What is Consignment and How Does It Work?

Alibaba.com JANUARY 08, 202410 MIN READ
What is Consignment and How Does It Work?

Businesses can sell things using a variety of business models. The consignment approach is rising in popularity due to the fact that it allows producers to sell their items through a third-party channel while minimizing their expenses, like overhead. If you make or sell things, then you may benefit from knowing about consignment selling. In this article, we will discuss the consignment definition, outline how it works, list the advantages and disadvantages of consignment selling, and share tips to help you get started.

What is Consignment?

Before jumping into the consignment game, it's essential to understand the basics. So, let's start by answering the fundamental question: "What does consignment mean?"

Consignment is a business arrangement where you leave your goods in the hands of a trusted third party to sell them on your behalf. We call these goods "consigned" items. This consignment definition is pretty basic and covers the essence of the process.

So, instead of selling the items directly yourself, you partner with a retailer who displays and sells the goods in their store or on their online platform. So the retailer essentially showcases your goods and handles the selling part for you. However, there’s a little catch: when your goods are sold, the consignment shop typically takes a cut from your revenue, and the cut can sometimes be quite sizable.

To illustrate this, imagine a clothing designer who has an agreement with a local boutique for consignment sales. In this arrangement, the boutique gets to keep 40% of the profit earned from each piece of clothing they sell.

Now, consignment isn't limited to just one type of product. It's a versatile arrangement that can cover anything from artwork and trendy clothing to snazzy accessories and captivating books. Also, while some retail sales can be considered a form of consignment, it is more common practice to associate consignment with places like secondhand stores and thrift shops.

Note, however, that consignment arrangements don’t usually include big retailers like Walmart or the usual supermarkets. Superstores like these generally procure their stock directly and outright from wholesalers and then sell it at marked-up prices.

How Does Consignment Work?

In the 21st century, consignment shops have become really popular1. These shops sell all sorts of things, like specialty products, baby clothes, pet supplies, and fancy fashion items. The millennial generation, in particular, is known for being smart shoppers. Instead of shopping at expensive stores, they love finding great deals at thrift stores and consignment shops.

Economists think there are a few reasons why younger shoppers are drawn to consignment shops. One reason is that student debt is on the rise, and wages have been pretty stagnant2. Another reason is the psychological impact of the Great Recession that happened between 2007 and 20093.

When someone wants to sell an item at a consignment shop, they bring it to the shop, and the shop takes care of selling it for them. But before the shop starts selling the item, they have to agree on how the money will be split when it gets sold. It's usually a percentage of the sales price that goes to the shop owner and another percentage that goes to the seller.

Different consignment shops have different fee schedules that show how much they take. But sometimes, they're open to negotiating, especially for really expensive things like artwork. The seller might have to give up anywhere from 25% to 60% of the sale price as a consignment fee, depending on the shop and the item being sold.

Consignment agreements usually have a time limit. If the item doesn't sell within that time, the owner can take it back. But if they want to keep trying to sell it, they can agree with the shop to extend the time.

Advantages of Consignment

Selling on consignment is a fantastic option if you don't have a physical store. Nowadays, you can even find consignment arrangements online. Take Alibaba, for example. It's like an online consignment shop where you can showcase and sell your stuff in exchange for a percentage of the sale.

It's a nifty alternative because you don't have to go through the hassle of creating your own website, finding customers, or setting up payment systems. It's similar for items sold through TV channels, like the famous as-seen-on-TV products. They're also examples of consignments.

Consignment has its advantages for both the sellers (consignors) and the shops (consignees):

Advantages of Consignment

Benefits for sellers:

  • There is no need for a physical store. With consignment, you don't have to worry about creating listings on marketplaces or managing an online store.
  • Skip the marketing and advertising. Consignment shops already have their own audiences, so you don't have to spend time and effort on marketing strategies.
  • Convenient logistics. The shop that takes your items for consignment will often handle the shipping, delivery, and return processes.

Benefits for shops

  • Better cash flow. Consignment shops don't have to pay for the items upfront. If something doesn't sell, they can simply return it to the seller. Plus, they can set their own terms for payments when items do sell.
  • Build a loyal customer base. Consignment shops known for offering sought-after items can attract a motivated and repeat clientele. It's a win-win for both the shop and the customers.

Disadvantages of Consignment

Let's look at some possible drawbacks of the consignment model:

Disadvantages for sellers (consignors):

  • High fees. Consigning items may lead to lower income compared to selling directly to buyers, as consignment shops often charge steep commissions.
  • Delayed payment. Consignors have to agree to payment terms that might involve waiting a long time before receiving their money.
  • Limited customer interaction. When selling on consignment, it may not be possible to collect customer information or sales data.

Another disadvantage of consignment is that sellers can lose control over how their products are marketed and sold. The consignment shop typically takes charge of all marketing and presentation aspects. This means that the owner or producer may not have a say in how their products are presented. While some consignment agreements might address this issue, selling on consignment often means giving up a significant amount of control to the shop.

