Consignment sales, when handled properly, can be an extremely lucrative method of boosting sales margins through the roof. Here's the how and why...
If you sell products with high turnover, such as computers, electronics, books, CDs, and similar items, consignment sales, when handled properly, can be an extremely lucrative method of boosting sales margins through the roof. Because of the explosion of online auction sites like Ebay, consigned products can also be used to greatly expand your target market and reputation for excellence.
Standard retail margins are extremely limited because of stiff competition. You can only mark up an item so much before it becomes unsellable. Many items barely cover their cost of sale, let alone provide substantial profits. Many computer and electronic retailers especially have shifted their attentions to after sales profits through extended services and high priced accessories. Consignment and used product sales allow you to recover a tremendous profit margin by leveraging your expertise and the reputation of your established business.
Suppose you buy a product which you enjoy for one year, and then wish to sell. You know the risks of buying used, and so do your potential buyers. As an individual, you have no ability and no wish to offer any kind of warranty or support; you simply want to sell the item as is and be done with it. Thus, the price you can command for the product is about 50% of current retail, or less.
As a business, you can offer many perks that individuals cannot. Thus, you can purchase or consign products at the standard used price, but sell them for more, because you are providing the guarantees that come with buying from an established retail shop. In this situation, everyone wins: you earn a substantial profit, the buyer gets a great product at a lesser price, and the consignor sells the product through your shop. With every sale you are actually earning two customers; the buyer and the consignor.
However, as a retailer you are assuming all the risks of purchasing and selling used products when you offer consigned merchandise. To benefit from the high margins and increased product lines available through consignment sales, you must strictly adhere to certain guidelines.
You Must Have A Consignment Contract
An absolute must! Consignment items can prove very tricky, very quickly! You must have a specific, comprehensive consignment contract which must be signed by all customers leaving a consignment item, and there can be no exceptions.
When you receive a consignment item, you have no knowledge of the item's history, level of functionality, or problems. You can expect that many customers will "stretch the truth" a bit, in an attempt to ensure the sale of the product. It is your responsibility to carefully check all the features of the product to ensure that it is functional and ready for sale, or easily repairable before being ready for sale. Of course, all repair costs should be considered before offering a consignment fee to the seller.
Your contract will cover your limited liability for the product in case of damage or theft, the exact manner in which the consignor will be paid their fee (how much, when, and according to what method), and will specify what situations may warrant the return of the consigned product. Extremely important is an agreement as to how much time the customer must leave the item on consignment. Our shop chose 60 days to stem the temptation for the customer to sell the consignment item through other channels, and then request the item back from our shop. At this point, we had likely invested time to repair it, prepare it for sale, and perhaps even struck a deal with a purchaser on the product. In some cases, we may have actually sold part of the product if placed in consignment as a system. Do not leave anything to speculation or common sense; spell it out in the contract, so there can be no misunderstanding between your business and the consignor.
I understand that this can be very complicated if you have never offered used or consigned products in your business. East Point Consulting can assist you with an affordable consultation on offering consignment products, and taking advantage of the substantial profit margins and increased inventory they offer your business. Don't miss out on this very exciting opportunity for a retail shop. Please don't hesitate to give us a call or send us an email.
Track All Consignments Carefully
Misplacing a consigned item, or selling it and neglecting to pay the consignment fee is a paramount error that will cost you dearly. All consigned items must be carefully tracked according to date consigned and who is the consignor. You must also track the cost of the consigned item so that you do not undersell it and lose money. Consignment fees, even on similar products, vary greatly according to the perceived value the consignor has placed upon the item at time of consignment. One customer may demand a much higher price for his consigned product, while another may only wish to receive a small consignment fee upon sale. You should use this spread to your advantage to earn the largest profit you can from each item, while paying the consignment fee that makes your customer happy.
Consigned products can also be split, but this again requires especially careful tracking. In our shop, we frequently received entire systems for consignment, but customers would always want to divy up the merchandise according to their own needs, buying a piece here and a piece there. This requires not only an effective tracking system, but an equitable fee and return policy as well. Our 60 day policy worked well, allowing us to divide and sell products from a consigned system without fear of the consignor requesting the return of their items after we had sold half of them. We also implemented a blanket fee policy on systems, paying the consignor for the entire system, rather than a fee for each item in the system. This greatly simplified accounting, and allowed us to sell smaller items in the system without having to send out tiny checks to our consignors. Our method was to pay the entire fee upon the sale of the most expensive item in the system, whether it sold first or last.
If a product is not going to earn a substantial profit or offer incentive to other purchases, or is in unsellable condition, you must return the consignment. A very substantial percentage of products we received for consignment were damaged, or otherwise unsellable due to serious cosmetic flaws or other problems. Our policy, as specified in our consignment contract, was extremely inflexible in such matters because of the high percentage of customer flak we received in such cases.
We found that a larger than expected percentage of customers consigning products would offer us dysfuntional items without explanation. We would invest time into testing the products only to find they didn't function properly, or at all. Upon calling the customer, we would hear those famous words with which every repair agency is familiar: "It worked fine when I brought it in."
