Consignment selling is a sales method where the distributor controls the shelf and the retailer is only obliged to pay the seller for the goods that actually sell.
This offers the distributor a way to get inventory some exposure to consumers, and also protects retailers from risk.
In this article, we outline what consignment sales are, how they work and the benefits and advantages they entail for both parties.
Breaking Down Consignment Sales
Under consignment, goods are placed with a retailer who pays you, the consignor, only for the merchandise when it sells. In this situation, the retailer has the right to return to you any products which do not sell, free from any obligation to pay you.
Consignment sales might be used fr perishable or seasonal items where the retailer does not want the risk of unsold items, or when a distributor has excess inventory or new lines they wish to expose to consumers.
Advantages
For manufacturers or distributors, consignment sales can be a great way to gain new exposure or additional exposure to the buying market. This is particularly useful for small businesses or businesses which have just started up and need to increase the market exposure of their inventory. This can be productive for a manufacturers or distributor as it increases the likelihood that consumers will purchase your goods. This is a much more productive option compared to having inventory stored and isolated in a warehouse while waiting for an order from a buyer.
For the retailer, since no capital of theirs is tied up in inventory, consignment sales can encourage them to range items they might not otherwise accept. Likewise, it also provides retailers with an incentive to stock seasonal or otherwise newly introduced merchandise which might otherwise be overlooked for lack of demand.
Disadvantages
The first obvious disadvantage to consignment selling for the distributor is that, although your products are getting exposure on the retailers’ shelves, you make no money on them until they are actually sold. This means that you must ensure you have enough cash on hand to tide you over, as you may have to wait for extended periods of time before the goods are sold and the retailer pays you. Selling on consignment can also be a risk since it puts your products out of your physical control. This means that you will not be able to control the damage and shopper abuse that merchandise can be prone to.
Likewise, you may not be able to affect shelving decisions according to where and how your products are presented in the retailer’s store. Consignees may be more inclined to give precedence to merchandise which they have outright ownership of, rather than the goods you have sold them on a consignment basis.