How to Start a Consignment Store

Why Consignment?

So you want to start a consignment store. You've made a great choice!

In 2018, 60% of Americans dreamed of owning their own business. And consignment stores are some of the simplest to set up---and some of the most ethical:

• Up-front costs are minimal.

• You don't have to spend time shopping for inventory.

• You help keep money in your local community.

• You're part of a greener, more sustainable approach to shopping.

And now is one of the best times to start a consignment business. Consignment is a form of resale, and the resale market is growing 11 times faster than traditional retail. In fact, it's estimated that the resale market will be worth $84 billion by 2030. 

In this article, you'll discover what to do before you launch your business. You'll learn how to perform market research, how to classify your business, what software and platforms you should use, and more. And as we write other best-practices articles moving forward, we'll link to them in the relevant sections in this article. So feel free to bookmark this page and use it as a reference for future reading.

What to do before launching your store

We're going to cover a lot of topics here, and each one is going to require some thought and consideration before you take action on it. If you're just starting the process of launching your store, we recommend starting at the beginning, with the section "Market Research." If you're already part of the way through the process, you can simply jump to the topics you still need to tackle. The topics we'll cover are:

• Market research

• Your business model

• Online-specific considerations

• Strategic best-practices

• Consignment software

• Business structure and compliance

• Choosing what to sell

• Telling your business' story

Market research

Market research allows you to understand your market and potential customers' needs and desires. With this knowledge, you'll be able to create a business that puts your inventory in front of the people most likely to buy.

We recommend working through the following questions, adapted from the U.S. Small Business Association:

1. Demand: Is there a desire for a consignment store?

2. Market size: How many people would be interested in patronizing your store?

3. Economic indicators: What is the income range and employment rate of your potential customers?

4. Location: Where do your potential customers live and where can your business reach?

5. Market saturation: How many other consignment stores are already available to your potential customers?

6. Pricing: What do your potential customers pay at other stores? Do other consignment stores have higher or lower prices than you?

As an example, let's look at market saturation. If there are a lot of consignment stores in your area, it likely means that there's high demand, so your store may have a good chance of success. But it could also mean that the market is oversaturated. How long do most consignment businesses last in your area? If most go out of business within their first couple years, chances are that a bricks and mortar (B&M) store isn't a great idea. An online store, however, can reach far beyond local market saturation. Today, an online store can reach every potential customer in the country, so online may be a viable option even when B&M is not.

By looking at market saturation and other market research elements, you can inform this and other critical business decisions. So as you work through these questions, take your time and put in the work to research your answers.

Choose your business model

You have two major decisions to make regarding your business model:

• Consignment vs. buy-outright

• Bricks and mortar vs. online

Consignment vs. buy-outright

Buy-outright is exactly what it sounds like. When people bring you their items, you buy the items from them, making you the outright owner. Once each item sells, you keep 100% of the profit. Consignment, on the other hand, is a little different. When someone consigns an item with you, they retain ownership of the item until it sells through your store. Once the item sells, you (the store owner) keep a portion of the money from the sale as a commission. So this question essentially boils down to this: do you want people to consign their items with you, or do you want to buy their items from them up front? 

There are pros and cons for each model. The main benefit of buy-outright is you don't have to set up consignor accounts or manage consignor balances. This simplifies your inventory management and keeps overhead low by minimizing your administrative and record-keeping work. But if you find a problem with an item after you buy it, you can't return it to the original owner. Buy-outright also requires a lot more money up front. You won't have inventory until you buy enough items to stock your merchandise floor or website.

With consignment, you don't pay the consignor until after the sale. This means you don't need any money at all to stock your store. Consignment also usually leaves the original owner of each item liable for damaged goods (assuming you've included this as a term in your consignor agreement), which puts less financial risk on you. You'll learn more about this in the "Business Structure & Compliance" section.

Consignment also allows the original owner of the item to earn more money. Many people start consignment stores so they can help out their friends, family, and local community. If you want your business to be service-oriented this way, consignment may be the best option for you.

You can also adopt a hybrid model, combining buy-outright, retail, and consignment inventory, depending on your particular inventory mix. It's also common to invert the consignment model, renting out your space out to vendors who manage their own inventory.  We'll cover hybrid models in more depth in a later article.

Bricks and mortar vs. online

Once you've decided between consignment and buy-outright, it's time to choose between bricks and mortar and online. Do you want to have a physical storefront, or would you prefer to run an online business?

A B&M store allows you to build a stronger presence in your community. If you have an inviting physical location, people are more likely to develop store loyalty. It's also easier to creatively display your merchandise. But, similar to buy-outright, a B&M location requires more money up front---rent, utilities, and insurance aren't cheap. You're also more restricted in your schedule. If you have a physical store, you have to set business hours, and you (or your employees) have to be there during those hours.

An online store, on the other hand, requires little to no money to start. You can start selling on Facebook Marketplace or eBay at little to no cost. The only costs involved are incurred when it's time to ship items to customers. An online store also gives you more freedom to set your own work schedule and attend to other responsibilities as needed.