Disadvantages for shops (consignees):

  • Lack of control over supply. Consignment businesses rely on consignors to provide a consistent stream of inventory. They don't have direct control over what items they receive.
  • Inventory management. Consignees need space to store, organize, and protect potentially valuable merchandise that they do not own.

It's important to consider both the advantages and disadvantages before deciding whether consignment is the right choice for you as a seller or as a shop.

Common Products Sold Via Consignment

Consignment shops can sell a wide variety of products, but here are some common items you might find:

  • Clothing and accessories: Consignment shops are often known for their selection of gently used or vintage clothing, shoes, handbags, and accessories. You might find different styles for men, women, and children.
  • Furniture and home decor: From sofas and tables to lamps and artwork, consignment shops can be a great place to find unique and affordable pieces to spruce up your home.
  • Electronics: Consignment shops might also offer electronics such as smartphones, tablets, laptops, and gaming consoles. These items are usually tested and in good working condition.
  • Books and media: If you're a bookworm, consignment shops may have a selection of second-hand books, CDs, DVDs, and video games for you to explore.
  • Jewelry and watches: You might discover some beautiful pre-owned jewelry, including rings, necklaces, bracelets, and earrings, as well as vintage or designer watches.
  • Sports equipment: From bicycles and golf clubs to fitness gear and outdoor equipment, consignment shops can be a treasure trove for sports enthusiasts on a budget.
  • Baby and children's items: Consignment shops often have a range of gently used baby clothes, toys, strollers, car seats, and other essentials at more affordable prices.

Tips for Successful Consignment Selling

Tips for Successful Consignment Selling

Explore consignment options

You can either visit a physical consignment store or sell your items online. Before making a decision, take the time to visit the store and assess its reputation, clientele, and overall atmosphere. Consider whether it's a place you would personally shop at, as this can affect your chances of selling your items successfully. Additionally, pay attention to the condition of the merchandise, how it is displayed, and the prices of similar items.

Find the right match

Look for consignment shops that specialize in selling the same type of products you are offering. If you're selling Western-style clothing, for example, a shop that focuses on hip-hop clothing may not attract your target customers. Similarly, if you're selling antiques, avoid consigning them to a contemporary home furnishings store.

Choose a store with good foot traffic

To maximize your chances of selling your products quickly, select a store that attracts a large number of customers. Avoid consigning items to stores that haven't established themselves or have a low customer flow. If a store is difficult to find or lacks effective marketing, it may diminish your earning potential. It's important to choose retail stores where your products have a higher chance of being sold.

Prioritize product display

Ensure that your items are clean, in good condition, and well-presented to increase their likelihood of being sold. Additionally, aim to have your products prominently displayed in areas of the store that receive the most customer traffic. If possible, try to have your items included in store window displays, as this will attract even more attention.

Set a timeframe

Give the consignment store a specific period of time to sell your items. If they are unable to sell your goods within that timeframe, arrange to have them returned to you. Sometimes a lack of sales can be attributed to the wrong choice of store or location. Remember that unsold inventory means your potential earnings are "sleeping," so it's important to periodically assess and replace items that aren't selling well.

Get the agreement in writing

Regardless of your relationship with the reseller, always formalize your consignment arrangement with a written contract. The contract should outline the agreement between you and the retail store, including details such as payment schedules, responsibility for lost or stolen goods, merchandise display and upkeep, and other important terms. Familiarize yourself with the contract, including fees, pricing, and payment terms.

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FAQs

What does consignment mean?

Consignment is a business arrangement in which a retailer agrees to sell goods for a supplier, but only pays for the items they manage to sell. The unsold goods are returned to the supplier, making it a low-risk option for retailers.

What is the difference between a consignment shop and a thrift shop?

In general, consignment shops sell items on behalf of individual sellers, earning a commission, while thrift shops rely on donated merchandise from charities and non-profits and offer lower-priced items.

How does consignment selling work?

Consignment selling works by a consignee (usually a retail store) agreeing to display and sell goods for a consignor (the supplier or owner). The consignee only pays the consignor for the goods once they are sold, and unsold goods are typically returned to the consignor.

What are the benefits of selling/buying via consignment?

Selling via consignment allows vendors to market their products without needing to pay upfront, while only having to pay a commission once their items are sold. For buyers, consignment shops often provide a wider variety of unique, vintage, or designer items at lower prices compared to regular retail stores.

How is the price of a consignment item determined?

The price of a consignment item is typically determined through a mutual agreement between the consignor (owner of the item) and the consignee (the shop or individual selling the item). It takes into consideration factors like the item's original price, its condition, demand, as well as prevailing market rates for similar items.

What is the usual agreement between a consignor and a consignee?

The usual agreement between a consignor and consignee is that the consignor (the owner of the goods) will provide goods to the consignee (the retailer), who will attempt to sell the goods. The consignee only pays the consignor for the goods once they have been sold to a customer.

References
1. https://www.narts.org/i4a/pages/index.cfm?pageid=3285
2. https://www.investopedia.com/millennials-are-financially-confident-but-stressed-5224413
3. https://www.federalreservehistory.org/essays/great-recession-of-200709