What is Consignment? Consignment Definition and Benefits
Are you tired of the typical business models that come with hefty startup costs and inventory risks? If so, have you considered consignment? In this brief guide, we’ll uncover the mystery of consignment and explore its benefits and drawbacks.
Whether you’re an entrepreneur simply curious about the inner workings of consignment shops or seeking a low-risk, high-reward business opportunity, we’ve got you covered. You’ll learn the basics of consignment, the opportunities associated with it, and some potential challenges you may face.
What is consignment?
Consignment is a business arrangement between two parties: a consignee (usually a retailer), and a consignor, the seller. The consignee agrees to compensate the consignor for the goods sold, usually after the sale.
Traditionally, consignment stores have been physical shops catering to a specific consumer need. However, there has been an increasing trend toward online consignment stores offering various goods.
Consignment enables businesses to profit from goods that may have been discarded or overlooked. While consignors may not receive the full value of their goods, it provides an opportunity to earn cash from unused items.
So, how does consignment work? Businesses receive items from consignors and pay them when the goods sell. Common products sold on consignment include:
- Athletic gear
- Musical instruments
- Baby accessories and furniture
Pros of consignment
The consignment model is popular for a reason among merchants and business owners. Let’s look at the pros for each party.
Benefits to sellers:
- Do not need to up a retail storefront or create listings on Amazon, Craigslist, or eBay.
- No need to deliver or ship sold items.
- Quickly get the item off hand and not stress over whether it will sell elsewhere.
Benefits to business owners:
- No need to pay for inventory upfront, like most retail stores need to.
- Can pay days or weeks after the product sells to improve cash flow.
- Can return any products that don’t sell to consignors or dispose of them.
- Can build a solid client base that regularly returns to scope out new merchandise.
Cons of consignment
The consignment model has some drawbacks, too. Below are the main ones to consider.
Drawbacks to sellers:
- Earn less than you could earn by selling directly to buyers online.
- Have to wait for payment based on the specific store’s consignment period.
- Difficulty in knowing how much money the business left on the table.
Drawbacks to business owners:
- Incur disposal fees if there is a lot of consignment inventory left over.
- Dependence on sellers to provide a steady stream of merchandise.
- Software package required to simplify tracking of merchandise.
Every consignment shop has its own consignment arrangement, but the split between the individual seller and the business usually ranges from 50/50 to 40/60 or 60/40. The success and reputation of the store often determines who gets the bulk of the proceeds.
Consignment stores are often a staple of the local community, generating profits for both seller and retailer. Naturally, higher quality goods deliver more profits to each party, since they attract more customers than standard quality items.
Consignment trends indicate greater adoption
According to the Association of Resale Professionals, demand for consignment products is on the rise. With the recession starting to show its effects, many consignment shops have opened up as entrepreneurs look to earn more income.
Although not suitable for everyone, the consignment business model can be an excellent option if you’re not looking to rely on creating or producing your own inventory. Many entrepreneurs have already jumped the bandwagon as indicated by the 7% annual growth in the number of new consignment shops. With the right strategy and approach, you can reap the benefits and minimize the limitations associated with consignment.
Consignment model FAQ
What’s the difference between resale and consignment?
The retail business model is where the merchant offers to buy a product upfront. With a consignment business model, the merchant will offer a percentage of the item’s sale.
What percentage of sales do consignment stores take?
The percentage of sales taken by consignment shops depends on multiple factors, including the season, type of item, and sales trends. Typically, stores divide consignment sales from a 50/50 split to 40/60 or 60/40.
How does a consignment store differ from a thrift shop?
The key difference between a consignment store and a thrift shop is that the former is typically a for-profit organization, whereas the latter is generally non-profit or donation-based for a charity.