In summary, there's no universally right or wrong business model. You can build an online buy-outright store, or start a B&M consignment store (and vice versa). You can even run a B&M store that eventually expands into the online market, or start online and open a B&M location when you have the money. The best model is simply the one that best fits you, your current situation, and your long-term business goals.

Online-specific considerations

If you've decided to run an online store, you'll generally have an easier time starting your business. But there are a couple of things you need to invest in to make sure that you don't have any hiccups when it's time to sell and ship items.

In terms of equipment, you'll need a printer and a scale. The printer will let you print off shipping labels, and the scale will be used for weighing packages, which must be done before you print your shipping label.

You'll also need a place to store your inventory when people bring it to you. At first, you might not need a ton of space since your first consigners will probably be limited to family and close friends. Depending on how much stuff they're trying to get rid of, a garage or spare room should be enough for you to get started. You'll also need an inventory and consignor management system. We'll cover this more in-depth in the "Consignment Software" section of this article.

The next task is to choose your selling platform. Nine times out of 10, your best bet is to sell on eBay. The main reason for this is that when most people shop online, they look at eBay first. eBay also has a deal with Google so that their items come up in the top search results when you Google that item, so listing your item on eBay will ensure that it's put in front of the largest possible audience. But there are lots of other options, like your own website  hosted on Shopify, Poshmark, Facebook Marketplace, and many others. A good way to start might be to list on eBay first and your website second (if you have one), and then expand into another platform.

The last major consideration is that when you ship an item, you have two primary options for covering the cost of shipping. The first option is to absorb the cost. That means that you cover the costs of shipping before you send the consignor their share of the profit. In other words, the consignor's percentage is calculated from what's left over after you've replaced shipping costs with money from the sale. The second option is to partially or entirely charge the consignor for shipping costs through surcharges.

3 strategic best-practices

While the best-practices you're about to discover aren't the only ones you should adopt, we think they're the most important. So starting with these will put your business in a strong position to enjoy early success, which you can then build on over time.

First, a business plan is the most important strategic tool in an entrepreneur's toolkit. It's easy to think of it as something that you only need if you're pitching investors, but even if you're a solo entrepreneur or a partnership, developing a business plan forces you to think through the nitty-gritty details of your business and establish benchmarks for success. No battle plan survives contact with the enemy, but being able to compare your business plan with reality is a key way to look at your business from an objective perspective while you're busy with daily operations.

Additionally, people often fall into the 'sunk cost' fallacy when it comes to their own business. They're so heavily invested, both financially and emotionally, that without objective, outside benchmarks, it can be difficult to tell whether the business is functioning well.

Second, if you're a consignment store (as opposed to buy-outright), you'll need to determine your consignor terms, such as percentage split, length of consignment period, and fees. You can change these terms later, but A) it's much harder to change them later than to get them right the first time, and B) if you don't get them set up right the first time, you may not be in business long enough to adjust them. For an example of consignor terms, you can check out Consignment Chats' resource here.

Third, if you're a B&M store, you need to choose your hours. Small businesses have a reputation for erratic hours. Picking a schedule that works for you and for your customers, then sticking to it, will go a long way toward building a loyal clientele.

Software

Tracking consignors, inventory, and sales takes a lot of work, and if you do it manually, it can consume a substantial amount of time. And the more time you spend in tracking and recording, the less time you have left over for other critical business tasks, like organizing your floor, shipping, and meeting with new consignors.

When you're starting your business, this time matters, so you need to be able to quickly process consignors, inventory, and sales. There's a lot of software on the market that takes the time and effort out of tracking, but picking a platform can be difficult. So here, we'll point out the most important features your software should include.

First, your software should let you easily add new consignor accounts. When someone drops off an item, you don't want to spend 10 minutes adding them to your system. The longer it takes to add a new consignor, the longer it'll take you to process their items and get them on your floor or website.

Second, your software should let you add inventory and connect each item to an individual consignor. You have to make sure that each item is connected to the right consignor so you know who to pay when a certain item sells. If your software lets you easily connect inventory to existing consignor accounts, you can save yourself some future headaches.

Finally, your software should give you insights into the challenges and successes you've had in the past. In the age of Amazon, data helps small shop owners stay competitive and answer questions about their businesses, such as:

• How well do electronic products perform compared to other product categories?

• When do we sell the highest volume of products each year?

• Is there a certain style of clothing that people buy more of in my town?

• Should we stop selling furniture?

If you can answer these and similar questions, you'll be able to improve your business over time and focus on the items that return the greatest value to you, your consignors, and your customers.

These features are just the table stakes for running the store. Some software solutions might check all three boxes, but bog you down with bugs and clunky workarounds. ConsignCloud aims to be the simplest, easiest-to-use software out there for running a resale shop and includes these three features and more. For a walkthrough of our platform, check out this video here.

