What is Consignment Model: Meaning and Benefits

Reaching new markets, managing inventory, and minimizing risks can be potential challenges in doing business. The consignment sales model can help with this.

Whether you’re a seasoned online business owner or a fresh starter, understanding the consignment model might just be what you need to be successful.

Learn all about consignment stores in this article to gain the knowledge and skills that solve your problems and improve your business.

How Does Consignment Model Differ From Traditional Sales Models

A sales model is how a company strategically sells its products. These business models have existed for hundreds, if not thousands, of years in some form or another. 

Various traditional sales models include the following:

• Retail Sales Model: Many consignment stores purchase from wholesalers and then sell goods to end consumers.
• Franchise Model: Granting rights to other businesses to operate under their established brand.
• Direct Sales Model: Selling directly an item or service to consumers. For example, an artist can consign their art to an art gallery, or a store that sells similar items.

There are more types, though, and one of them may be right for you. But they are not what we’re here to discuss.

But a business model that’s piqued the interest of owners recently is what we call the Consignment Model.

Consignment model basics

In commerce, the word consignment means a business arrangement between two parties where items can be shipped from a supplier to a retailer to display, advertise, and sell their products or services for them. 

In this model, the retailer will be paid a portion of the revenue from the sale. 

Many consignment shops often specialize in selling particular products and attracting buyers. Thrift shop stores and second hand shops are examples of the consignment business model.

Common products sold through consignment are clothing and shoes, art, athletic equipment, antiques, furniture, musical instruments, and jewelry. These common products can in specific times be donation-based, and contribute to charity.

Consignment model vs. traditional sales models

While the traditional model has its advantages,  consignment has its own set of benefits to offer business owners. To understand how both will benefit you, let’s look at their differences.

The main differences between the consignment model from traditional sales models include:

• No storefront or marketing is needed: Consignment is a way to make money without having to spend energy to create listings on marketplaces or maintain a physical store. Plus, retailers will do the advertising, so a marketing strategy isn’t required for the suppliers.
  
• Easier cash flow: Retailers don’t need to pay for inventory; it is only when a product is sold that they will pay the owner on terms set by the retailer, and any unsold goods at the end of the consignment period can be returned to the owner.
  
• Developing a motivated customer base: Retailers with a reputation for sourcing in-demand items can attract motivated, returning customers, especially if the goods sell quickly.

The consignment model benefits both suppliers and retailers in ways not found in a traditional sales model. 

Suppliers reduce inventory and marketing costs, increase cash flow, and access new markets. 

For retailers, the model provides lower financial risk, greater sales potential, access to unique products, and improved cash flow.

Consignment Model Key Concepts 

If you want to have a thorough understanding of the model and how it will benefit you, you need to understand several key concepts: who will be involved, what will be the agreements, the ownership, and most importantly, what benefits will be gained.

Consignor and Consignee 

In a consignment arrangement, two key parties will be involved – the consignor and the consignee.

The individual or business entity that supplies goods, products, or inventory to another party is the consignor. The retailer to whom goods are entrusted to display, advertise, and sell is the consignee. 

To better understand, let’s make a sample scenario that represents most consignment shops.

An online Pakistani website, PakistArt, showcases unique handmade products made in Pakistan. Ali joins PakistArt as the consignor in his first consignment deal, showing his handcrafted bags for sale. PakistArt as the consignee, displays Ali’s products on their platform.

This benefits both parties – Ali gains exposure to a broader audience without the need to create an online storefront, and PakistArt curates a diverse range of high-quality products without the financial risk of purchasing goods upfront. 

Consignment Agreement

For both parties to ensure a successful and profitable consignment agreement, they need to have terms and responsibilities. 

There should be clear guidelines for both parties to avoid misunderstanding. 

When creating your own consignment arrangement, a special form of terms and responsibilities should include the following: 

• The quantity and quality of the consigned items; 
• The commission and payment terms; 
• Clear expectations for handling inventory maintenance
• Duration of the specified period of the agreement;
• Responsibilities of each one party;
• The process of returning unsold goods on consignment; 
• A dispute resolution.

By including these key components in a consignment agreement, both parties can work together for a collaborative and mutually beneficial relationship, where all opinions expressed are taken into consideration. 

Ultimately, this is a win-win situation for both the consignor and consignee.

Inventory Ownership

Inventory ownership means being legally and financially responsible for a product in a supply chain. 

To continue the sample scenario above to understand this key concept, Ali retains ownership of his bags until a customer makes a purchase. When a sale occurs, PakistArt receives a percentage of the revenue, and Alice is paid the remaining amount. 

In most consignment arrangements, inventory ownership remains with the consignor until the consignee sells the product to the end consumers. 

