When it comes to starting a business, there’s no shortage of business models to consider. Some entrepreneurs may choose the dropshipping route, while others may want to invest in growing a traditional brick-and-mortar store.
One type of business model that continues to grow in popularity is what’s known as consignment. In this brief guide, we’ll cover what a consignment is, as well as look at its pros and cons.
Whether you’re looking for your next business idea or just want to understand how consignment shops work, be sure to read on to learn more.
What is consignment?
Consignment is a business model in which a retailer, also referred to as a consignee, agrees to pay a seller, or consignor, for merchandise after the item sells. Consignment shops are typically retail stores that specialize in a particular type of consumer product. However, there has been a rise in ecommerce-based consignment shops over the past several years.
The consignment model is effective in that the business turns otherwise unwanted or needed items into profit. Consignment arrangements generally do not give the sellers top dollar for their items, but they do give sellers the opportunity to make some cash for items that may otherwise go unused or donated in the future.
The consignment business accepts items for sale and agrees to pay the seller a percentage of the proceeds if and when the goods do sell. Consignment is often referred to as a thrift or second-hand store, however it should be noted that a thrift store generally refers to a non-profit organization, whereas consignment shops are typically for profit orgnaizations.
Common products sold through consignment:
- Athletic equipment and gear
- Baby furniture and accessories
- Antiques and collectibles
- Musical instruments
Consignment pricing arrangement
Each consignment shop ultimately creates their own consignment arrangement, but the typical split between the business and the individual seller ranges from 50/50 to 40/60 or 60/40. Who gets the bulk of the proceeds often depends on how established and successful the store is. Consignment shops generally have a significant impact on the local economy, and the most well known stores are often a staple of the community.
Not to state the obvious, but the higher the demand and quality of the item you're selling, the higher the profit for both retailer and seller.
Pros of consignment
The consignment mode is popular for a reason. Let’s look at the pros for both the business owner and seller.
Pros to business owners:
- No need to pay up front for inventory to sell, as most retail stores need to
- Any products that don’t sell can be returned to consignors or disposed of
- Can build a solid clientele who return regularly to scope out the changing merchandise
- Payments can be made days or weeks after the item sells, improving cash flow
Pros to sellers:
- No need to spend time creating listings on eBay, Etsy, or Craigslist to sell items, or setting up a retail storefront.
- No need to ship or deliver sold items.
- Sellers can get the item off their hands quickly and not have to worry about whether or not an item will sell elsewhere.
Cons of consignment
There are some downsides to the consignment model to consider.
Cons to business owners:
- Dependence on sellers to provide a steady stream of inventory.
- Disposal fees if there is a lot of merchandise left over, which can be reduced by donating leftovers to charity.
- A need for a software package that makes keeping track of merchandise easier.
Cons to sellers:
- Receiving less than could be earned by selling direct to buyers online.
- Having to wait for payment based on the consignment period established by the specific store.
- It's difficult to know how much money the sellers left on the table.
Consignment shop trends
Demand for consignment goods is on the upswing, says the Association of Resale Professionals. With the pandemic still affecting the economy, people are looking to consignment as a means to generate extra income. Growth in the number of new consignment stores is currently around 7% annually, with many consignment shops continuing to be established on a regular basis.
While not the right business model for everyone, the consignment model can be a great option to consider if you’re looking to not have to rely on producing or creating your own inventory to sell.
Consignment model FAQ
What’s the difference between a consignment store and a thrift shop?
The main difference between a thrift shop and a consignment store is that consignment stores are typically for-profit organizations, whereas thrift shops are generally donation-based for a charity or non-profit.
What percentage of sales do consignment stores take?
The percentage of the sale that consignment shops vary depending on a wide variety of factors, such as the item, season, and overall sale trends. In general, stores split the sales anywhere from 50/50 to 40/60 or 60/40.
What's the difference between resale and consignment?
With a resale business model, the business generally offers to purchase an item upfront. With a consignment business model, the business will offer a percentage of the sale of the item.