Consignment is an arrangement in which merchandise is put in a store’s care up to the time that a buyer purchases these items. For an uninitiated, the term ‘merchandise’ refers to the products that are yet to be sold. A consignment business is usually a retail store specializing in a specific kind of product. That business accepts the merchandise, and they agree to pay a portion of the profit earned from the sale when these products sell.
The consignor keeps ownership of their products until that occurs. The consignee or the shop would pay the goods’ owner an agreed-on percentage of the money obtained out of the sale. Read on to know more about consignment.
In What Way Does the Consignment Process Work?
The term ‘consignment’ originates from a French word that translates to “to deposit”, meaning to take the merchandise to a particular place. For instance, a party may provide a secondhand shop with a miniature toy house for sale. The product stays in the store up to the time that it sells. Assume that $20 is the price of that doll’s house. When it is sold, the store retains 50% of that price, which gives the owner/consignor $10.
One more example is an automobile consignment dealer who sells a person’s vehicle for a linear rate or flat price. Some of the goods put on consignment are clothing, athletic gear and equipment, shoes, baby accessories, collectibles and antiques, toys, furniture and musical instruments.
How Small-Scale Businesses Can Utilize Consignment
In the event that your business lacks a physical store to sell products, selling your goods on consignment could be an option. To make their stock stronger, several retailers are ready to take new things on consignment. You would, in effect, be lending your goods to a store to sell in your interest.
Under a consignment agreement, you will not sell goods to a shop, as in the case of a wholesale contract. The retailer acts as an intermediary who will work for you to produce compensation out of the sale.
Advantages of Consignment
It makes it possible for a small business to sell products without incurring the cost of owning a storefront. This is the biggest advantage of consignment. It is risky and costly to pay shop rent and salaries to staff to handle the store without the promise of making enough sales. For many small-scale businesses, that is not feasible.
Consignment gives these businesses the chance to sell products without needing to pay property rent and staff. Rather, the consignee will pay the expenses in exchange for compensation as the goods sell.
A consignment deal enables selling goods on a sales floor, and it places the items in the presence of potential customers, thereby increasing awareness of the brand.
On the opposite and less good side, when a small organization owns a store, selling on a consignment basis enables them to do so for a wider variety of goods. This can lure more customers into your offerings, plus help distinguish your brand from competitors.
What Small Businesses Can Utilize Consignment
Any such business selling goods can be physically put in a different store, and can use consignment in order to benefit from it. Businesses that specialize in popular retail products such as toys, accessories, clothing and others can perform well with a consignment contract. Craft businesses that make homemade products like jewelry, artwork and cards are good candidates for the arrangement. Such businesses would lack the volume of products or financial means to open a store and sell online. However, they can put their goods in a brick and mortar shop through consignment.
The Downsides of Utilizing Consignment
The main negative aspect of selling products through it is that the consignor will not be able to retain every profit. The consignee can take up to 60% in exchange for selling the other party’s goods.
With consignment, the consignor will not get any amount before their goods sell. That could end up being problematic for their cash flow needs. Therefore, they should handle cash flow in a careful way to not run into such problems. If your products are stolen or lost when at a store, then it could just cost you a lot. Therefore, you must make sure that your consignment contract notes which party is liable for such products.
Consignment would not work for small businesses dealing mainly in service. It would fail to work for products, which usually cannot stand out from the competition in a good way or which are not sold in standard retail shops.
Consignment will work well only if your goods sell, so it may be insufficient to rely only on consignment deals for the successful operation of your small business.