Consignment Agreements -- Dos and Dont's
Should You "Sell" Your Products on Consignment?
When starting out your wholesale business, many professional crafters, producers and artisan decide to consign their work rather than sell wholesale. They ask about the dos and don'ts of consignment!
If you want one suggestion about consignment, instead of selling at wholesale .... DON'T! Your generosity will likely be abused, and you are entering the world of bookkeeping nightmares, and he-said, she-said, when it comes to getting paid.
Of course, there are exceptions to this (as we will discussion later), but in most cases, consignment can be bad for your business.
Why Consignment is Usually a Bad Idea
You will get asked occasionally to consign merchandise, especially if the retailer senses "NEWBIE"! Consignment is good for the store owner, as you are paying for THEIR inventory. You could easily tie up thousands of dollars in slow-moving inventory if you use consignment as a primary market penetration strategy to multiple stores.
And look at this from the store owner's perspective. They did not pay for your inventory, and even though your stuff looks nice, if it sells, they WILL need to pay. So if they sell your consignment booty, they really only get half, in terms of cash flow. On the other hand, the rest of the store inventory is PAID for, so their cash flow benefits 100% when a sale is made. Guess what lines get the premium locations, while yours gets ... a narrow back aisle in a dark corner.
Here are some of the downsides of consigning your products:
** Since stores owners don't have as much invested in a consignment product, they USUALLY don't give it as much visibility or importance as a product they have invested in (purchased wholesale).
** Consignment items can be 'man-handled' in a retail setting thus making them unsaleable.
** Should the items be loss, damaged or stolen, who is responsible?
** Unless you have a way to check and monitor on your consignment products (local store), I would not recommend leaving products there.
** Consignment can be a bookkeeping nightmare for you and the stores. Who is going to manage that?
** If you leave items in a store on consignment, what incentive does a store have to EVER purchase your products?
If You DO Consign
In spite of my warnings, if you DO consign, get more than your regular wholesale pricing, since you are fronting the inventory, and absorbing the risk of product obsolescence, scuffed labels, and other problems. I recommend consigning at 60-70% of the retail price (based on keystoning), rather than 50%, and the retailer gets to keep the other 30-40%.
For example, if you wholesale an item for $5 normally, you should set a consignment retail price of $10 (keystone or more), but when it sells, if works out to the following:
At 60% consignment: $6 to you and the store keeps $4
At 70% consignment: $7 to you and the store keeps $3
You should also require a signed agreement, with clauses including the percentage and frequency of payments to you, responsibility for breakage and "shrinkage" (shoplifting or employee theft), and how often you will update inventory. Since only the retailer exerts protection and control over your products while in the store, he or she should be responsible for losses of any kind, just like with other products in the store. Many stores will chafe at this, but hold your ground. Of course, expect normal wear and tear (e.g. scuffed labels) and you will probably need to replace those periodically, on your dime.
When you consign to a store, submit a complete list of inventory consigned, including the retail price per unit, and the allocated prices and percentages to both parties. Keep a copy with the buyer's signature for your records. Of course, you need to update the inventory list (and get a signature) every time you re-stock.
To be frank, consignment is a bookkeeping nightmare. And to top it off, when you restock and provide a list of what sold, to the store owner, they often disagree, or want you to then give them (another) Net 30.
Again, avoid consignment.
Having said that, there are a few instances where I think consignment works.
The Two Situations Where Consignment is a GOOD Idea!
The first situation is when you are dealing with a consignment-only store (more on this option below), often a craft store, where you are basically renting a little booth space for a monthly retainer, and giving up a small percentage of your retail price. While you are usually responsible for theft in this case, the risk is relatively small. However, since maintaining a booth is time consuming, make sure you live close by to reduce your time investment.
