What is OEM? Explaining the differences from ODM and private brand management, and the benefits of starting

When you want to sell your own original products on an e-commerce site, the keyword you hear is "OEM." Many products around us, from apparel and cosmetics and food to home appliances, are made using OEM mechanisms. Especially in recent years, with the rise of D2C (Direct to Consumer) businesses, there has been a sharp increase in cases where companies and individuals without their own manufacturing plants are leveraging OEM to launch their brands.

In this article, we thoroughly explain the basics of OEM, the differences from "ODM" and "PB," and the advantages and disadvantages of both the client and contract providers, aimed at businesses who want to launch an e-commerce business or develop their own brand products. Furthermore, from the perspective of payment experts, we will thoroughly explore the "payment strategy" and how to choose a payment processing company company (PSP) to maximize sales on your own e-commerce site selling OEM products and reduce the practical burden on accounting staff.

What is OEM (Original Equipment Manufacturer)? Basic knowledge and meaning

Definition of OEM and Business Model

OEM (Original Equipment Manufacturer) literally refers to a company that manufactures products under brands other than its own, or "manufactures products under other brands." Generally, it is widely recognized as a business model where companies that plan and design products or own the brand (contractors and brand manufacturers) outsource only the actual manufacturing process to another company (contractors or OEM manufacturers).

By focusing on planning, marketing, and sales, while manufacturers focus on efficient mass production systems, the strengths of both can be maximized.

Applications in diverse industries such as apparel, cosmetics, and food

OEM is utilized across a wide range of industries closely connected to our daily lives.

• Apparel & Miscellaneous Goods: It is common for apparel brands to specify design patterns and materials, and then outsource manufacturing to domestic or international sewing factories.
• Cosmetics & Cosmetics: Decide on ingredient formulations and package design, and outsource manufacturing to specialized factories with cosmetics manufacturing licenses and equipment. This OEM is also utilized when beauty salons and influencers produce their own shampoos and cosmetics.
• Food & Supplements: This is a pattern where original retort curry, seasonings, or health foods are manufactured by a food processing factory. Recently, OEM products that utilize local specialties have also increased.

In this way, OEMs can quickly bring original products to market with minimal initial investment, making it a highly effective method regardless of industry.

Clear differences between "ODM" and "PB" that are easily confused

When researching OEMs, you often come across similar terms like "ODM" and "PB." Let's clarify the differences so that misunderstandings do not arise when defining business requirements.

Differences from ODM (Original Design Manufacturer)

ODM is a system where the contract provider (manufacturer) undertakes not only manufacturing but also the product from the "planning, design, and development" stage. The client can only provide their own brand name and sell professionally designed, highly refined products under their own brand, even without advanced expertise or know-how for commercialization. While this reduces the workload for contractors compared to OEM, it tends to make it harder to showcase product uniqueness.

Differences from Private Brands (PBs)

PB (Private Brand) does not refer to manufacturing methods, but rather product brands independently developed by "retailers" such as supermarkets and convenience stores. (Conversely, brands independently developed by manufacturers are called national brand NBs.) Since retailers often do not own their own factories, when planning and developing private brand products, it is common to outsource manufacturing to major manufacturers that produce national brands under the form of "OEM." In other words, OEM exists as one of the means to bring PB products to market.

Benefits of Businesses Introducing or Contracting OEM

OEM business brings significant benefits to both the client (contract and brand companies) and the manufacturer (contract and manufacturing plants). We will explain from each perspective.

Benefits for the client side (reduced initial investment, more concentrated resources)

1. Significant capital investment and labor costs can be reduced
Building factories, equipping manufacturing facilities, and employing skilled artisans and workers requires enormous initial investment and maintenance costs. By leveraging OEMs, you can completely avoid the risks associated with these fixed costs (facility costs) and externalize only the necessary portion as variable costs.

2. Focus resources on planning, marketing, and sales
By letting go of manufacturing expertise and production management operations, you can devote all your internal talent and funds to the core tasks of your brand—product planning, promotion, improving your own e-commerce site, and customer service—to 'generate sales.'

3. Ability to conduct test marketing in small lots
Some OEM manufacturers may support small-lot production (such as in hundreds of pieces). This allows you to quickly conduct test marketing to observe market reactions while minimizing the risk of holding large inventory.

Benefits for the contractor side (improved utilization rate, accumulation of technical capabilities)

1. Improved Factory Utilization and Productivity
If manufacturing only in-house brand products creates gaps on factory lines, outsourcing OEM production from other companies maximizes the utilization rate of machinery and personnel and secures a stable revenue infrastructure.

2. Reducing Sales and Marketing Costs
OEM contract manufacturers can reliably generate sales by producing and delivering the product. Since there is no need to bear sales risks such as brand building, advertising, or holding inventory for sales, stable cash flow can be expected.

Disadvantages and Challenges of OEM

While there are many advantages, OEMs also face unavoidable structural disadvantages and risks to be aware of. It is important to understand these correctly before implementation.

