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What is Consignment?

Robinhood LearnJuly 3, 2020
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
definition

Consignment is a business relationship where one party agrees to sell an item on behalf of another party for a fee.

🤔 Understanding consignment

A consignment company sells items on behalf of another individual. In this type of business relationship, the original owner (consignor) brings the item to the consignment company (aka the consignee). The consignee then sells the piece and gets to keep a percentage of the sale price — often a large percentage. Consignment companies often specialize in selling second-hand items. The seller can make a little money by selling their belongings through a consignee, and consumers can buy used items at a discount. Consignment shops are popular for things such as clothing, children’s toys, and furniture. Consignment shops can be brick and mortar businesses, but many now exist online as well.

example

Let’s say Megan is attending a holiday party for her company. The party is a black-tie event, and Megan doesn’t have anything appropriate to wear. She doesn’t want to drop a lot of money on a dress she likely won’t have another opportunity to wear. Instead, Megan visits her local consignment shop. She’s able to buy a dress for a discounted price. The original owner of the dress and the consignment shop each get a cut of the profit.

Takeaway

Buying from a consignment shop is like buying a used car from a local dealer…

Rather than buying a new car, you buy used to save a little money. Someone else owned the vehicle first. They sold it to the car dealer for a specific price, and the dealer sells it at an even higher price to make a profit. Consignment shops are similar in that the items usually belonged to someone else. They brought them to a consignment shop, and both they and the consignment shop get some of the profit. Of course, in the case of the car dealership, the car’s previous owner usually gets their money immediately. The current owner in a consignment transaction doesn’t get their money until someone buys their item.

Tell me more...

What is consignment?
What does it mean to sell on consignment?
How does consignment work?
How do you calculate a consignment percentage?
What is the average percentage for consignment?
What is a fair percentage?
What are the advantages and disadvantages of consignment?
What is the difference between consignment stores and thrift stores?

What is consignment?

Consignment is a business relationship where one party (the consignee) sells an item on behalf of another party (the consignor) and agrees to split the profit with them. Consignment companies often sell second-hand items or handmade goods such as art.

A common type of consignment shop is a second-hand clothing store. These stores are often either brick and mortar storefronts or online consignment clothing stores.

What does it mean to sell on consignment?

Selling on consignment is one method that someone might use to sell one of their items. When an individual sells something on consignment, they take it to a consignee or consignment shop and ask them to sell it on their behalf.

When someone sells an item on consignment, they agree with the consignee about a consignment percentage upfront. The original owner makes money by selling on consignment when the consignee sells the piece and gives them their share of the profit.

How does consignment work?

In a typical consignment relationship, there are two parties: a consignor and a consignee. The consignor is the person who brings their item to another party to sell. The consignee is the party who sells the item.

In a consignment sale, the current owner of an item will bring it to a consignee, often a consignment shop. The two parties will agree to a consignment percentage. Consignment shops often have predetermined rates they offer for specific items. The parties agree to the amount of time the consignee will post the object for sale. If no one buys the item during that time window, the consignee might return it to the original owner.

Suppose you’re selling a used bicycle to a local brick-and-mortar consignment sporting goods shop. You bring the bike to the shop, and the shop owner tells you they’ll give you a 50% consignment. They keep the bike for sale for three months. If the bike sells within those three months, the consignment shop will send you a check for half of the profit. If they can’t sell the bike during that time, they’ll call you to come to pick it up.

You can also sell or post items for consignment with an online consignment shop. In this case, it might work one of two ways. First, you might mail your item to the consignment shop, and they’ll try to sell it. The online clothing consignment shop ThredUp uses this business model.

Another option is that you might be the one to post an item for sale on the website. Then, if someone buys the item, you mail it to them. The company whose website you sold the item on takes a cut of the same. The site eBay is an example of this type of consignment model.

How do you calculate a consignment percentage?