Unlike traditional sales models where ownership transfers upon shipment/delivery, in consignment, the consignee takes possession of the inventory in stock but does not assume ownership until a sale is made.

This setup allows the consignor to maintain control over the products and reduces the financial risk for the consignee until the next consignment or until the item sells.

Benefits of the Consignment Model for Consignors

Entering a consignment deal brings several benefits for consignors, blending ownership and financial responsibilities with strategic advantages. 

These benefits include:

• No storefront is needed: In consignment, consignors do not need to spend energy on creating a storefront or listings on an online marketplace. The consignee will do this job.
  
• No marketing or advertising: A marketing strategy is not required because the consignee will also do this job.
  
• Access to new markets and customers: Consignors can reach a wider audience in a consignment arrangement compared to doing marketing on their own.

By agreeing to a consignment, consignors actively work toward boosting their market presence and financial strength. This is something that would be difficult to pull off in traditional models, as achieving the same effect would require more time, effort, and resources.

Benefits of the Consignment Model for Consignees

Consignees also have numerous benefits that create a dynamic space where financial wisdom blends with diverse inventory opportunities.

Here is how consignees can benefit it this case:

• Lower financial risk: Consignees will experience reduced financial risk because they won’t need upfront costs. They will only pay the consignors once the goods or raw materials are sold.
  
• Wider variety of products: Consignees will have access to various unique products from different consignors, offering a distinctive inventory that can attract many customers.

The consignment model shields consignees from the burden of un-sold inventory while also empowering them to create profit from product varieties. In traditional models, the risk drastically shoots up if you try to match the product variety that’s available in consignment models.

Consignment Model in E-commerce

The prevalence of e-commerce and online marketplaces stems from the increasing trend of online shopping, its convenience, and the chance to engage with a broader customer audience. 

These platforms have established a way for businesses to connect with customers all around the world.

In the US, some of the major international e-marketplaces are eBay, Lazada, Alibaba, Rakuten, AliExpress, and Etsy, while Amazon leads as the largest e-commerce marketplace, with about 2.2 billion visits per month.

Meanwhile, Lazada, Shopee, and Zalora are the large peer to peer marketplaces with a consignment model that are top choices for both buyers and sellers in the Pakistani online market. This is because of their wide range of products, customer-centric platform, immediate payment options, brand credibility, seller support, and logistics being offered to Pakistani customers.

As an online business owner, you need to recognize the importance of these marketplaces because they offer you a unique path to tap into a digitally engaged consumer market. 

Incorporating the consignment model within these platforms can boost your business presence and profit from the flourishing e-commerce landscape in the country.

Pricing Considerations in the Consignment Model 

It is important to discuss pricing considerations in consignment to create a pricing strategy for both parties to gain profits and set fair and competitive prices in the market.

The pricing considerations to include should be the following:

• Commission agreement: You need to consider the percentage of the commission for the consignee in setting your selling price. A consignment store typically receives 25% to 60% of the sales price in a flat rate fee.
  
• Market Demand: The demand for an item is an important factor to consider. If your product is in high demand, you can set your price higher.
  
• Product’s Value: The brand, age, rarity, and condition of your product can also affect the price. Products or items in excellent condition can be priced higher, while a designer bag that has been used multiple times can be priced lower.
  
• Competitor Prices: Researching competitor prices and trends helps to ascertain competitive pricing and consumer product expectations.

Being mindful of the percentage of the commission, market demand, product value, and competitor prices, can help you create a pricing strategy that lets you ensure a competitive and reasonable price for your customers.

Evolving Trends and Future Outlook 

Evolving trends in consignment if the Pakistani context include the integration of advanced technology and the rise of the resale and second-hand stores which reflects sustainability.

The integration of advanced technology is becoming prevalent. Online e-commerce platforms nowadays offer real-time tracking, automated inventory management, and enhanced communication channels between sellers and those who purchased the goods. This trend boosts operational efficiency and aligns with the preference of the digitally-inclined Pakistani consumer base.

Furthermore, Pakistani markets are witnessing significant growth in the popularity of secondhand apparel and sustainable products. Pakistani consumers are interested in second-hand items as a sustainable option, creating the rise of the thrift store and the second-hand clothing store.

Monitoring the trends in the consignment model is a big advantage for you. It empowers you to proactively adapt to changing market dynamics and consumer behaviors, catering to the evolving preferences of the Pakistani consumer. 

It also presents an opportunity to align your consignment with sustainability practices, thus appealing to a socially conscious Pakistani market.

Most importantly, it allows you to strategically plan, position yourself as an industry leader, and profit from emerging opportunities.