What is Consignment: Business Model Explained

Consignment selling is a business model that allows individuals or businesses to lend out their items to a shop that contracts to sell them at an agreed price and split the proceeds in accordance with an agreed formula.

What Is Consignment: Business Model Explained

Consignment selling is a business model that allows individuals or businesses to lend out their items to a shop that contracts to sell them at an agreed price and split the proceeds in accordance with an agreed formula. In this blog post, we will explore the ins and outs of consignment selling, including how to price consignment items, examples of goods sold on consignment, and tips and tricks to help you succeed in the consignment business.

What is the Consignment Business Model?

The consignment business model is a type of retail business in which a shop contracts with individuals or businesses to sell their items for them. In this model, the owner or maker of the items essentially lends them out to a consignment shop, which contracts to sell them at an agreed price, then splits the proceeds in accordance with an agreed formula. As we have seen, a typical consignment percentage is split 60:40 in favour of the seller.

Benefits and Risks of Consignment Selling

Consignment selling has many benefits, such as allowing craft artists, fabricators, and private citizens looking to dispose of lightly used or estate items a chance to make money without the hassle and expense of storing and advertising the articles themselves. This can be lucrative, too, if the consignment percentage split for these goods is fair.

However, there are also risks associated with consignment selling, such as potential damage or loss of merchandise, shopper damage, and shoplifting. These risks can be mitigated by proper planning and evaluation of fairness and competitiveness of prices.

Pricing in Consignment Business

One of the more stressful tasks in consignment selling is pricing items. You don’t want to price items so low that you lose money or upset your consignors, but you also don’t want to price items so high they don’t sell. So, how do you determine the price for consignment items?

The One-Third Rule of Consignment Pricing

At my consignment shop, we sell clothing, shoes, and accessories. To establish a base price, we start with 1/3 of the item’s original retail price, then add or subtract 10% for details that affect the item’s desirability (wear, color, styling, etc.). You may need to adjust your base price ratio depending on the type of goods you sell.

Adjusting Base Price Ratio

Every consignment item is unique, so you should only take in items that you know you can sell. For example, if you know what clothing styles are popular in your area but aren’t sure about collectibles, then focus on the clothing. If you’re versed in certain styles of clothing or certain styles of furniture but not with others, stick to the items from styles you know well. You should also consider how niche an item’s style is.

Calculating Profit from Sales

To calculate profit on a consignment item, subtract the contracted payment that you must give to the owner of each consignment item from the sales price for that item. Place the difference onto the line next to the listed piece of inventory. This difference is the profit from the sale of the item, and that item’s specific inventory value to you.

Example of Consignment Pricing Formula

Imagine a consignor brings in a designer dress to a consignment shop. The original price of the dress was $100.

To determine the consignment price, the shop owner must consider several factors such as brand, age, condition, and market demand.

Step 1: Determine the initial selling price

As a general rule of thumb, consignment items are priced at 25% – 40% of the original price.

In this case, let’s assume the designer dress in excellent condition and still in demand. The shop owner decides to price it at 35% of the original price ($1,000), which would be $350.

Step 2: Calculate the consignment split Consignment shops typically take a commission based on a predetermined split.

Common splits include 60/40, 40/60, or 50/50. For this example, let’s assume the shop operates on a 60/40 split, meaning the consignor will receive 60% of the sale price, and the shop will retain 40%.

Step 3: Calculate the consignor’s earnings and the shop’s commission

Once the dress sells for $350, the consignor will earn 60% of the sale price, which amounts to $210.

The consignment shop will retain the remaining 40%, which is $140.

Getting Started with Consignment Selling

If you’re thinking of starting a consignment store, there are some things you should consider. For example, what types of goods do you want to sell? What is your target market? How will you price your items?

Examples of Goods Sold on Consignment

Consignment shops can sell a wide variety of items, such as clothing, accessories, furniture, collectibles, and more. The key is to focus on items that you know you can sell and that will attract your target market.

Consignment Selling for Small Businesses

Consignment selling can be a great option for small businesses that want to extend their inventory without the cost of purchasing the product beforehand. However, it’s important to evaluate the risks and benefits involved and to plan accordingly.

Special Considerations and Factors

When it comes to consignment selling, there are several special considerations and factors to take into account. For example, the consignment percentage split is different from a wholesalepercentage and a retail percentage. Consignment selling is one of a range of business models that include retail and wholesale. A typical consignment percentage split is 60:40 in favour of the seller, while a wholesale scenario usually involves a 50:50 split, and retail selling allows the seller to keep 100% of the profits.

Managing Consignment Inventory

One of the challenges of consignment selling is managing inventory. Since the inventory is still owned by the supplier, it does not count toward your actual inventory valuations when counting assets for financial reports or tax purposes. However, proper management of consignment inventory is crucial for internal business decisions and ensuring a smooth sales process.

Dealing with Damaged or Lost Merchandise

In the event of damaged or lost merchandise, it’s important to have a clear agreement with the consignor regarding responsibility and compensation. This can help prevent disputes and ensure a fair resolution for both parties.

Planning for Shopper Damage and Shoplifting

To mitigate the risks of shopper damage and shoplifting, it’s essential to implement security measures, such as surveillance cameras, security tags on items, and employee training on loss prevention strategies. Additionally, having a well-organized and clean store can help deter shoplifters and minimize accidental damage.

Evaluating Fairness and Competitiveness of Prices

Setting fair and competitive prices is key to the success of a consignment store. To evaluate the appropriateness of your prices, consider factors such as the original retail price, the condition of the item, and the prices of similar items at other stores. It’s also important to regularly review and adjust your pricing strategy based on market trends and customer feedback.

Tips and Tricks

As you begin your journey in the consignment business, keep the following tips and tricks in mind:

Practice Makes Perfect

Initially, consignment pricing will feel like a ton of work, but with practice, you’ll become more efficient at determining appropriate prices for items. Eventually, you’ll be able to glance at a standard item and know, without Googling and without 10%-ing, what the consignment price should be.

Go Directly to the Product Website

To get a better idea of an item’s original price, try going directly to the product website and searching for similar items. This can help you establish a realistic starting point for your consignment pricing.

Setting Prices to Sell

Remember that the goal is to sell items quickly and efficiently. Set your prices to be competitive and fair, while also considering factors such as item condition, desirability, and current market trends. Don’t be afraid to adjust your prices as needed based on customer feedback and market changes.

Importance of Consignment Selling for Retailers

Consignment selling can be a lucrative and rewarding business model if done correctly. By understanding the ins and outs of consignment pricing, focusing on items you know well, managing consignment inventory, and implementing effective security measures, you can set yourself up for success in the consignment business. Remember, practice makes perfect, and with time and experience, you’ll become more efficient at pricing items and making the most of the opportunities presented by consignment selling.

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