Consignment Explained: How It Works and Its Benefits

What Is Consignment?

Consignment is an arrangement in which goods are left in the possession of an authorized third party to sell. Goods sold in this way are said to be "consigned" to a third party for sale. Items sold on consignment are typically sold by consignment shops, which receive a percentage of the revenue from the sale (sometimes a very large percentage) in the form of commission.

Consignment deals often involve products like artwork, clothing, accessories, and books. Certain retail sales resemble consignment, with producers relying on stores to sell their products. However, consignment is more common in secondhand and thrift stores.

Some types of retail sales may be viewed as a special form of consignment where producers rely on retail stores to sell their products to consumers, although secondhand stores and thrift stores are more typically associated with the practice of consignment.

Consignment doesn't include retailers like Walmart or supermarkets, which buy goods directly from wholesalers and sell them at a markup.

How Consignment Works in Today's Market

In the 21st century, so-called consignment shops have become trendy, especially those offering specialty products, infant wear, pet care, and high-end fashion items. The millennial generation, in particular, is known for its frugal shopping habits, which include eschewing high-end stores and designer boutiques in favor of bargains found at thrift and consignment shops.

Rising student debt, stagnant wages, and the effects of the 2007-2009 Great Recession push younger shoppers to consignment and discount stores.

Benefits of Selling on Consignment

Consignment is ideal for those without a brick-and-mortar store, and it can also occur online. To a certain degree, online companies such as eBay are consignment shops; for a percentage of the sale, they offer people a marketplace to exhibit and sell their wares. This removes the necessity for an individual to have to create their own website, attract customers, and set up payment processes. Similarly, items sold on TV, like those in "as-seen-on-TV" promotions, are forms of consignment.

Those who lack the time or desire to sell directly may find consignment fees worthwhile, especially if they negotiate a low fee.

Challenges of Selling on Consignment

The primary disadvantage of the consignment model for producers or owners is that consignment shops typically charge a high level of commission on consignment sales. For artworks, for example, it's not uncommon for galleries to charge a 50% commission. Since this commission comes out of the share returned to the owner or producer of the goods sold, it can reduce their profits significantly.

Another downside is sellers losing control over product marketing and sales. The consignment shop will generally take control of every aspect of marketing and presentation for a given product. This can mean that products are presented in a way that the owner or producer does not approve of. Sometimes, issues like this are covered in consignment agreements, but often selling on consignment means ceding a great deal of control to the consignment seller.

How Consignment Payment Agreements Work

A person wishing to sell an item on consignment delivers it to a consignment shop or a third party to do the selling on their behalf. Before the third party takes possession of the good, an agreement must be reached as to the revenue split when the item is sold.

Most consignment shops have standard fee schedules that indicate the percentage of the sales price that is paid to the shop and the percentage paid to the seller. However, many consignment shops are willing to negotiate, particularly for larger-ticket items, such as artwork, that offer greater revenue potential. Depending on the consignment shop and the item being sold, the seller may concede 25% to 60% of the sales price in consignment fees.

Consignment arrangements typically are in effect for a set period of time. After this time, if a sale is not made, the goods are returned to their owner. Alternatively, the consignment period may be extended upon mutual agreement.

Popular Items Sold on Consignment

Some types of product are commonly sold through consignment. These include clothing, athletic equipment, furniture, musical instruments, art, and jewelry.

For example, an artist might have five large pieces of artwork to sell but has no place to showcase the work for prospective buyers. The artist decides to employ an art gallery to show and sell their works of art. The gallery does not charge the artist a fee for the wall space but will charge a sales commission for any works sold, which is incorporated into the price.

Another example of consignment would be Bethany visiting her grandmother's house and finding an old case full of clothes from the 1940s. She keeps a few pieces that she likes and decides to sell the rest. She takes the clothes to a thrift store to sell the clothes on consignment. Bethany and the thrift store come to an agreement that Bethany will receive 60% of the revenues from the items sold while the thrift store will receive the remaining 40%. This business model is used by many second-hand stores.

The Bottom Line

Consignment allows items to be sold by an authorized third party, with sellers receiving a portion of the sale proceeds as either a flat fee or commission. This arrangement is advantageous for those without a physical or online marketplace, as it broadens the audience for their goods. However, the high commission rates typical in consignment deals can cut deeply into profits. Despite this, consignment remains popular for selling items such as clothing, art, and furniture, offering sellers access to potentially larger markets without the need to manage sales activities themselves.