This wasted time and energy obviously didn't fly with us, and didn't help us to offer great consignment products and fee services to our various customers, so we implemented some pretty strict policies:
a. Products offered for consignment must be cleaned and ready for sale, and must be in working condition.
b. Consigned items will undergo testing to ensure their funtionality within one week of consignment.
c. All products found to be obviously dysfunctional will be returned to consignor, and must be picked up within 15 working days or they will be disposed of.
d. Items requiring repair or part replacement will have their consignment fees lowered accordingly. Items requiring cleaning will be assessed a $15 cleaning fee.
Once we posted these policies, a strange thing happened. We no longer had any of these problems. We never assessed a cleaning fee. We never repaired an item and lowered the consignment fee. And we only had to toss a defunct item once or twice in a year, after it had been left in the shop for months. Customers knew we were serious about selling quality products, and since they wanted our help in selling their items, they brought us items that were, by and large, in good working condition and ready for sale. We did sometimes have to repair items, but we simply called the consignor and discussed the costs of repair, (parts only, we never charged labor to repair consignment items!), giving them the option of having us repair and sell it, or having the item returned.
Fee vs. Percentage
Every store I've ever placed items for consignment with has paid me a percentage of the selling price. This is logical, but not effective. It introduces mystery into the selling process, and mystery creates anxiety in the consignor and the large potential for unmet expectations. If I consign an item that is worth $75 to me, and the retail shop sells it for less than expected and only pays me $50, I am now disappointed, and may even feel cheated. I may even suspect that they really sold it for more, and told me they sold it for less in order to give me a smaller percentage. This is not good. Instead of getting two happy customers, one who bought the item for less and one who received a healthy consignment fee, the retail shop has gained one customer but lost another.
Our shop only offered flat fees for all consignments. No percentages. If you consigned an item with us, you knew exactly how much you would be paid upon its sale, if it sold (95% or more consigned items sold within the 60 day consignment period). If we discounted the item or sold it at cost as an incentive, you didn't know or care. You still received the fee as agreed.
The result was many, many happy consignors. Even more importantly, customers felt very comfortable offering consignments to us because they knew exactly what to expect. We told them how much we could pay, and gave them a receipt when they signed our contract. There were no surprises and the process generated no anxiety from customers who worried their items would be sold for less by some hyper active sales rep.
In the rare cases where either a lesser offer was made on an item that hit below our cost, or an item lost value because it sat on the shelf, we simply called the consignor and explained the situation as clearly as possible. We left it up to her whether to retrieve the item, or allow us to sell it for a lesser price. In these instances, I always sent a copy of the purchase receipt with the consignment fee, so she could indeed see what her item was actually sold for.
Cash, Store Credit, or Trade
If high profits and extended inventory aren't enough, many customers gladly take store credits or trade items in lieu of their consignment fees, saving you from parting with cash. We offered great incentives for customers to choose credit or trade. If our consignment fee was $50, we would offer $75 in credit or trade. This proved extremely popular. We did place some limitations on what could be purchased through store credit or trade to avoid losing money on items with miniscule margins.
Mail Consignment Fees On Time
Many people who consign their products are hoping they will sell as soon as possible. Do not disappoint them with late fees. I mentioned earlier in the course that our shop paid all its bills on one day each month. The single exception was consignment fees, which were paid within one week after the item's sale.
This encouraged customers to tell their friends about their product, for sale at our shop, which expanded our customer base. It also avoided the embarrassing situation of a customer coming into your shop to check on their item, finding it sold, and then rightfully demanding their payment. Do not offer to sell consignment items if you are not committed to paying the fees on time, or the entire plan will backfire on your business.
Again, consignments can be tricky, but we can offer your company assistance in developing a fair and profitable consignment and used item sales plan. It is a dynamite way to increase inventory and sales margins, while involving your customers in a way that nothing else can. Customers who earn money through your sales channels will become your greatest spokespeople, generating loads of free advertising and publicity for you in an attempt to help you sell their items. They will also become acutely interested in the success of your business because they will see it as a possible source of revenues for them from time to time as they have products to consign with you.
Consignment really is a win-win situation that you cannot afford to miss.
This article is just 1 of 84 lessons taken from our affordable, life-changing coursebook for small business owners, called: Take Charge: Proven Strategies to Improve Your Business and Reclaim Your Life Today! Available in Paperback, Adobe PDF (eBook), and MP3 Audio CD at www.eastpointconsulting.com.
About the Author
Author of the internationally beloved 'bible' of small business management, Take Charge! Proven Strategies to Improve Your Business & Reclaim Your Life Today, Showalter is the owner and founder of East Point Consulting, a small business consulting firm in Los Angeles and Prague. East Point's popular website is packed full of free and dynamic resources for small business owners. Is your business running you? Come to our website today and click on "@sk Dave!" This weekly column answers your email questions, free, with "no-frills small business strategies that work!"