How to Build Your Ideal Consignment Business Model
May 30, 2022
For a first-time business owner, the phrase "business model" can be laden with ambiguity and insider nuance. This makes choosing a business model seem like an intimidating process. But it's not as daunting as it sounds. When it comes to consignment, "business model" simply refers to 1) the forms of resale you want to use and 2) where your store lives.
For resale forms, you can choose between consignment and buy-outright. And your store location is limited to either bricks-and-mortar or online. Choosing is made easier by the fact that none of these options are mutually exclusive. Your business model can include just one form of resale and one location, but it can also involve all four elements, which is a popular approach.
Before you jump right in and try to implement all four at once, though, you should weigh each option against your vision for your business and your current bandwidth. In this article, you're going to discover the benefits and drawbacks of each option, how they can work together, what items are best taken in through each resale form, and some key considerations when deciding how niche or comprehensive you want your business model to be.
Consignment & Buy-Outright
The main difference between consignment and buy-outright is item ownership. When you buy an item outright from someone, it's yours. Once the item sells, you keep 100% of the profits. When a consignor consigns an item with you, they retain ownership while you do the legwork of pricing and displaying or listing it. Then, when the item sells, you take a predetermined portion of the profits for services rendered and send the rest to the consignor.
Both models share certain advantages. They both get community members involved in sustainable shopping practices and make them feel as if they're part of a larger cause. But they also have their own unique advantages and drawbacks that should be considered.
Both resale forms offer benefits, especially when combined.
Since you don't pay consignors until after their items sell, you don't need any money to stock your inventory. Consignors understand how the system works, and they're perfectly comfortable bringing you all of their unwanted stuff and waiting weeks or even a few months for their payout. This makes consignment an attractive option for somebody who doesn't have investors or spare capital.
Consignment also typically leaves the consignor liable for lost or damaged items. This varies from region to region, so you'll need to familiarize yourself with liability laws in your state, and you'll need to make liability clear in your consignor agreements. But in general, if a customer breaks an item or if it's stolen, you don't lose any money.
Of course, you want your consignors to benefit from your store, too. Consignment allows them to earn more money than if they simply sold their items to you outright. Many people start consignment businesses to help out their family, friends, and local community members. If you want the people around you to earn more for their items, this resale form is a great way to help them do that.
Consignment requires more hands-on inventory and account management. You have to know who your consignors are, what items they bring in, how much each item is listed for, when they sell, whether or not you've paid each consignor for sold items, whether an item has passed its cutoff date, and whether an expired item has been picked up.
Consignment requires more hands-on inventory and account management.
Many store owners will set up their own inventory and account management system in an Excel sheet or another platform. While this can work, it takes a high level of effort and organization, both of which require time and energy you may not have. Luckily, there are pre-built software platforms that take out the work so you can focus on other mission-critical tasks. ConsignCloud offers an effective, easy-to-use system. To see it in action, check out this video.
What can be taken on consignment
In theory, anything can be taken on consignment, but not every item is worth the combined investment of time, energy, floor space, and money. If the price you charge for an item is not that high (less than $5), it probably won't be worth it to run it through your consignment system.
There are four categories of items that are typically taken on consignment:
If you focus on items from these categories that you can list for a reasonably high price, you'll see greater returns on your inventory investments. To learn more about how to select which items to take in on consignment and how to price them, check out this article.
Buying items outright, as you've already learned, eliminates the work of setting up and running consignor accounts. This minimizes your administrative and record keeping work and simplifies your inventory management. And, of course, when the item finally sells, you don't have to split the profits with anybody.
Buying outright leaves you liable for covering the cost of lost or damaged items. And if you find a problem with an item after you've already accepted it, you can't return it---you either have to repair it or cut your losses and throw it away.
You also need a lot more money to get started. You won't have any inventory until you invest in items financially. This is why many new resale stores opt for consignment first and expand into buy-outright later.
What can be taken through buy-outright
If you do only buy-outright, you can take in anything you want. If you're running a hybrid resale model, buy-outright makes the most sense when taking in small, cheaper items like baby clothes, cards and envelopes, small novelty gifts, and collectibles.
