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

How Does Consignment Work?

How does consignment work? Consignment refers to an arrangement where goods are placed in the care of a store until a buyer purchases the item. 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.

So, you might be asking yourself: How does consignment work and if it is a viable option for my small business?

This article will touch explore the mechanics of consignment, its benefits and drawbacks, and provide insights to determine if it aligns with your business model and goals.

First, let’s take a look at how consignment works.

Here’s a word from Ann Eckhart about how to make money at a consignment store:

How Does Consignment Work?

how does consignment work - jewelry maker

How consignment works is pretty straightforward. Consignment, as a retail practice, offers a unique sales model.

Here’s a breakdown with some examples:

  • Traditional Consignment Shops:
    • Example: A consignor provides a second-hand shop with a doll’s house to sell.
    • Process: The item remains in the shop until it sells.
    • Pricing & Payment: If the price tag of the toy is $20 and it sells, the shop keeps 50% of the sale price. The owner of the item then receives 50%, which is $10.
  • Vehicle Consignment Dealers:
    • Example: These dealers specialize in selling vehicles on behalf of owners.
    • Process: The dealer manages the sale process from advertising to closing the deal.
    • Pricing & Payment: Instead of taking a percentage, these dealers might charge a flat fee upon the successful sale of the vehicle.
  • Artisanal Products:
    • Example: A jewelry maker who predominantly sells her creations online.
    • Process: She might partner with a consignment store to display and sell her products in a physical setting, offering local customers the chance to view and buy her pieces.
    • Pricing & Payment: The terms of payment would be negotiated, often as a percentage of the sale price, but sometimes as a fixed rental space or fee.

In all these scenarios, the original owner (consignor) retains ownership until the item sells, at which point the consignee (shop or dealer) pays them according to their agreement. This arrangement can offer increased visibility and sales opportunities for the consignor while providing a diverse product range for the consignee without upfront inventory costs.

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%.

Types of Small Businesses That Can Use Consignment

how does consignment work - toy consignment

Any small business that sells products that 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, jewelry 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.

Steps for Setting up a Consignment Shop

how does consignment work - clothing rack and salesperson

Setting up a consignment shop involves a mix of strategic planning, legal formalities, and effective marketing. Here’s a step-by-step guide to help you establish your consignment business:

Research and Planning

When setting up a consignment shop, it’s crucial to immerse yourself in the intricacies of the industry. This means understanding current trends, consumer preferences, and the overall landscape of the consignment market. Identifying a niche, whether it’s in vintage apparel, antique furniture, children’s toys, or another area, is a key step. This focus not only aligns with your personal interests but also meets the specific demands of your target market.

Business Plan Development

Developing a comprehensive business plan is vital. This plan should clearly outline your business objectives, target audience, marketing strategies, and financial projections. It should consider factors such as startup costs, operational expenses, and anticipated revenue. This step is essential for navigating the early stages of your business and setting a course for future growth.

Choosing a Suitable Location

The success of a consignment shop can be significantly influenced by its location. Look for areas with high foot traffic and good visibility. The chosen space should be large enough to display items attractively while providing adequate storage. Accessibility for both consignors and customers is also key.

Legal Formalities

Navigating the legal aspects is crucial. This includes registering your business, acquiring necessary licenses and permits, and opening a business bank account. Additionally, consider the types of insurance needed to protect your store and the consigned items.

Consignment Agreement

A well-crafted consignment agreement is critical. It should detail terms such as the sales commission percentage, item return policies, and quality standards. A legal expert’s review of this agreement is recommended to ensure it’s comprehensive and legally sound.

Store Setup

Creating a welcoming and efficient store layout is essential. Invest in quality shelving, racks, and display units, and implement a reliable point-of-sale (POS) and inventory system. The interior design should effectively showcase the consigned items, making them appealing to shoppers.

Building Relationships

Establishing and maintaining strong relationships with potential consignors is fundamental. Attend local events to network and foster transparent communication with consignors, ensuring they feel valued and respected.

Marketing and Promotion

Developing a strong branding strategy, including a catchy name and consistent theme across all platforms, is essential. Utilize social media, local advertising, and possibly an e-commerce website to promote your shop. Hosting events or sales can also attract more customers.

Operational Protocols

Establish clear policies regarding item acceptance, pricing, markdowns, and handling of unsold items. Training your staff in customer service, inventory management, and sales techniques is equally important to ensure a smooth operation.

Ongoing Management

Regularly review and refresh your inventory. Engaging with customers and consignors for feedback can lead to continuous improvement. Monitoring financials closely ensures profitability and identifies areas for growth.

Expansion Considerations

As your business grows, consider expanding to new locations, offering online sales, or diversifying your product range. This could involve exploring new niches or enhancing your existing offerings to cater to a broader customer base.

By following these steps, you can establish a successful consignment business that meets the needs of your local community while providing a sustainable and profitable entrepreneurial venture.

Remember, success in the consignment business hinges on trust. Being transparent, fair, and communicative with both consignors and buyers will pave the way for your shop’s success.

The table below provides a concise overview of the steps. You can use the key focus areas essential for a checklist for setting up a successful consignment shop:

StepKey Components/Focus Areas
Research and Planning- Industry understanding - Market trends - Niche selection
Business Plan Development- Business objectives - Financial projections - Marketing strategies
Choose a Suitable Location- Foot traffic - Visibility - Space adequacy
Legal Formalities- Business registration - Licenses & permits - Business bank account & insurance
Consignment Agreement- Sale percentage - Item return policy - Item condition standards
Store Setup- Interior design - Display units - POS and inventory system
Build Relationships- Networking with consignors - Transparent communication
Marketing and Promotion- Branding (name, logo) - Social media & local ads - Events & sales
Operational Protocols- Item acceptance criteria - Pricing & markdowns - Staff training
Ongoing Management- Inventory review - Customer & consignor feedback - Financial monitoring
Expansion Considerations- New locations - Online sales - Product range diversification

Benefits of Consignment for a Small Business

how does consignment work - benefits

The principal 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 staff to manage the shop without the guarantee of 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.

The Cons of Using Consignment

how does consignment work -pic of woman unhappy with her consignment items

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 for the successful running of your business.

Photo via Shutterstock

Gabrielle Pickard-Whitehead Gabrielle Pickard-Whitehead is a staff writer for Small Business Trends and has been a member of the team for 7 years. She is based in the United Kingdom and since 2006, Gabrielle has been writing articles, blogs and news pieces for a diverse range of publications and sites. You can read "Gabrielle’s blog here.".