Disadvantages for the client side (lack of production know-how, declining profit margins)

1. The company does not accumulate manufacturing and technical know-how
Because all manufacturing depends externally, no technical expertise remains in-house. When you consider "owning your own factory and making it in-house in the future," you will face the high hurdle of building know-how from scratch.

2. Lower profit margins compared to in-house manufacturing
Because the contract manufacturer's profit margin is added to the cost price, compared to handling everything from manufacturing to sales in-house, the gross profit margin for the product is inevitably lower.

3. Difficulty in Quality Control
Because production is done in external factories where they cannot be overlooked, there is a risk of product quality variations or delivery delays. It is essential to identify reliable partners (OEM manufacturers) and establish thorough communication and quality control systems.

Disadvantages for contractors (inability to develop their own brand, risk of price competition)

1. Developing your own brand is postponed
Since OEM production plays the role of a 'hidden pawn,' no matter how high-quality the product is, it is the client brand's name that is recognized by the public. Your company's brand awareness will not increase, and you may lose opportunities to grow your own branded products.

2. Relying on the performance and price negotiations of the client
If the sales of the client brand decline, order volumes will noticeably decrease. Additionally, compared to competing OEMs, they are vulnerable to price competition, such as being required to implement strict cost reductions (unit price reductions).

The importance of payment when selling OEM products in the e-commerce business

Even if you leverage OEM to develop attractive original products and launch your own e-commerce site, that alone will not succeed in your business. payment experience sales can be a factor that determines sales for end users who add products to their cart, helping them "complete the purchase smoothly to the end."

Preventing "cart abandonment" with diverse payment method

Data shows that when end users reach the payment screen of an e-commerce site, about 70% give up on purchasing and leave without their usual payment method (cart abandonment). Even if you go to the trouble of making excellent products through OEM, losing sales due to the inconvenience of payment is a total loss.

Credit card payment is essential, but in recent years, with the spread of smartphones, more end users find entering card information troublesome. Therefore, the introduction of "〇〇Pay / ID payment," which completes payment instantly with only ID and biometric authentication using Amazon Pay, Apple Pay, and PayPay, directly leads to a dramatic improvement in conversion rates (CVR). Also, for younger people who do not have credit cards or who feel uneasy about entering a card on a site for the first time, preparing a "buy now pay later payment" is a very effective strategy.

recurring payment and account update in Subscriptions (subscription)

When handling OEM products such as cosmetics, supplements, and food, adopting a "subscription (subscription)" model where products are delivered monthly for a fixed fee can maximize customer lifetime value (LTV). Supporting this model is the "recurring payment" system, which automatically processes monthly payment.

Furthermore, by introducing a payment system equipped with a "account update (reroll)" feature that automatically updates card information to the latest when an end user's credit card expires, it is possible to strongly prevent customer churn caused by unexpected payment errors.

How to Choose a payment processing company Company (PSP) to Lead Your OEM Business to Success

When implementing diverse payment method on your own e-commerce site, it is not realistic to contract and systematically integrate with each card company or payment institution individually, as it would require excessive development costs and practical effort. Therefore, it is essential to utilize a "payment processing company Company (PSP)" that consolidates multiple payment method and provides them in one place.

Centralized management by Online Payment Service

When choosing a payment processing company company (PSP), the rule is to choose a "Online Payment Service" that allows you to implement Credit card payment, CVS Payment, buy now pay later payment, various 〇〇Pay/ID payment, and more in one system or contract. Sales data, closing dates, and payment dates for multiple payment method are integrated into a single management dashboard, dramatically reducing the burden of sales clearance and monthly closing tasks for accounting staff. In OEM business, concentrating resources on product development and marketing is paramount, so selecting a PSP that can streamline back-office operations is extremely important.

Robust security and EMV 3-D secure support

When operating your own e-commerce site, there is always a risk of credit card fraud by third parties. If a fraud occurs, the losses from chargeback (sales cancellations) will be borne by the business owner, greatly squeezing profits. Therefore, choosing a PSP partner with a solid security foundation capable of smoothly implementing the latest identity authentication scheme, "EMV 3-D Secure," and capable of withstanding large-scale access concentrations and cyberattacks, is an absolute condition for business survival.

payment For infrastructure building, GMO Payment Gateway is the way to go.

Businesses utilizing OEM are highly attractive models that allow you to showcase your unique brand value while keeping initial investment low, and achieve high profit margins. However, behind the scenes, what supports this growth are smooth payment experiences that don't hinder end users' desire to buy, and robust infrastructure of payments that don't overwhelm business operations.

As a leading company in payment processing industry, we at GMO Payment Gateway (GMO-PG) have continuously supported the growth of numerous e-commerce businesses from a payment perspective. Our "PG Multi-Payment Service" offers not only bulk deployment of diverse payment method but also advanced recurring payment features, automated account update functions, and the highest domestic security environment.

If you are a business launching a new business using OEM, or if you are facing payment challenges in increasing sales or preventing abandoned carts in your own e-commerce, please feel free to consult with our Actual extensive GMO-PG. We propose the optimal payment strategy for your business model and support your outstanding business growth.