The other instance where consignment makes sense (and my husband and I found this very useful) is where you develop a close working relationship with a store in your own community. Of course, this assumes you don't run a local retail operation yourself. You need to find a gift retailer whom you completely trust, and who keeps meticulous records. This gift store is of benefit to you as a consignment outlet, under two, very common, scenarios:
1. A prospect hears about your line, or a former customer wants to re-order a product, and calls you. You could ship of course, but often they want to pick something up TODAY, or do not want to pay extra for shipping. If you don't run a store, they will ask where else they can buy your products. A cozy relationship with the local store allows you to inventory your entire line in a publicly accessible location. And when you refer people, you still make 70% of the sale. (Of course, a better deal is if the store would WHOLESALE your entire line, but that is not always available.)
2. Invariably you discontinue some products, even entire lines, and need a place to dump (er, merchandise!) the leftover inventory. Or you might upgrade your packaging, which makes leftover products with the old packaging harder to move. A local consignment partner is a perfect way to get out of your predicament. You should retain control over the retail pricing (after all, you DO want to sell this stuff out), so you may decide the discounting. However, maintain the 70-30 split regardless of the discounted price, if at all possible.
A Third Consignment Scenerio
Consigning solved a problem for us!
Another situation where you may wish to consider consignment is for a regional show. For instance, we consigned a few products to a friend who was attending a show out of the area. I could not go at the time and she volunteered to take my products (which were a compliment to her line), and sell them for me. We had a plan of action, including percentage split and terms to buyers, before she left for the show.
Worked out well -- I got exposure in an area where I had not been before and she made a little extra cash for her trouble!
Where Consignment is an Acceptable Practice
Or course, there are a couple places where consignment is an the typical way to 'sell' your products -- where the individual store is set up on a consignment basis only (or mostly). Although, still not the best scenario to sell your items, but better than most other consignment options.
Following are some examples:
1. Craft Consignment Stores
2. Consignment Galleries
Craft Consignment Shops ...
.... One of the few places where consignment works!
Successful craft consignment stores all over the country. These shops were made popular in the 80s -- they gave artisans and crafters and outlet to sell their beautifully crafted handmade products. Occasionally, these stores would evidently evolve into gift shops that would buy some products outright.
As a sales rep, I visited lots of these stores. Often, the owner wanted a retail outlet to sell their own products and brought in consignees to help with the expense of stocking the store. Well managed consignment stores brought in wonderful products that would not find elsewhere -- and generated good sales.
Consignment craft shops are much easier to work with as they are already set up to sell your products in the consignment venue. Some of these craft consignment stores require consignees to pay a monthly 'space' fee and/or work at the store a certain number of hours per month. Working in these stores also has the added advantage of seeing first hand how your products are received by the customer. A good deal for smaller producers wanting to get their feet wet with wholesaling their products (although, it is not quite the same as wholesaling)!
Maybe You Would Like to Open Your Own Consignment Shop - One of the few outlets where consignment is a good idea!
... Another good consignment option!
Consignment Galleries are an excellent option for fine art and collectibles. Most of these types of galleries, feature high end products that would be difficult for the owner/manager to purchase outright to stock their stores.
The best information I found on this subject comes from Alan Bamberger, who is an art consultant, advisor, author, and independent appraiser.
Here are his tips:
* The more collectible your art, the more you should consider the consignment option. Highly collectible art sells fast, galleries will want to sell it for you and they'll make attractive offers in order to represent it. ...
* Work with a gallery that has experience selling art and artists similar to yours. Ask to see similar art currently in stock or sales records ...
* Look for indications that the gallery has a high probability of selling your paintings (or fine crafts) within a set period of time, and that you'll get paid in full within thirty to sixty days after that sale takes place. The closer this approaches a guarantee, the better. ...
* Make your consignment agreement for a reasonable period of time, usually six months to a year. ...
* Make sure your paintings (or fine crafts) are offered at fair prices, you know what those prices are, and that the gallery posts those prices for all to see. ...
* Occasionally, a gallery will offer, as part of a consignment agreement, to buy your art for cash if it fails to sell after a certain period of time. Be careful here ...
* Avoid working with galleries that lack experience selling art similar to yours, no matter what terms they offer. Some galleries appeal to the greed instinct by offering to take consignments at ridiculously high prices ...
If your products fit into this category, I recommend you read the entire article at Art Market.
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