Consignment is based on a percentage of the final sale price of the item. The consignment percentage refers to the portion of the sale that the consignor gets, while the consignee gets the rest. Depending on the situation, you may not know what the sale price of an item will be until it sells. The buyer might negotiate the consignment company down to a low price, which would reduce your final consignment profit.

The formula for calculating consignment is:

Sale Price x Consignment Percentage = Consignor Profit

Suppose you take a designer purse to a local consignment shop. The shop offers a consignment percentage of 75% for designer items. A few weeks later, the shop owner calls to let you know that they were able to sell the bag for $150. Based on the 75% consignment, your profit is $112.50, while the consignment shop keeps $37.50. The calculation looks like this:

$150 (sale price) x .75 (consignment percentage) = $112.50 (consignor profit)

What is the average percentage for consignment?

The average percentage for consignment will vary based on what kind of item you’re selling. Typical rates can range anywhere from 25% to 60%, depending on the item. The more valuable the item, the higher the consignment percentage you’re likely to get.

If you’re an artist, you can also sell your art on consignment. The rate of return for selling art on consignment is probably more than you’ll make by selling your work to a dealer. A typical consignment rate for art is between 60% and 80%.

What is a fair percentage?

Determining what is a fair consignment percentage is likely to be subjective. What you, as the original owner, consider reasonable and what the consignee considers adequate might be two vastly different numbers. There are a few things you might want to consider to determine what you believe to be an appropriate consignment rate.

  • Is the item second-hand or homemade? Suppose you’re an artist selling a piece of your work on consignment. You’d probably expect to get a higher consignment rate for something you made than you would for something you previously bought elsewhere and are now reselling.

  • What is the quality of the item? You can probably expect that the better your object’s condition, the better the consignment percentage you’ll get. It’s likely not reasonable to bring a lower quality or highly-used item to a shop and expect to get a high consignment rate.

  • Is your item high-end? For a high-end or designer piece, you might expect to get a higher consignment rate in return.

  • How old is the item? Trends come and go. If an item is newer and still trendy, you’re likely to get a higher consignment percentage than if it’s older and out of style.

What are the advantages and disadvantages of consignment?

The consignment business model can be beneficial for both the original owner of an item and the shop agreeing to sell it on their behalf. For the consignor, going this route allows them to make money from their second-hand items without putting in the effort to sell them directly. After all, the consignment shop has access to a customer base that the average individual probably doesn’t.

The relationship is also beneficial for the consignment shop. Though most retailers have to pay for inventory upfront, consignment shops only have to pay for inventory after someone buys it. If they don’t sell an item, they can easily return it to the original owner.

Second-hand consignment shops are also great for consumers. They can purchase items for less than they’d pay in a traditional retail store. This perk applies to any second-hand shop, of course, not necessarily just consignment shops.

Finally, second-hand consignment stores help to reduce consumer waste. This business model is more environmentally friendly than some other options.

There are also downsides to both parties, however.

First, the item’s owner might receive a lower profit than they would if they sold the piece on their own. Online marketplaces today make it simple for individuals to sell their used items, allowing the seller to keep all profit (perhaps minus some platform fees). By selling an item on consignment, they’re giving up some of that profit in return for someone else doing the work.

There also might be disadvantages to the shops. Unlike other retailers who can proactively seek out products, consignment shops only have access to items other people are willing to sell. As a result, they might be short on inventory at times, and they don’t have the option of ordering more of a product that sells well.

What is the difference between consignment stores and thrift stores?

Though people often use the terms consignment store and thrift store interchangeably, the two aren’t necessarily the same. The term consignment refers to how the seller acquires the items they’re selling, while the term thrift has to do with the types of pieces a store sells.

A thrift store sells second-hand items. They might acquire the items they sell through consignment relationships. But they also might pay sellers upfront for items or accept items as donations. Thrift stores might sell things to make a profit or to raise money for charity. Goodwill, for example, accepts items as donations and uses the money to help train individuals in need of stable careers.

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