What Is Consignment, and How Does it Work?

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For retail businesses considering selling consignment options to expand their customer base, it's an alternative method to traditional wholesale. Working with a supplier to sell consignment might be ideal for increasing your inventory stock and maximizing profits while not incurring additional risk. For both parties in a consignment agreement—the supplier and retailer—consignment offers several benefits, such as minimized risk, a flexible offering, and robust inventory management.

In this article, we'll explain how consignment differs from other options and its potential benefits and risks.

What is consignment?

Consignment is the process of a supplier (the consigner) handing over reduced-price inventory to a retailer. For retailers, instead of buying inventory at a wholesale price, you can consider selling items on consignment. This is a way to test new products or brands to see if your customer base purchases them while reducing your risk of purchasing new items that might sit on shelves. It's a way to expand your retail business' inventory while offering expanded customer price points.

For small retail businesses, selling consignment options diversifies your inventory, reduces your risk, and helps maximize profits. Consignment can positively affect sales, introducing new products that attract new customers. It also allows retailers to keep up with trends, purchasing items that might only be popular for a few months.

How does consignment differ from other selling methods?

Compared to direct selling, which is when a retailer purchases items upfront from a supplier, consignment is an alternative solution that provides more safety to the retailer. Instead of buying items upfront, a retailer only pays 20% to 60% of the final cost after the item sells. [1] If items fail to sell, you can risk-free return them to the supplier.

This is significantly different from direct selling, as if items go unsold, it's your responsibility as the retailer to either reduce the cost of the items or lose revenue. Consignment is a cost-effective way to stock your store without the investment of purchasing large quantities of inventory upfront. Consignment reduces risk, especially for seasonal or trending products, while maximizing profits. You're responsible for storing, protecting, displaying, and selling the products.

What is the step-by-step process of consigning items?

If you're ready to consider selling consignment, assess whether vendors in your area offer consigned goods. Also, consider that you now possess someone else's goods, which makes you a third-party vendor. You'll most likely enter a legally binding consignment agreement that protects you and the supplier. Check out the step-by-step process of selling consigned items.

A supplier wants to get rid of inventory

A supplier might have excess inventory it wants to get rid of, or some vendors operate entirely on a consignment model. Either way, a supplier might approach your retail business, or you can approach suppliers to sell their items on consignment. You might explore a supplier who sells products outside your normal inventory style or for a slightly different customer audience.

Agree on consignment terms

Through a legally binding contract, you and the supplier agree on how to sell their items and distribute payments once they are sold. This might also include legalities and insurance to protect the supplier's goods from damages, loss, or theft.

Customer buys the product

Next, you display the consigned items in your store. If a customer buys the product, you pay the supplier the agreed-upon fee after you take out your profits. If the item doesn't sell after the agreed-upon time, you can return the item to the supplier at no cost to you. If you were experimenting with a new product or style that didn't sell, you could try again with different items from the supplier.

Advantages of opting for consignment

If you want to experiment with niche items, a new brand, or a new product style, consignment allows you to do so without purchasing massive amounts of inventory that could go unsold. There are significant advantages to opting for consignment - on both the supplier's side and the retail business. Take a look at some below.

1. Improving finances

For the supplier, consignment sells their products for them with little effort. As a retailer, you can fill up your store with minimal risk and upfront investment. Instead of purchasing thousands of dollars of inventory that may or may not sell, consignment gives you products to sell without a major purchase. Plus, instead of needing large amounts of cash or credit to purchase inventory frequently, you can save that cash for other expenses and purchases.

2. Maximizing profitability

Consignment helps you maximize profitability on every item in your store. Especially if consigned items are highly profitable and top-performing, you can attract repeat customers who will come back for those items. After you make a sale, you can keep a large profit, depending on your terms with the supplier. Your business gets paid first, and then you give the fee to the supplier.

3. Reducing risk

While this item takes up space in your store, you have little risk since you can return the product if it doesn't sell. Also, if you want to experiment with new products or niche items, consignment allows you to see how these products sell with your customer base. If no one purchases, you're not out a significant monetary loss.

4. Introducing new products

If you've ever wondered whether a certain style or product line would attract more of your current customers, consignment is a way to present new options without risking your own money. Also, if you want to expand into a different demographic, you can try first with consigned items. For example, if you're a women's retail boutique and you're curious if menswear would sell as well, you can offer consigned items to gauge interest. After looking at your customer data and sales, you'll see if your current or new customers need men's clothes.

What are the risks of consignment?

While consignment has numerous positive benefits, there are a few challenges. Security and protection of the items is your responsibility as the retailer, and there's a potential risk of diluting your other store inventory. Also, finding a reputable supplier you enjoy working with might be difficult as you'll want to avoid the headache of legal and contractual disputes. Take a look at some of the potential challenges of selling consignment below.

Ensuring the security and protection of consigned items

Consignment contracts typically include insurance coverage or other protection for the items to mitigate the supplier's risk. The supplier needs to cover their items in case of loss, damage, or theft. Your supplier will want protection, especially if you store consigned goods in a warehouse or third-party location.

Diluting your pricing and goods

If you sell consignment items at a reduced price, you risk customers becoming accustomed to that lower price. If you ever purchase similar items from wholesale and need to sell them at a higher price, customers might resist a higher price. Also, if you sell consigned items at a low cost, your profit margin might be pretty slim after you pay the supplier their fee.

Legal or contractual disputes

You may run into a legal or contractual dispute with your supplier. You might incur losses if their items are damaged in your care, or if customers complain about low-quality items, you might have disputes around returns. Either way, your contract provides guidelines for your professional relationship, and all stipulations should be laid out and agreed upon beforehand.

Using consignment to your benefit

For small retail businesses, selling consignment might be a way to diversify their inventory, introduce new products, and expand their customer base. At little risk, you can sell consignment items and only pay the supplier when you make a sale. Instead of traditional swelling, where you pay upfront for inventory, selling consignment offers financial benefits and the chance to maximize profits.

To start selling consignment, approach suppliers to see if they want to consign their items. See what sells with your customer base, and if an item is popular, consider purchasing from that supplier again. You'll want to consider legal agreements with your supplier, protecting you and their items. Explore filling seasonal gaps or trendy products you're unsure will sell long-term with consigned goods.

To learn more about retail management and operating your small business efficiently, check out the below resources: