Everything you need to know about selling on consignment
Would you like to get your products on the market faster? Consignment is specifically designed to stimulate your business, boost your growth, and help manage omni-channel sales. How can you get started in consignment sales while still keeping a handle on your sales and inventory? This guide contains all the key information you need about consignment.
What is consignment?
Traditional sales are based on a simple process. A seller, distributor or retailer buys products from a supplier or straight from a manufacturer. They then take possession of the merchandise and usually need to store it before going on to sell it, which is key to making the investment profitable. Unless they opt for consignment sales.
A consignment agreement is drawn up between a consignor - who owns the merchandise until it is sold - and a consignee. This merchandise consignment agreement should include a certain number of clauses, in particular concerning:
- Payment terms;
- Delivery costs;
- Duration of the agreement between the parties;
- Insurance, including cover for shoplifting and receiving damaged goods.
More and more consignors are contacting sellers for both in-store and online consignment to improve their exposure and maximize their chances of selling. With consignment sales, the sender remains the owner of the consignment stock until it is sold by the consignee. The consignee only pays for the purchase of the merchandise once a sale has been made. They must send their revenue from the sale to the sender at the same time. If the products aren’t sold, they can be returned. This means that the consignee does not have to bear the costs associated with unsold inventory.
As the consignor retains full ownership of the merchandise until it is sold, they have the right to request the merchandise be returned at any time. There are also standards in place regarding how the consignee should store consigned goods. The consignee should keep the merchandise separate from their own products.
The consignor owns the consignment stock, which means it cannot be seized by the consignee’s creditors. It is also useful to note that consignment can also serve as a clause in a factoring agreement. Factoring is a financial transaction whereby a third party (factor) handles the collecting of a business’s accounts receivable.
Which markets and products is consignment used for?
Consignment sales are most commonly used for seasonal merchandise. This includes Christmas decorations, beach accessories, and summer clothes, as well as newspapers and magazines. All these products have a limited shelf life and carry a higher risk of remaining unsold than traditional merchandise. This is also the case for perishable foodstuffs such as meat, eggs, and fresh fruit and vegetables. Children’s consignment sales are a growing business as well.
The consignment sales model is of particular interest for large items that are expensive to store, such as furniture for example. Consignment is also becoming more widespread for products that have just been launched and for which the commercial success is uncertain.
What are the pros and cons of consignment?
The pros of consignment
- The consignor gets greater visibility for selling their merchandise.
- The consignor has more chance of convincing wholesalers and retailers to add their products to their shelves.
- The consignee does not have any storage or holding costs, which makes it easier to manage cash flow and generates less financial risk.
- The consignor can optimize their inventory rotation and there is no need to keep products in a warehouse while waiting for orders to come in.
- Consignment can be used as a testing phase to confirm a new product’s commercial viability.
The cons of consignment
- The consignor does not make any revenue until a customer buys a product from the consignee.
- The consignor needs to have sufficient cash flow to be able to wait for the potential payment of their merchandise.
- The consignee could damage the consignment stock, generating costs for the consignor in the event of unsold inventory - this is why insurance is such an important part of the consignment agreement.
- Customers could damage the products themselves while they are on display.
- The consignor may have difficulty managing and tracking their inventory, which is spread across various sites.
- The consignor has no control over where the consignee chooses to sell the merchandise.
- The relatively low risk for the consignee means they have little incentive to promote the consigned goods. They may also be tempted to push sales of their own merchandise to make their investment more profitable.
- The consignor has to make the bulk of the investment required to sell the products.
Why use specialized software for selling on consignment?
Using specialized software gives consignors greater visibility and control of their consignments. The Erplain solution offers several functionalities for optimizing your consignment sales management:
- You can create different consignee profiles and storage sites for your various consignments and optimize the tracking of your merchandise.
- You can track stock levels in real time for each point of sale and manage the receipt of items that the consignee has not sold.
- You can create a stock movement to replenish a consignment site (learn more).
- You can use the software to issue an invoice from a consignee’s storage site.
Whether or not consignment would be beneficial for your business depends on your situation. Before you get started, you need to weigh up the pros and cons of the sales model. The key word for a successful consignment is preparation. Take the time to look at different scenarios and consult an accountant for legal and practical considerations. If you decide to give it a try, specialized software can provide comprehensive support for handling your consignments from A to Z!