Consignment sales are an agreement in which one party (the consignor “client”) provides items to another party (the consignee “seller”) to sell. In return, the seller receives a portion of the sale price as a commission for their work in selling the item.
Consignment is great for some resellers specifically, those who lack the time to source, do not have access to desirable inventory, or are trying to raise money to scale their business. With a $0 cost of goods (COG), consignment can be a great opportunity to yield consistent inventory and consistent sales, without fronting any money. Consignment selling is a great way to make money without spending it.
How does consignment work?
Consignment models differ but generally, the reseller takes possession of the client’s items and agrees to sell them, perhaps within a specified period. The client and the reseller agree on how the profit from the sale will be divided and paid out to each party.
Consignment fees should be established immediately. Under a consignment fee arrangement that is 50/50, both the reseller and the client would receive half of the profit for the item. More common consignment fee arrangements include 60/40 and 70/30 whereby the client is favored, as the owner of the items that are being sold.
What is the industry standard for consignment fees?
Many resellers that sell goods on consignment get very creative in fee agreements. Many implement a “scale” by which the fee split is dependent upon the sale price. For example, you might agree that items sold under $100 are split 50/50, but items sold for more than $100 are split 60/40. Whatever you decide, you will want to make sure that it is fair to both parties, and that you account for any selling and shipping fees, by explicitly noting who will pay them.
Do I need a consignment contract?
Yes. In business deals, always make a contract. Even (especially) if you are selling items for a friend, it is a good idea to have a contract that outlines all terms. A consignment contract can be very simple, but should include:
- Names of the parties
- Period of consignment term- How long will you have the items?
- A breakdown of fees- Including who pays any selling or shipping fees?
- An analysis of the frequency and mode of payments
- A disclaimer about how the seller retains pricing discretion
- A clause about how the items will be returned if unsold
- A disclaimer about the risk of fraud in eCommerce, relinquishing the reseller’s responsibility in the event of scam or fraud (i.e. a scammer purchases your item, intentionally damages it due to buyer’s remorse, and successfully opens a case).
- Signatures of both parties
- An attachment “Schedule” of inventory, itemizing each piece and its value (for insurance purposes in the case of a loss)
Is Consignment Worth It?
Consignment selling can be very lucrative, but it can also be a disaster. The key is to make sure that it is worth it to you. Consignment comes with extra time and risk. Consignment items take far more time to process, especially the accounting, receipts, payouts to clients, and tax preparation. The first time you sell a bundle containing two of your own items, and two additional items from two consignment clients, you will be confronted with a mathematical nightmare that requires patience and diligent accounting. Consignment also poses further risk and liability as you are in possession of someone else’s items. So, make sure that your fee agreement accounts for the extra time you will spend and the risk you will incur.
I have done consignments with many clients in different ways over the years, and I have become much more selective when I decide to do this. In fact, I rarely do consignment anymore. I much prefer to buy out the inventory and then sell it, especially to evade the book-keeping entailed in consignment selling. I personally feel that consignment selling isn’t worth it under most arrangements, unless the inventory is of a very high resale value, much higher than you have access to locally. Selling an item on consignment is twice as much work as selling an item you own, so make sure to account for that and your fee agreement is favorable to you.
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Where To Find Consignment Clients
It can be difficult to find clients but remember that everyone has unwanted items lying around their house. Often, people do not want to just donate items that they spent a lot on, and you might be the perfect solution for them! In the past, I have found consignment clients by simply networking, and telling people what I do. I have also attracted clients by posting on NextDoor, local Facebook groups, and reseller Facebook Groups.
Consignment Tips for Poshmark, eBay, etc.
- Write and sign a contract and follow through with its terms (see example terms above).
- Set reasonable expectations about the time you believe it will take you to sell the items and the profit that you expect to yield.
- Inform your clients of exactly how much work is entailed in reselling: cleaning and preparing, photography, photo-editing, researching, listing, cross-listing, responding to offers and inquiries, inventorying, book-keeping, tax-preparation, and shipping. When you illustrate your process, you are more likely to achieve a more favorable fee division. Do not be afraid to say “no” to anything that is not worth your time.
- List items promptly, and provide timely pay-outs and updates as necessary.
- Be consistent in relisting, sharing, and promoting your clients’ items for consistent sales.
- Keep an inventory of all items that you do not own, separate from your “normal” inventory management system.
- Be sure your insurance covers all items in the event of loss, theft, or natural disaster.
- Consult with a tax specialist on how to claim profit from consignment sales in your state.
You might also be interested in the article 9 Steps to Start a Reselling Business Online for Profit
Do you sell items on consignment? Please share any tips you have below!
