What is consignment?
Consignment is a retail arrangement in which a person or business (the “consignor”) enlists their goods with a third-party seller (the “consignee”). If and when the item is sold, the profit is divided between the two parties according to a mutually agreed upon percentage. Consignment stores follow a model in which people bring items for the shop to sell on their behalf, and are compensated only after the merchandise is purchased. For example, clothing consignment stores are a popular form of this business type.
Common consignment arrangements
Consignment deals can be brokered for a variety of items, either new or second-hand. Some common examples include:
Equipment for hobbies like sports or music
Consignment arrangements are not limited to one kind of marketplace. Both physical stores and eCommerce platforms can use this model:
In a brick-and-mortar retail shop, people can bring their new or used merchandise to be sold by the store’s salespeople. For example, a jewelry designer looking to sell their products might speak with a local clothing and accessories consignment store about establishing a regular display case there. This allows the designer to receive a portion of the sales when customers buy the pieces, while saving on all of the overhead costs of operating a dedicated storefront on their own.
On an eCommerce platform, small businesses or individuals can usually upload their items onto a common marketplace. Just like with physical shops, sellers vary in their level of selectivity and type of retail they focus on. For example, there are online consignment stores that cater exclusively to high-end designer labels. The famous eCommerce retailer eBay has also branched out into consignment, where users can commission certified sellers to handle the sale of certain kinds of items.
Note that consignment deals are not the same as purchasing items wholesale, when a retailer might buy a large quantity of merchandise from the manufacturer or brand and sell it in their own stores at a higher price value than the items originally cost (known as a markup). In that case, the ownership of the products has fully changed hands and all profit from in-store sales will go towards the retailer.
However, under the consignment model, the retailer assumes responsibility for selling the merchandise, and the resulting profit is generally divided between the original owner and seller only after the items are sold.
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Calculating the percentage a consignment shop receives
The breakdown of the eventual profit between the merchandise’s original owner and the seller depends entirely on the seller’s store policy or a private agreement between the two parties. Usually, the total profit is split along common percentages like 50/50 or 60/40. The chosen division is generally dictated by factors like market demand, the rarity of the owner’s objects, and the prominence of the seller.
In addition to clarifying how the profit will be split, consignment arrangements should also specify the length of time the seller agrees to display the item for a potential sale before it’s returned to its original owner.
Pros and cons of consignment deals for the owner
If you have merchandise you’re looking to sell, there are pros and cons to consider before pursuing consignment.
Saves time and money you would have otherwise expended selling the items yourself.
All logistical considerations, from display to shipping, will be handled by the seller.
Avoids the need to do lengthy research to set an appropriate price, instead placing the task in the hands of someone with potentially more market expertise.
Less control over the sales process, including the in-store or online item display.
Receiving a lower percentage of the final sale.
You will only receive payment after the item is sold (if it all).
Pros and cons of consignment deals for the seller
Before opening a consignment enterprise, there are advantages and disadvantages worth considering:
More flexible business model, as retailers generally don’t have to pay upfront for items and can also send payment to owners on a monthly basis, for example, rather than immediately after each item is sold.
Can develop a reputation for niche or selective taste, especially for consignment retailers specializing in antique, vintage, or designer items.
Without an intuitive understanding of whether a product will sell, sellers can face lots of unsold merchandise and the logistical consequences of returning items to their owners.
Can require constant advertising and relationship-building with clients to ensure new inventory and requires more advanced inventory management.