Bricks-and-mortar & Online
First-time business owners often have one of two dreams. The first is to open up a shop that becomes a community fixture, a warm, unique place where locals and visitors alike can go to have fun. The second is to start an online business that allows them to build their store around family life and other commitments.
Both options---bricks-and-mortar and online---can be highly profitable. In 2021, 96% of Americans shopped online, while 65% of American shopping budgets were spent in physical stores. So you should consider your own vision for your business, but choosing between the two (or choosing both) deserves careful thought.
A physical store makes it easier to establish customer loyalty and brand identity.
A physical store allows you to build customer and consignor loyalty more easily. The customer experience is one of the most important factors in any business, helping to bring people back again and again. A physical location lets you engage with people face-to-face, improving your customers' and consignors' experiences and developing a stronger connection with them.
It's easier to display merchandise in creative and attractive ways in a physical store. It does involve more work than simply posting a photo on your website or Instagram page, but curating your storefront and interior will strengthen your brand identity and enhance the in-store experience.
Customers also love to try clothes on and handle items before they purchase them. This lets them see if an item has too much wear or damage that can't be seen in a photo online. Some don't mind the risk and work of ordering online, but many think it's too much of a hassle and prefer to find, test, and buy their items the old-fashioned way. Physical stores also simplify communication with customers and consignors. Rather than having to wait to hear back from somebody through email or Facebook, you can sort out issues as soon as they come up.
Of course, if you want to have a physical store, you need money up front to either purchase or rent space, as well as to cover utilities, insurance, and maintenance work. This isn't necessarily a problem if you have either liquid cash or investors, but many looking to start consignment stores don't have immediate access to these resources.
Another consideration is that you have to set business hours, and you have to be there when you're open. This isn't a problem in and of itself, assuming you have time to be there or you have employees. But again, many first-time store owners prefer to start small and scale up and would like more freedom in the early stages of running their businesses.
Online stores require little to no up-front money. There's no physical space to buy or rent. Heck, you don't even need a website to get started---you can sell on Facebook marketplace or eBay to start bringing in revenue immediately. You also have more freedom to schedule your work when you want, depending on your existing commitments and family life. And you have access to a practically limitless customer base. Physical storefronts are limited to a customer base within their own geographical areas, but well-marketed online stores can reach people across the country.
An online store gives you the freedom to work around your other commitments.
Online stores aren't restricted by season when it comes to accepting certain items. Bricks-and-mortar stores typically stock items for an upcoming holiday or season two to three months in advance, and they'll focus on those items until the holiday or season passes. But online customers approach shopping with a different mindset: sometimes, they'll buy seasonal items weeks or even months after a season has already passed. So with an online store, you can accept practically anything at any time of year.
When people consign through your online business, they don't interact with the rest of your store. This means they're not walking through aisles of items they might want to purchase before they reach your consignment counter. It's much harder to create customers out of consignors, and vice versa.
You'll also experience inevitable shipping delays. Especially now, with significant shortages in transportation labor, shipping delays aren't limited to major holiday seasons like Christmas. This can strain relationships with consignors and customers alike, which are already harder to develop.
Storage space isn't necessarily a problem, but it's something to consider. Many online store owners run their businesses out of their homes, so they don't have the facilities to store larger items like furniture or even bulkier clothing items like formal wear and shoes. Even if you do have space for them, you also need to decide whether you can reasonably ship these types of items, given their size and weight.
Now that you know the benefits and drawbacks of each element of a consignment business model, how should you create your own?
First, you should answer each of the following questions:
How much capital do you have? How much capital can you access through investors?
How much time do you have to devote to your business? How much time will you have over the next few years?
How flexible do you want your work schedule to be?
How much liability and item responsibility are you comfortable with?
What real estate is available in your area?
How much storage space do you have at home?
Once you've answered each of these, you'll have a good idea of what business model you can sustain with your current bandwidth and capabilities.
And, of course, you can always take the simplest route. Start by adopting an online consignment model. Once your business is established, you can scale up or down as desired based on revenue and changes in your lifestyle and commitments.