How Does Consignment Work and is it an Option for Your Small Business?

Consignment refers to an arrangement where goods are placed in the care of store until the item is bought by a buyer. The owner of the goods — the consignor – retains ownership of the items until they sell. When the item sells, the shop or person who sold the product — the consignee — would pay the owner an agreed upon portion of the proceeds from the sale.

How Does Consignment Work?

For example, a consignor may give a second-hand shop a doll’s house to sell. The item remains in the shop until it sells. The price tag on the toy is $20. When it sells the shop keeps 50% of the sale price, giving the owner of the item their 50%, equating to $10.

Another example is a vehicle consignment dealer, which sells an individual’s car for a flat fee. Or a jewelery maker who sells her items online could use a consignment store to sell her products locally on a shop floor.

How Small Businesses Can Use Consignment

If your small business does not have its own shop or physical place to sell goods, an option could be to sell your products on consignment. To strengthen their stock, many retailers are willing to accept new items on consignment. You would effectively be lending a store your products to sell on your behalf.

A consignment contract differs from a wholesale deal in that you are not selling your products to the store. The retailer is acting as a third party, an intermediary working on your behalf to generate compensation from the sale, which is typically from around 20 — 60%.

Benefits of Consignment for a Small Business

The principle benefit of consignment is that it enables small businesses to sell their goods without the expense of having their own storefront. Paying rent for a store and payroll for a staff to manage the shop without the guarantee to making sufficient sales, is costly as well as risky, and for many small businesses, isn’t a feasible option.

Consignment gives small businesses the opportunity to sell their goods without having to pay rent on premises and staff. Instead, the consignee pays the costs in return for compensation when the products sell.

As well as being able to sell products on a physical sales floor, a consignment contract puts your products in front of customers and prospective customers, thereby raising awareness of your brand and products.

On the flip side, if a small business owns a shop, selling on consignment allows them to sell a wider range of products. This can attract more customers and help differentiate them from the competition.

Types of Small Businesses Which Can Use Consignment

Any small business that sells products which could be physically placed in another store could potentially use consignment to their advantage.

Businesses specializing in clothing, toys, accessories and other popular store items, can do well with consignment contracts. Craft businesses making homemade items such as cards, jewelery and artwork are also good candidates. These businesses wouldn’t have the financial means or volume of goods to open their own shop and typically sell online. But they can rely on consignment to put their items in front of customers in a physical store.

The Cons of Using Consignment

The biggest disadvantage of selling your products through consignment is that you don’t get to keep all the profit. Consignees can take as much as 60% in compensation for selling your products, costs which need to be factored in when determining how much it costs you to make or purchase the items in the first place.

With consignment, you won’t receive any money until the items sell. This could potentially prove problematic for cash flow requirements and you therefore need to manage cash flow carefully to avoid running into such issues.

If your goods become lost or stolen while in a store, it could cost you out of pocket. It is therefore important that you ensure your consignment agreement notes who is responsible for lost or stolen goods.

Of course, consignment wouldn’t work for service-led small businesses. Nor would it work well for any products not generally sold in retail stores or not able to stand out well from other retail products in a store setting.

It is important to remember that consignment only works well if and when your products sell, so relying solely on consignment contracts may not be sufficient in the successful running of your business.

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This article, "How Does Consignment Work and is it an Option for Your Small Business?" was first published on Small Business Trends