Consignment Definition: What Does Consignment Mean
What Is Consignment?
We can define consignment as the process of selling on behalf of someone else for some percentage of sales. Consignment is any business arrangement whereby manufacturers or retailers leave their merchandise to third parties to sell for them. Manufacturers or retailers are called a consignor while the sellers are called consignee.
Consignments are usually contract based between a consignor and consignee and they will split revenues according to the agreement. Consignees take percentages from recorded sales only.
Consignment Business Model
Consignment business model is mostly for retail store owners and they supply other retailers or individuals to sell their goods. The consignee doesn’t pay any upfront payment and can return goods if sales are not recorded at no additional cost.
Now, most brands use the consignment business model online. Ecommerce giants such as eBay, Alibaba, and Etsy adopt this model by allowing brands sell goods on their ecommerce website.
What Is a Consignment Store?
A consignment store is a business store that markets and sells goods or merchandise for commissions from sales price. Store owners do not need to own goods and don’t pay any fee for goods supplied. Suppliers ship goods to stores and get paid after sales are made.
Consignment stores provide customers with an attainable means of sustainable shopping. Customers tend to shop better from less expensive stores.
Consignment Payment Structure
A manufacturer or retailer delivers goods to consignment stores or third parties; the two parties set up a contract which denotes how revenues from sales will be split. Most times, a standard fee is scheduled by the consignment store.
Conversely, if the consignment store doesn’t have a regular fee it charges, negotiations with suppliers can be done. Most sellers charge between 20 to 60% of sales price as consignment fees leaving the remaining percentage for stores.
Examples of Consignment
A very good illustration of consignment is, say company C finds it difficult to market its products eventually making little to no sales. Then company C decides to approach store S to fix their lack of sales. Company C knows store S has significant reach and can promote products much better.
Company C and store S make an agreement and sign a contract lasting for 4 weeks. Company C proceeds to ship an agreed amount of goods to Store S who markets for the stated period.
Afterwards, as Store S markets and sells goods, it takes the agreed percentage and pays company A. Once the stipulated time frame is reached, leftover goods are retired at no additional cost.
Advantages of Consignment
Increased market visibility
Consignment gives manufacturers or retailers more reach and improved market visibility for their products. Consignors place goods in consignment stores, who help them market their products at no additional cost.
Selling more seasonal products
Seasonal products have demand fluctuations since they are needed during certain periods of the year, so most sellers avoid selling such products. With consignment, retailers can stock up seasonal products and sell through this business model.
No marketing plan needed
Selling with consignment doesn’t require any marketing plan. Retailers and manufacturers simply need to move their goods into consignment stores to sell for them.
Elimination of on-hand inventory
Before consignment came along, manufacturers and retailers store their goods in warehouses, then they make deliveries to customers when orders are made. Now, they can take inventory off their chest by placing them in consignment stores.
Elimination of delivery costs
Consignment helps wholesalers reduce their delivery costs. They do not need to worry about shipping costs. They only move goods to consignees who are marketing and selling.
Disadvantages of Consignment
Delay in revenue
As a consignor you only get profits on products sold after the agreed timeframe. Percentage of sales are gotten only when consignees complete the timeframe.
A consignor ships goods to consignment stores and sets time for sales to be made. If a consignee fails to sell all goods before that stated period, those goods are sent back to consignors.
Reduction in revenue
A consignee only helps to sell a consignor’s goods and leftovers are sent back after agreed period lapses. Consignors only earn percentages from sales made rather than getting total profits if they sell themselves.
A recent report by Association of Retail Professionals, NARTS, stated that there is a rise in consignment good’s demand and there is a projected growth of 7% annually over the past two years.
It was also reported that the consignment market was worth $24 billion in 2018 with a projection of $64 billion by 2028.