Consignment in business terms, refer to products with selling arrangements in which a supplier has agreed to provide a seller without a need to pay for them until they are sold.

Such arrangements can reduce the risks taken on by retailers should they have purchased the inventory outright and fail to sell them, or move them at a high sell-through rate.

Consignment benefits to retailers

Retailers can often find that placing unproven products on their shelves can be risky and cause them to incur not just the costs of buying them from wholesalers, but also the opportunity cost from underused premium shelf space.

While consignment products do not eliminate potential opportunity costs, the fact that a retailer has not paid for them upfront means that they can decide quickly that a product range is not performing at all and replace them with better seller products to take up the shelf space.

The consignment can then be returned to the vendor at no COGS to the retailer.

Consignment benefits to suppliers

From the perspective of suppliers, consignments allow them to put it’s products in front of customers by reducing the risk carried by retailers.

In many cases, they would request for cheaper shelf space from retailers or even get them for free.

While it can seem that big retailers giving up shelf space for free is improbable, other factors might convince them to do so.

For example, a nationwide advertising campaign for the product is scheduled by the supplier. To avoid having customers walking into their stores and fail to find the product, big retailers might be receptive to allow suppliers to place their consignment good in the store for free.

These arrangements can also be ideal when suppliers are testing new products that have not yet demonstrated to have a high demand from consumers.

As the demand cannot be determined, consignment arrangements can induce a retailer to try selling them without the risk of paying for them upfront.

Consignment arrangements

Products sold on consignment basically means that a split on sales is agreed between the parties involved.

A 50/50 split for example would mean that every unit of a $10 item sold would result in the retailer keeping $5 and the supplier receiving $5.

There are no standard splits and all such arrangements would be negotiated and agreed between the parties involved in the deal.

The rise of online retailers have created a new awareness for a different type of consignment called dropship.

This is when a website list products that it does not own online for sale. And when people purchase them, the supplier who is holding onto the inventory in their warehouse, ships the item directly to the end-user.

The ecommerce store collects the receipts and pay the wholesale price to the supplier.

This enables the online store to have products to sell without having to invest in inventory. And allows the supplier to tap on the online marketing capabilities of the online store to sell to it’s customers.

Dropshipping partnerships are widespread in the world of online retail. And is in fact, even practiced by the biggest ecommerce sites like Amazon.

Dropshippers are able to have zero holding costs, and generate sales from products they do not own.

They are the epitome of the ideal consignment business where sellers don’t incur any COGS and holding cost, but books in profits as and when products are sold.


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