There are many different ways to run a retail business. One model growing in popularity is consignment, where goods are “consigned” from the seller to a third-party retailer or business owner rather than sold directly. So, how exactly does consignment work? Why is it growing in popularity? And what are its pros and cons?
How Does Consignment Work?
The seller provides goods to the business owner to handle selling the items in exchange for a portion of the revenue made from the sale. The third-party retailer sells the goods from a consignment shop. This may be a physical brick-and-mortar store or an online store. No money is exchanged until after the goods are sold to consumers.
Consignment works in contrast to traditional retail, in which the business owner buys products outright from a manufacturer or supplier, selling them to consumers at a markup.
In the right circumstances, consignment can be beneficial for both the seller and the business owner. The seller receives money for their goods without running a physical shop or online store. Enlisting the help of a third-party business also allows them to reach a wider audience. For the business owner, consignment enables them to sell goods and make money without paying upfront.
The business owner typically negotiates a flat rate fee or a percentage of the revenue, known as a commission.
Business owners can offer fixed terms or negotiate deals with each seller. To ensure the deal remains profitable and they are not undercutting their services, retailers need to know how to write an estimate, their best guess for the cost, resources, and time it will take to sell the goods. With an accurate estimate in place, the business owner can determine the fee or commission they need to charge the seller.
Why Is Consignment Growing in Popularity?
Consignment is growing in popularity, with sellers looking to generate income without the complication of running a store themselves. Given the effects of the pandemic and the challenging economic outlook, consignment offers a way for everyday people to create a second income, a side hustle to supplement the salary from their primary job.
Consignment shops are also popular among consumers. They typically specialize in a particular product and are run by people with passion and knowledge for the subject area. Items commonly sold in consignment shops include clothing & shoes, jewelry, furniture, antiques or collectibles, athletic equipment, musical instruments, and many others.
Consumers looking for a different retail experience are turning to consignment shops for these items and more. Often shoppers can find unique items instead of the cookie-cutter, mass-produced goods found in traditional retail stores. Consignment shops have become trendy alternatives where consumers can find something a bit different, often at a great deal.
Consignment is closely linked to thrift stores and second-hand shops. However, many thrift stores are non-profit operations that rely upon charitable donations for their stock. Consignment shops are for-profit businesses that make a deal with sellers to split the profit from their goods.
Examples of consignment in action could be someone going through their grandparent’s unwanted belongings and finding vintage clothes and jewelry that may have value. Rather than selling the items themselves, they visit a specialized consignment shop and work out a deal with the owner to showcase the goods for a cut of the sale. Another example could be an artist looking to exhibit and sell their work. Rather than paying a gallery for wall space, they work out a deal to showcase their pieces in exchange for a percentage of any sales they make.
As you can see, consignment can be a mutually beneficial situation for both the seller and the business owner.
The Pros of Consignment
Consignment is a great option for individual sellers that do not have a brick-and-mortar presence themselves. They can get their goods showcased in a specialist shop with an existing customer base.
While they can also utilize online consignment shops, online marketplaces such as eBay have made it easy for people to sell their goods directly to others without needing a consignment shop. However, online consignment shops can simplify operations for people who don’t want to make listings or deal with shipping themselves.
For sellers, consignment is a trade-off between sharing the profit from their goods with a third party and having to sell the items themselves. It saves them the time and energy of advertising their products, researching prices, and getting the goods to the end customer. Plus, the expertise and reputation of a consignment shop can help increase the price obtained for their items.
For business owners, consignment offers a low-risk way of getting items to sell, often niche items that would otherwise be difficult to source. They do not have to pay for stock upfront, and they can often return any items that do not sell.
The Cons of Consignment
The main downside of a consignment business model is the splitting of profit between the two parties. Consignment stores can charge upwards of 50% commission, reducing profit. Sellers also have to put their faith in the business owner, relinquishing control of how their goods are marketed and sold.
Businesses relying on consignment goods are inherently depending on a volatile revenue stream. The volume and quality of consigned goods they find can vary dramatically. Additionally, they need a stock management system that tracks the original seller for each item in their store.
|Access to a pre-existing store, no need to create their own online listings.
|Reduced profit from each item due to business owner’s commission.
|No upfront payments.
|Volatile source of goods.
|Delivery of goods handled by business owner.
|Less or no control over how their goods are marketed and sold.
|Products that don’t sell can be returned to the seller.
|Tracking the original owner of each item.
|Can quickly get the items off their hands.
|Have to wait longer to receive payment.
|Improved cash flow with payment for goods after the sale.
|Potential disposal fees for unsold stock.
Making Consignment a Success With the Right Payment Structure
Consignment brings new and interesting items to the market, allowing sellers and business owners to make money from items they may have previously dismissed. However, when it comes to making it a success, it all comes down to the deal – the push and pull between the business owner and the seller to determine who takes what share of the revenue.
Whatever side of the deal you’re on, you need to push for the most favorable payment structure possible to maximize profit and build a long-lasting business model.