Consignment sales are advantageous for both parties involved, but there are some cons that you should be aware of. Let’s take a look at the disadvantages of consignment sales so you can make an informed decision before considering this method for selling your products.
What are the disadvantages of consignment sales? The disadvantages are split between the seller and the retailer, such as the uncertainty around the sale, the necessity of a good understanding between the two parties and the logistical limits.
Also find out what the advantages of consignment sales are here.
What is Consignment Sales?
The principle of consignment sales is based on a business model where the retailer deals with a seller or shipper in order to sell the merchandise while keeping a portion of the profit made.
So here are the disadvantages of consignment sales for the seller as well as the retailer.
The Disadvantages of Consignment Sales for the Seller
The seller has to bear the cost of producing the goods and can put a lot of money at stake on products that are not guaranteed to sell.
If those products are not sold, the seller remains the owner of them. At some point, the retailer could lower the price of the items to try and sell them more quickly.
The seller also risks never getting any payment if the products are not sold. The seller would then have to find storage for the unsold goods if the retailer no longer wants to display them in their store.
2. Lack of Motivation to Sell
Consignment sales are based on an agreement between the seller and the retailer. In this agreement, the retailer bears no monetary risk, it is then possible that the retailer has little incentive to sell products that do not belong to them. If this situation arises, the product may become difficult to sell.
3. Necessity of a Good Agreement
A good understanding between the seller and the retailer is crucial since most of the disadvantages of consignment sales stem from this agreement. Consignment sales are therefore dependent on this agreement to perform well.
Moreover, if the seller wishes to remove the consigned items before the end of the contract, this can lead to extra charge or loss of revenue for the retailer.
The seller has no control over the retail space and the arrangement of its items in the retailer’s store. The retailer could therefore favour certain places that sell more than others for his own goods to make his investments profitable.
In the agreement between the seller and the retailer, if the commission that the retailer receives on consigned products is less than the profit from his own goods, the offer is not attractive to the retailer and they might not have a good reason to sell the consignment items.
Depending on the type of agreement between the two parties, the revenue stream may vary. Some sellers will only receive what is due to them when all products are sold or when a sales threshold is crossed.
One of the disadvantages of consignment sales for the seller is the commission fees. Retailers who sell items on consignment typically charge commission fees that reduce the amount the seller receives for the items sold.
This means that doing business with a retailer reduces the amount of income earned.
As we mentioned earlier, the seller owns the unsold products. In terms of time and money, it is therefore logistically disadvantageous for the seller to always have to pick up and carry the products from one place to another when the products are not sold. Also, the seller must have a warehouse large enough to contravene these situations.
It can also be difficult to manage and track consignment inventory which is scattered all over the place between several stores.
6. Uncertainties on the Condition of the Products
Since the seller does not manage the products when they are at the expense of the retailer, the seller cannot do anything about the damage and mistreatment that buyers or retailers inflict on the products. The seller does not have the means to ensure that the products are represented according to their vision and integrity through the windows of others.
One of the disadvantages of consignment sales is the competition between selling consignees. Indeed, retailers can do business with several sellers at the same time and they can be motivated to sell the products of one or the other. It can mean that the seller ends up competing with similar products from another seller at the same retailer.
To avoid these disadvantages, it is therefore essential to have a solid and fair contract for the seller.
The Disadvantages of Consignment Sales for the Retailer
This disadvantage of consignment sales applies to both the retailer and the seller since the sale of consignment items is never guaranteed. The retailer can potentially lose selling space if the products don’t sell while this space could be better stocked with more in-demand products.
Also, profit margins are often lower for the retailer when selling consigned products because some of the profit goes to the seller.
For the retailer, it takes more time to manage consignment sales. Indeed, the retailer may need more time to receive, check, and list items.
Also, the retailer needs to have a place ready to receive the consigned goods in large or small quantities and store them with care. Having an inventory that balances with a physical inventory and a returnable product inventory can become quite a challenge for the retailer.
Knowing how to calculate your physical inventory as well as your consignment inventory becomes an asset for any retailer using consignment sales.
3. Difficult Inventory Management
4. Necessity of a Good Agreement
Once again, a good agreement is required for the sustainability of consignment sales. The retailer is usually responsible for shipping costs.
The retailer will also be responsible for selling and displaying products that are in good condition and will comply with local regulations. The retailer therefore takes on additional responsibility for products that belong to the seller.
It is therefore essential to have a good contract between the seller and the retailer on this subject.
5. Limited Control Over the Goods
Another disadvantage of consignment sales for a retailer is the lack of control over the inventory received. The seller has control over the quantity of products. If an item sells well, only the seller can decide to order more of it.
In conclusion, consignment sales has several advantages for sellers and retailers looking to minimize the risks and costs associated with selling their products. However, this method of selling also has several disadvantages and challenges to consider.
Sellers must be prepared to face potential financial losses in the event of non-sales, as well as to give up some of their control over the sale of their products. Retailers should be aware that this process can add weight to their shoulders and inventory can quickly become a headache.
Ultimately, the decision to use consignment sales will depend on the needs and goals of each seller and retailer. It is important to think seriously about the advantages and disadvantages of consignment sales before making a decision on this sales method.