The Consignment Process: Practical Steps for Businesses

How many outstanding products never make it past the drawing board because a startup lacks the funds to turn their ideas into sales? Consignment offers a way around this by giving businesses the chance to have their products featured in stores without the upfront costs.

Consignment is a flexible arrangement where one party agrees to market, sell, and distribute goods for another party. It’s an attractive prospect for businesses that want to get their products into the hands of their customers without the hefty price tag that comes with going it alone.

Whether you’re considering selling via consignment or want to know how you can use it to diversify your in-store stock, we’ll explain what you need to know in this guide. Let’s start with a consignment definition and then talk about how it works.

Consignment is a sales arrangement where one party sells goods on behalf of another party. Let’s break down the key elements that make this possible:

• Consignor: This is the business or individual who owns the goods. They then send goods to the consignee to sell on their behalf.
• Consignee: This is the business or individual that receives the goods from the consignor. They’ll then sell the goods using their own processes.
• Commission: The consignee requests a fee for their services. This will usually be a fixed percentage of the sale price every time an item is sold.
• Ownership: The consignor keeps control of goods until the consignee sells them. This gives them the right to reclaim unsold goods, but it also puts them at risk.
• Risk: The consignor bears the risk if the goods are damaged, lost, or unsold.

In essence, consignment offers businesses a way to sell their products and turn a profit while avoiding the hassle of inventory management, marketing, packing orders, and handling distribution themselves.

In a traditional business sale (such as in a retail setting), the buyer purchases products wholesale and then sells them to customers to turn a profit. Once the retailer buys the goods, they’re the new owner of the products. That means they take on all of the risks (and all of the rewards) that come with them.

However, with consignment, the consignor retains ownership over the products until they’re sold. This means less risk for the consignee (they don’t have to deal with damaged products and unsold goods), but the margins are often lower, as the consignor takes a larger portion of the profits.

Here’s how to set up a consignment agreement in six simple steps.

First, the consignor needs to find and partner with a consignee. This will often be a specialised consignment shop or website that has a strong reputation for marketing and selling business goods.

At this point, the consignor and consignee will work together to land on terms for the deal, discussing things like pricing, commission rates, consignment payment schedules, the returns policy, and the responsibilities of each party.

Once the deal is finalised, the consignor will send over the goods to the consignee’s store or warehouse. As mentioned, ownership will remain with the consignor at this stage.

The consignee will take control of the marketing and sales process on behalf of the consignor. This could include displaying the goods in a physical store or adding the products to an ecommerce site. Consignees may also use their own channels to market the products.

The consignor can also play a role in marketing, especially if they’re already an established brand. The exact details will depend on the agreement.

Whenever the consignee makes a sale, they’ll deduct their predetermined percentage from the selling price. They will then pay the consignor their share of the profits.

If the goods haven’t been sold after a certain amount of time (90 days, for instance), the consignee will usually return the goods to the consignor.

Because the consignor still owns the goods, they take full responsibility for any products that are damaged or lost during the return process.

Looking to get started with consignment? It’s important to make sure your agreement is well-structured, clear, and legally sound.

Here are the key terms consignment agreements need to cover:

• Parties involved - Include the full legal names of both the consignor and the consignee.
• Goods - Create a detailed list of the items, their quantities, and the agreed price.
• Commission rate - Clearly outline the percentage the consignee will earn on every sale.
• Payment structure - Specify how the consignor will be paid, when, and how often.
• Consignment period - How long the consignee will keep goods before they’re returned.
• Ownership - Reiterate that the consignor retains ownership until the goods are sold.
• Insurance - Determine who will be responsible if the goods are lost or damaged.
• Returns - How will the goods be returned? Outline the process and associated costs.
• Termination clause - Define what happens if either party decides to end the agreement.

Including these details will help to protect your interests while outlining clear expectations for both parties - essential when seeking to avoid disputes, delays, and miscommunications.

Consignment has become invaluable to various businesses in dozens of industries. Here are some real-world examples that show why it can be so beneficial.