Business structure & compliance

"Business structure" refers to your business' tax classification. LLCs are a remarkable business structure because they're easy to start and simple to maintain. Using one of the myriad online services that help with LLC formation makes it even easier, although keep an eye out for unnecessary upcharges for add-on services.

Most states and municipalities do not require a separate business license for retail stores, but the requirements for liability for handling secondhand merchandise, lost property laws for uncollected money owed to consignors, and privacy regulations vary so wildly by state (and even by city) that they're worth researching before you start. Your local chamber of commerce is a great resource. The U.S. Small Business Administration also has a vast network of Small Business Development Centers, which provide free, one-on-one advising on all phases of small business development. They're great places to meet successful entrepreneurs, get another set of eyes on your business plan, and learn about the requirements and challenges specific to your area.

Choose what to sell

Generally speaking, there are four categories of items you can take and sell:

• Furniture

• Home goods

• Clothing

• Electronics

When thinking about what types of items you want to sell, there are a couple of key considerations. First, you need to think about the state or quality of the item. This applies to all categories. When someone brings in an item to consign, it needs to be clean, in working order, and not thrown crumpled up into a bag (depending on the type of item). Second, you need to think about the age of the item. It's common to take newer items only if they're younger than 3 or 4 years. If it's vintage, the standard is typically older than 25 years. 

Next, you can decide on the categories of items you want to sell, which comes down to two more considerations: your available space and your expertise. If you don't have space for furniture, then you can cross that category off your list. If you don't have room for hanging up formal wear in your storage shed, you can go ahead and turn down those items as well. And when it comes to your expertise, you need to decide how comfortable you are taking and selling items you don't know a lot about. For example, if you don't know much about electronics, you may want to steer clear of that category. If you know a lot about a particular fashion trend, you can focus on taking items that fit that style. But keep in mind that the more niche you get, the higher the risk of your inventory going out of style or becoming obsolete. If your clothes suddenly go out of style, you'll be stuck with a bunch of items no one wants. 

Tell your business' story

We've touched on this already, but consignment is often less focused on competition between stores and more focused on improving local communities. More shoppers than ever are recognizing the ethical benefits of consignment, and the more people that shop consignment, the better it is for everyone. Here, we'll cover three key benefits of consignment that you can use to create a story around your business' contribution to your community.

Resale reduces waste

Resale is as green as you can get. Just take a look at ThredUp's 2021 Resale Industry Report: in the last decade, 116 billion pounds of CO2 have been displaced by buying used instead of new!

If you run a B&M store, you're even greener than exclusively online stores. As it turns out, shipping packages thousands of miles is typically bad for the environment. There are tactics you can apply to mitigate the impact of your online store, but at the end of the day, receiving inventory and selling it in the same location will leave a smaller environmental footprint than shipping items.

Local business is worth it

Local businesses aren't just good for the environment --- they're good for everyone. Here are some stats that show how beneficial local business is:

• Small businesses create more jobs than big businesses. In fact, small businesses have accounted for more than 65% of new jobs since the 1970s.

• According to Local First, "when West Michigan consumers choose a locally owned business over a non-local alternative, $73 of every $100 spent stays in the community. By contrast, only $43 of every $100 spent at a non-locally owned business remains in the community."

• More money spent on local businesses means more tax revenue for your jurisdiction --- which means more investment in local roads, schools, parks, and more.

• 28% of shoppers buy local for better service and 19% to help local non-profits.

Your customers aren't the only people who care that you're a local business --- your consignors want to sell local, too! When they do, their split goes right back into their pocket, and the rest goes to you and your shop. Because your supply chain is local, an even higher percentage of your sales stays in your community.

Local consignment has knock-on effects too. A thriving local economy encourages a healthy community by helping people meet their neighbors, get involved, and think more about how their own actions impact those around them.

Consigning for a cause

Mottos like "shop green" or "local first" are often enough to catch the eye of a potential customer and get them in the door. They're simple, to the point, and impossible to argue with. But for folks who are looking to invest more heavily in your shop by becoming a consignor --- essentially a business partner --- you often need to show them that your business goes above and beyond.

Charitable involvement is a hallmark of local business. Non-profits often receive as much as 350% more money from local businesses than from non-locally owned businesses. You can prove that your interests are aligned with your shoppers' and consignors' interests by being more charitably engaged.

Getting started is a two-step process. First, find out what values you share with the people you hope to partner with. Then, put your money (and time) where your mouth is! Do you want to raise support for young mothers? Help save an endangered species? Donate to a medical research project? Find something that you and your community can get behind, either with donations, volunteerism, or by simply raising awareness. 

A great way to dip your toes into charitable giving is to simply donate 10 cents from every sale or per item sold. If you let your consignors choose which charity to donate to, you can split the cost of the donation with them, reducing the impact on your bottom line while also getting on the same page as your fellow community members.

Summary

Hopefully, you've found some useful info, tips, and tricks in this article. Like we said earlier, we're going to continue to write more in-depth articles on these and related topics, so go ahead and bookmark this page.