Consignment inventory and how it could help your small business
If your business doesn’t have its own storefront, you may want to consider selling a few items on consignment. You may have heard of consignment stores in the context of second-hand goods, but many retailers are also willing to take new products on consignment, as a way to bolster their own stock. This is a situation where you (the product owner) act as consigner, and you lend your products to a consignee (the store) so that they can sell them on your behalf.
A consignment contract is different from wholesale because you aren’t actually selling your products to the store. They aren’t your customer, but rather acting as your intermediary, or salesperson. Your customers are actually their customers, and you aren’t paid unless the products are sold by the store. In exchange for holding the products and selling them on your behalf, the store will charge a percentage of the final selling price (it can vary from about 20-60%).And
What’s the benefit for the consigner (you)?
Given capital constraints, it can be risky for a small business to rent a storefront so that customers can come and see your wares. These are fixed costs that your business would do well to avoid, because you’ll always have to pay rent and your staff’s hourly wages, but you’re not guaranteed to make sales.
Consignment can work in your business’ favor because you don’t need to pay full price to rent floorspace or hire salespeople. The consignee assumes those costs for you, and they will hold your products as part of their existing stock.
Having your items on a physical sales floor can be a huge advantage because you’re getting your product in front of customers, in a space where they’re already leaning towards a purchase (i.e. shopping in a store). This is especially true if your goods were previously only sold online, where customers would not have a chance to have any hands-on time.
What’s the benefit for the consignee (the store)?
As mentioned, retail stores have to pay up front for their own stock, as well as pay for the floor space and the people who will manage checkout and sales. This is a significant amount of capital that’s tied up each month, so having items on consignment is a great way for retailers to bolster their own stock, without significant up-front cost.
What’s more, if the items on consignment don’t sell after an agreed-upon period of time (typically 30-90 days), the consignee will hand the products back to you (the consigner). They don’t have to worry about the product becoming irrelevant or out of season and losing out on an investment, because you (the consigner) assume that risk for them.
What to expect from a typical consignment contract
Consignment contracts vary from store to store, and also based on the type of products being sold (clothing, jewelry, etc.). However, in any given contract, there are a few factors you will want to consider.
You’ll want to determine that percentages up front. Consignees can take anywhere from 20-60% of the final sales price, and you’ll want to see whether they lower prices after a given period. This will help you gauge whether or not you can stand to gain money from a sale, or if you might be selling at a loss (in which case, consignment with that store is more of a marketing tactic, to gain exposure for your business). Certain consignees may also charge extra fees for:
- storing your product on site (for large items like bikes)
- taking pictures of your product for marketing purposes
- an admin fee for taking the time to consider your products
This list isn’t meant to scare you off, and you may not find all of those fees at a single store. It’s just wise to be aware of the kind of fees that can come into play in consignment.
Another important aspect to discuss is the consignment period: these tend to range from 30-90 days (1-3 months), and these terms will dictate the amount of risk your business takes by handing products over for consignment.
Longer consignment periods can mean less inventory management for you. But the longer your items stay on shelves, the more chances they have of being damaged or possibly stolen. Seasonality may also play a factor: getting Summer clothes back when it’s time for Fall isn’t necessary useful to your business.
Short consignment terms (ex. 30 days) need to be followed up on, or returned, and that can take up your time with administrative work. If you spend a day following up on inventory, that’s one day that could otherwise have been spent making something. Some consignees have special apps to help you keep track of which products have sold or when a consignment period is ending, and inFlow has a few handy workarounds to help track where your products are.
Consignment as an investment
Selling on consignment isn’t necessarily a way to do business full-time because it can be quite time-consuming, and it isn’t a guaranteed return. However, it can still be a good investment. If you’re trying to branch out and create more avenues for customers to find your product, or to find businesses to buy your product wholesale, then you could view consignment as part marketing spend, and part business investment.
The customers that walk into your consignee’s store may not be the same people who would visit your website, but they may still be interested in your product. Consignment allows you to get your products in front of potential customers without any major marketing budget or wholesale agreement — just the cost of the goods on consignment and a few fees.
Similarly, consignment may open doors to new wholesale opportunities, where shops agree to purchase a minimum amount of your product up front. A shop may not initially agree to a minimum order if you don’t have a reputation or pre-existing relationship with them, but they may consider taking a few items on consignment. If your products do well and bring more people into the store, you may be able to pivot from a consignment contract into a wholesale relationship down the line.
Just like Drop Shipping, selling on consignment isn’t a magical formula for success, but it is a worthwhile option to explore while your business is growing.