• Boutiques - Specialised businesses that sell handmade crafts, clothing, or jewellery will often act as consignors, allowing local artisans and craftspeople to sell items in-store.
• Auction houses - Perhaps the most famous consignor of all. People who bring their goods to auction are relying on the auctioneer to handle the sale for them. The auction house will then take a commission based on the sale price.
• Art galleries - Art galleries are another popular example. Artists (consignors) send their artwork to the gallery (consignee) for display. The gallery takes care of the marketing and sales process, taking a fee once the artwork is sold.
• Online platforms - Nowadays, there are dozens of online stores that offer consignment services, such as The RealReal . These platforms open the floor for businesses and individuals to sell their goods without marketing themselves.
• Consignment shops - Certain niche shops, like vintage clothing and musical instrument stores, run entirely on a consignment model. These consignment stores accept products from consignors, display the products, and work to drive sales on the consignors’ behalf.

Consignment is particularly useful for businesses and individuals who lack the time, money, or resources to market, sell, and distribute their products alone. It lowers the barrier to entry and helps sellers reach their audience without the significant upfront investment.

We’ve already touched on why consignment can be helpful for businesses, but let’s break it down further. Here are the key advantages of consignment for both the consignor and the consignee.

• Minimal investment - You don’t need to have a fully-fleshed logistics network and a dazzling ecommerce website to get your products into the hands of your customers. Consignment gives everyone the chance to sell their products regardless of budget.
• Increased exposure - Consignment gives you the opportunity to land your product in established stores that will sell and market on your behalf. This can increase exposure and open the door to a stronger brand reputation.
• Saved costs - As consignment removes the need for expensive supply chain management, warehousing, marketing campaigns, and dedicated team members, it saves money and resources that you can invest in other areas of your business.

• Lower risk - As a consignee, you don’t need to pay for any items that you don’t sell. This means you can stock more products and experiment with new trends without investing money to buy the products wholesale.
• Stock rotation - Since you can regularly return items that aren’t selling, you can rotate your stock and bring in fresh inventory rather than holding sales for unpopular items or leaving stock collecting dust in warehouses.
• A stronger reputation - If you can prove you’re capable of consistently marketing and selling items as a consignee, you’ll build a rock-solid reputation that regularly brings new clients through your door.

A consignment arrangement has many benefits, but it isn’t right for every business. Here are some considerations you need to keep in mind when deciding whether this method is right for you.

Consignment is a great fit for consignors with limited capital for marketing who want to ‘get points on the board’ and start generating steady, passive income. It’s also ideal if you currently lack the capital to handle marketing and logistics yourself, especially useful if you’re just starting out as a small business.

However, keep in mind that the profit margin is usually lower compared to selling directly. There’ll also be another voice in the room, meaning you’ll have less control over the way you price, display, and market your goods.

With that in mind, if you already have a strong brand presence and want total control over how you sell your products, you might decide it’s better to go it alone.

Becoming a consignee can be an attractive prospect for retailers that want to expand their product range and get stock through their door without the risk of buying wholesale. The lack of ownership means you won’t need to manage or pay for any stock that doesn’t sell.

This can be particularly handy in niche markets like art, high fashion, or crafts, where trends can change quickly and customers want one-of-a-kind pieces.

That said, the key is to be prepared. Consignment will make it harder to track your inventory. You’re also fully reliant on the consignor’s product quality and consistency; if their goods aren’t up to standard, you might take the brunt of the reputational damage.

Consignment principles are consistent globally. This means the process in Australia works the same way as anywhere else in the world. It typically involves a consignor providing goods to a consignee to sell on their behalf.

The only caveat is understanding your local regulations. For instance, you’ll need to make sure your agreement is compliant with Australian consumer law, and you’ll also need to account for how Goods and Service Tax (GST) will impact selling on consignment.

Consignment is one of the most flexible ways for businesses and individuals to get their foot in the door and scale consistently without significant upfront investment.

Whether you’re a consignor who wants to expand your reach into a new market or a consignee looking to diversify your stock and keep your store shelves rotating, there are opportunities on both sides of the equation that are worth your time.

Ready to grow your business? Salesforce Commerce Cloud can help you unify your data, deliver smooth customer experiences, automate your payments, and keep tabs on all of your inventory, consignment agreements, and sales metrics, all in one place. Watch the demo today to see how we can help you build smarter commerce processes for your business.