Consignment Selling: Your Complete Guide
One of the business models that makes it easier for artisans, fabricators, and the owners of goods to dispose of them is by selling on consignment.
This arrangement is different from the wholesale or retail sales models that most people are familiar with. In this guide, we'll be looking at the consignment meaning and value it offers to the owners of goods and to the outlets that sell them on their behalf.
What is Consignment?
Consignment is essentially an arrangement in which one party entrusts or "consigns" their goods to a third party, who contracts to sell them on the owner's behalf for an agreed percentage of the final selling price to the consumer.
In this scenario, the maker or owner of the goods in question is the "consignor". The outlet that agrees to sell the consigned goods on behalf of the owner is known as the "consignee" or consignment shop.
What gives consignment meaning and value to both parties is the agreed percentage split that they share of the proceeds of any sales.
What is consignment in the broader sense? It's a set of business models that governs the movement of goods between sellers and buyers, including retail and wholesale.
In a retail situation, the owner or maker of the goods retains sole responsibility for storing, promoting and selling the items to end buyers. As such, they get to keep all the profits that accrue from these sales and have to bear all the costs associated with their handling and distribution.
A wholesale scenario is when the owner or maker agrees to sell their items to a sales outlet for a fixed price upfront. This is typically 50% or half of the final retail price that the sales outlet passes on to the consumer.
Note that while wholesale requires the owner to sell their items to the sales outlet, goods in a consignment account are essentially consignment inventory loaned out to the consignee on the understanding that they will faithfully remit an agreed sum to the consignor on the completion of sales, and return to them any merchandise that remains unsold.
What is Consignment Inventory?
Consignment inventory consists of merchandise that is entrusted to a third-party sales outlet but which is still considered to be owned by the individual or organization that supplied the items. It's a supply chain model where the supplier retains ownership of commodities until the products have been sold.
The consignment supply chain model enables sales outlets to receive goods directly from the manufacturer or supplier. This saves the consignment shop the time, labour, and expense it would otherwise need to coordinate the shipment of inventory from third-party depots to its own warehouses.
Consignment account agreements should specify the intervals at which the consignee will make payments for any goods sold. The consignment contract should also include clauses specifying how goods are to be delivered to the consignee premises initially and picked up by the consignor if unsold or if they are being replaced with other merchandise. Other factors to consider include how the consigned goods are displayed and any special measures in place to protect perishable items and avoid general damage.
A market-responsive and seamless flow of merchandise is essential to consignment selling. This makes inventory management a critical part of the consignment equation. A software-based inventory management system can help both suppliers and sellers to keep track of their stock of merchandise and its sell-through rate – for example: the percentage of goods that a particular sales channel distributes to actual buyers. Monitoring sales channels also allows sellers to identify which products are running low and require replenishment.
Inventory management systems with stock control functionality can also enable goods suppliers and consignment shops to collaborate on the same platform. This allows stakeholders on both sides of the supply chain to stay up to date on the availability and movement of the consigned goods that are in stock.
Management platforms for consignment inventory are available for large enterprises and small and medium-sized businesses (SMBs). Most packages will include components for tracking inventory, consignor and customer management, and consignment account monitoring.
Common Products Sold Through Consignment
What is a consignment item? Broadly speaking, materials that may qualify as consigned goods can be seasonal items, hand-crafted work, or antiques. Some common products that are sold through consignment include:
- Antiques and collectable items
- Athletic equipment and sports gear
- Baby accessories and furniture
- Christmas or other seasonal decorations
- Musical instruments
What's in it for Consignors?
The ideal model for the consignment seller is to provide a sustainable and mutually beneficial partnership between makers or owners (the consignors) and the consignment shops that sell their goods (the consignees).
For the owners or consignors of the goods, there are a number of factors that make consignment selling a favourable arrangement. They include:
Reducing the Cost and Management Burden
Makers or estate sellers who rely on direct retail of their goods must take on the time, effort, and expense of storing and protecting their inventory, promoting it to the public, processing payment transactions, and organizing product delivery to the buyer. Though some of these activities may be taken on by online retail platforms such as eBay or Etsy, much of the responsibility for monitoring must still lie with the consignor.
Entrusting consignment inventory to a consignment shop allows the consignor to pass on these responsibilities to the sales outlet.
A Chance to Test the Market
If a fabricator is developing a new product or creating items for a particular niche, selling the goods on a consignment basis gives consignors a chance to test out how the buying public receives them without making a heavy financial commitment. This can be critical in assessing the market success of high-end merchandise such as furniture or jewellery.
Selling consigned goods through a major retailer or recognized consignment shop enables the consignor to expand the reach of their products to a broader consumer base. Note that such an arrangement puts the consignee in the driver's seat to some extent and may require the consignor to accept a smaller percentage cut of the sales.
What's in it for Consignees?
As previously mentioned, from the consignee's perspective, there are also benefits to selling on consignment. They include:
Taking on consignment inventory reduces the need for retail outlets to source at least some of their stock from third-party suppliers -- along with the negotiation, transport, and other costs that go with them. Goods from a consignor will also generally arrive at a faster pace. What's more, consignees do not have to pay for consigned goods until they are sold.
