Consignment is term used when a business (also known as a consignee), agrees to pay a seller (known as a consignor) the cost (or a percentage of the value) of the merchandise after they’ve sold the items on.
The kinds of brands that use the consignment business model tend to be traditional retail stores specializing in specific consumer products or stores selling second-hand goods.
Here are a few examples of products that are often sold through consignment:
- Musical instruments
- Sports equipment
- Baby accessories
Each pricing arrangement is specific to the retailers and sellers involved in the agreement, however, it’s typical to split the revenue 50/50, 40/60, or 60/40.
The Advantages of the Consignment Business Model
There’s no need to pay vast sums of money upfront to cover your inventory if you sell consigned goods because you only pay the consignor once you’ve sold the product. Then, if there are any products you don’t sell you can return to the seller which leaves you without unsold inventory. This provides the scope and flexibility to continually change your merchandise without the monetary limitations that most business models have.
In light of that, it’s no surprise that more and more retailers are using the consignment business model. According to the Association of Retail Professionals, there’s a 7% increase year-on-year of the number of consignment stores opening.
However, there are significant disadvantages to the consignment model. Namely, you’re forced to rely on the seller to provide you with a steady stream of products, so if they mess up, it can have a drastic effect on your business. You may also have to pay disposal fees if there’s a lot of merchandise left over, which can quickly eat into your profits. So, be sure to factor these limitations into your decision before committing to a consignment business model.