equip their sales force and allow prospects to evaluate the product.
  • You retain control of the provisioning or agree with a licensing mechanism scheme that allows you to monitor how many they are provisioning.
  • They provide first-level support, and you provide second-level support: you support their team, which is supporting the product.

For the purposes of your example, let’s take a 70% discount and a 2,000-unit forecast for years 1, 2, and 3.
At the start of Q1 they would pay you 500 x (1-0.7) x $100 x 3 months = $45,000

If they sold more than 500 units, they would pay you for the total units they licensed.
At the start of Q2, they would pay $90,000: $45,000 for renewals of Q1 subscriptions and another $45,000 for new licenses in Q2. Again, if total units exceeded the forecast, they would owe you for the excess.

They would owe you $450,000 for the first year if they just met the forecast.
In the second year, they would pay $900,000; in the third year, they would pay $1,350,000.

White LabelThis is a simplified example, but it shows that these deals work because they bring significant revenue without any associated sales, marketing, or first-level support costs. There will be sales training, sales support, and second-level support, but that is normally much less than the other expenses you would incur to close the revenue.

Your numbers may vary considerably, but the critical question is: what is the total number they can sell over 2-3 years? What customers are they already in contact with or can reasonably foresee closing? If 30% of that revenue, plus or minus, changes your firm’s current revenue trajectory, it’s worth engaging in a serious negotiation. There are other options to consider depending upon their capabilities and goals and your capabilities and goals: volume purchase, reference selling, reseller, master distributor, and ingredient branding, to name some common ones.

Q: I thought we might pay them a 20% commission on sales. 

A 20% offer is more in line with what you would offer a rep or first-tier reseller selling your product without a committed forecast.

Q: Because we still need to provide second-level support and host the application, I worry that with a 70% discount, we would lose money on every sale.

You have been in business for several years and understand your costs. Usually, the costs associated with customer acquisition and onboarding are a significant fraction of revenue, which are the costs the OEM or white label partner bears. If, in your situation, your hosting and costs for non-standard service (second-level support) are significant, then the discount you can offer for the white label should reflect that.

Q: How do we minimize conflict with this other company if they want to sell into the same industry?

A: You are not offering them exclusive distribution rights to your product; you are granting them the right to re-license your technology under a different name. They will mix it in with their services to create a unique offer. There is some risk of conflict, but there is also guaranteed revenue.

It’s a viable strategy in many situations and can help a smaller firm access customers they might not reach for years (essentially pulling forward revenue). It also shifts a significant fraction of the cost (sales, marketing, and first-level support) to the partner.

It resembles a master distribution agreement for a territory or market segment, another strategy that can be used to reach adjacent markets where your firm lacks reputation and perhaps relevant expertise.

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