A Chance to Test the Market
Setting up a consignment account and consignment inventory management system enables the retail outlet to try out new product ranges and track how they perform on the sales floor.
A Guaranteed Inventory
With regularly scheduled stock replenishing by the consignor, the consignment shop is assured of having inventory available for sale at all times. Negotiating consignment deals with seasonal producers also reduces the risk of running short of merchandise during holiday and peak buying periods.
Business Model / Business Split in Consignment
Consignment selling is one of a range of business models that also includes retail and wholesale. In consignment selling, the owner or maker of the items essentially lends them out to a consignment shop, which contracts to sell them at an agreed price, then splits the proceeds in accordance with an agreed formula.
The consignment percentage split determines the proportion of payment for a particular consignment item that goes to the owner or producer of the goods (the "consignor") and the establishment that's selling it on their behalf (the consignment shop or "consignee").
Consignment account transactions for many types of goods are conducted on the basis of a 60:40 percentage split that favours the consignor. So for every 100 dollars worth of consigned goods sold, the item owner receives $60, while the consignment shop keeps $40.
Examples of Consignment
We've been speaking of it in largely theoretical and procedural terms, so here's a consignment example to illustrate those principles in action:
Matthew inherited an antique typewriter from his grandmother, which has been gathering dust in his attic for years -- but is still in perfect working condition. Unsure how to dispose of it himself, he contracts with Bill, who agrees to display the item for sale at his bric-a-brac store. The agreed split if the machine sells is 80% to Matthew and 20% to Bill. Matthew retains ownership rights to the typewriter until a sale occurs.
Within a few weeks, a customer buys the typewriter from Bill for $500. At this point, ownership of the device passes to the paying customer. Bill remits $400 back to Matthew and keeps $100 as his own commission on the sale.
Pros and Cons of Consignment Model to the Business Owner
What are the pros and cons of consignment selling for the business owner?
One of the advantages we have noted is that consignment shops do not need to make upfront payments for consigned goods, as a typical retailer would when buying stock from suppliers. This allows them greater freedom to experiment with untested products, safe in the assurance that any goods that don't sell can be returned to the consignor. Payment to this supplier can also be deferred (depending on the consignment contract), improving the business owner's cash flow.
On the debit side of the equation, the business must rely on the owners or manufacturers of the goods for a reliable stream of consignment inventory. To keep track of this part of their enterprise, they may also need to invest in some IT infrastructure and an inventory management system.
If a lot of the consigned goods remain unsold, the consignment shop owner must also make arrangements to dispose of them directly or have the consignor collect them back.
The Challenges of Selling on Consignment
There can be challenges to selling items or products on consignment as it is different to traditional trading arrangements. These include:
- The maker or owner of the items receives less revenue than they might expect from direct retail sales to consumers due to the percentage split.
- While the consignor retains ownership of their goods, they also retain the risk and can suffer losses from damage to the merchandise or theft at the sales outlet premises.
- There's no guarantee that the consignment shop will devote much time or effort to promoting the consignor's items.
- The consignment inventory being held by the consignment shop means there is no guarantee they can take your items for sale.
Precise Expression of Consignment in Law and Accounting
In accounting, a consignment account is set up to determine the profit earned or loss incurred by the consignor on a specific set of consigned goods. Essentially, this account is a kind of combined trading and profit and loss account prepared specifically for consignment business. It is a nominal account, which is to say that it is drawn up to monitor the performance of the consignment business for a specific period. Debit and credit entries in the consignment account are typically made on the basis of the consignor's own records, in conjunction with the account sales data provided by the consignee.
Placing your Consignment with Around The Block
At AROUND THE BLOCK, our CPPAG accredited appraisers have the knowledge and experience to accurately price your items so that they sell as quickly as possible while getting you the best return on your consignment.
We require all consigned goods to be in as close to perfect condition as possible within reason -- a threshold we refer to as "house ready". The better the condition of the items in your consignment inventory, the faster they will sell -- and the higher the price they will command.
We accept and consign only high-quality pieces we know will sell. You can expect the highest level of customer service in the industry as well as 60% of the sale price!
Items we accept include:
- Furniture from various styles and periods
- Lighting (chandeliers, table lamps, wall sconces)
- China, porcelain, and crystal tableware, figurines, silver plate and sterling silver
- Original artwork
- Hand-knotted rugs
- Decorative mirrors
- Home décor
- Ladies designer accessories (handbags, wallets, etc.)
- Marked costume jewellery (i.e. Sherman)
When we have received your item, the initial price is set for the first 60 days. If your items have not sold after 60 days, the selling price will be reduced by 10%. Following the initial reduction, the items will continue to be reduced by 10% every 30 days until the items have sold. Consignment account checks are mailed out automatically to consignors at the beginning of every month.
You may take back consigned goods at any time without penalty. We kindly request 24 hours notice to retrieve your item(s) off the sales floor and prepare the corresponding paperwork.
Based in Toronto, AROUND THE BLOCK has a knowledgeable and friendly staff and offers the Best Consignment terms in the city!If you're ready to get started or would like to know more, get in touch with us.