Explanation of the Consignment Business Model

Have you ever walked into a consignment store to shop? The consignment business model is a simple and straightforward process toward profitability for everyone involved. The shop provides a place for someone to sell their goods or services. In return for the sales space, the shop owner takes a percentage of the sales price. The remaining amount is then paid to the consignor at some point in time, usually at the end of the month.

The consignment business model has been used successfully by thrift stores for decades, but it is being used successfully online as well. A number of major websites use a variation of this business model right now as seen in major commerce sites such as eBay and Etsy, all structured on the consignment business model.

It’s About the Listings

For these successful ecommerce sites, the consignment model exists with only one slight variation, a fee is charged in advanced. These websites charge consignors for the privilege of listing their item on the website. In return, the listing can be indexed through search engines or directly accessed.

Although there are advance fees, when managed appropriately, it becomes easy to find profits. Because payment processing is handled by the site, consignors simply pay a percentage of the sale to cover these costs.

Instead of providing the item to the site, however, the consignor is responsible for shipping out the items that have been ordered. To keep consignors honest, a system of feedback is put into place so that customers can research a seller to determine if the rewards of ordering a specific item outweigh any risks that are associated with the online purchase.

For Others It’s About Representation

On many freelance and service style sites, professionals are connected with freelancers, requiring a slightly different approach. Instead of creating an advanced fee to provide services, they charge a commission on any services ordered instead. That commission is paid out of existing revenues that are generated, much like royalties are paid to artists.

Advantages for Consignors:
With this type of business model, consignors do not have to manage the financial part of their business. The base site handles the cash to ensure the money clears and processes successfully. After a specific amount of time, such as 14 days, that money becomes available with a credit ard through an integrated payment system such as Paypal where it can be withdrawn by the freelancer.

What Is the Advantage of the Consignment Business Model?

The primary advantage of utilizing this particular business model is that the services being provided are salesmanship and space. Instead of securing inventory, consignors will provide it. Customers come because they have a need for the products that have been consigned. For selling the item in your space, you get to take a cut off the top. It doesn’t get much easier than that to make money.

A secondary advantage is that it becomes very easy to start a business using this particular model. As long as enough capital exists to create the structure for the business, then there will be a way to start earning some cash.

What Is the Disadvantage of the Consignment Business Model?

The disadvantage of this business model, however, is that a consignment business is at the mercy of the quality of merchandise or work being offered. If the quality is poor, customers don’t come back. For some sites they may promote their best sellers because this helps them obtain consistent revenues. The same is true with the ratings systems of other sites.

For the consignors, there is one immediate disadvantage with the payment for services not becoming immediately available. A freelancer would be required to work consistently for over two weeks before they can become eligible to take cash out. That is two weeks of not having cash to pay rent or other necessary living essentials. Once the payment system is established, payment schedules flow frequently.

The consignment business model is one of the easiest to implement, which is why it is seen so often today online and offline. It has some advantages and disadvantages, but when appropriately managed, can be a simple and easy way to bring in consistent revenues.