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Wholesale vs. Consignment

July 25, 2012

sourcinghandmade

Ever wonder if your handmade business is ready for the big time?  Wonder if selling wholesale is for you?  What about selling on consignment?  What is the fundamental difference, anyway??  Read on to find out:

Wholesale: Products are sold to a boutique.  The boutique pays the seller up front for the products, using the seller’s wholesale price and the agreed upon terms (i.e. net30).

Consignment: Products are lent to a boutique.  The boutique pays the seller a commission % after the items have been sold to a customer in her shop (generally 50-70% of  retail price).

Reading carefully, you see the big difference is when you, the seller, get paid.  Shops that buy wholesale typically have more available cash or credit on hand in order to make the wholesale purchase.  They buy outright, so once product is shipped and payment is made, the transaction is over.

Shops that buy on consignment take possession of the goods, but do not pay the seller until a customer buys them from their shop.  In this situation, the seller is basically temporarily lending their product to the shop.

Below are some pros and cons of both from the handmade seller’s perspective:

Wholesale

Pros:

  • You get paid upfront
  • Shop may be more financially secure
  • Shop is financially vested in your products, may push sales
  • If product sells, good chance you’ll get re-orders
  • Get your products in a shop to gain more exposure
  • May get a higher volume of business

Cons:

  • May be asked to make large production runs
  • May need to invest in more supplies, employees
  • Products may go on sale if they’re not selling, requiring a lower wholesale price on re-orders

Consignment

Pros:

  • Get your products in a shop to gain more exposure
  • Shop may price items slightly higher, waiting for the “right” buyer, thereby increasing your commission %
  • If product sells, good chance you’ll get re-orders
  • May have more autonomy to decide types of items to sell

Cons:

  • Shop is not financially vested in your product
  • Shop may not as assertively push sales
  • You may not get paid for several months
  • Products may go on sale if they’re not selling, giving you a small commission %
  • Need to buy on consignment may be an indication of the shop’s financial status
  • Potential loss / theft issues…who is responsible?

Both are a great means of increasing exposure for your brand and growing your handmade business.  Consignment does come with additional risks, though they can typically be addressed via the Consignment Agreement Form that both vendor and buyer sign prior to product shipment.  Some handmade sellers start with consignment to “test the waters,” then graduate to wholesale when the time is right.  In a future post we’ll discuss important factors to take into consideration when selling on consignment.  Until then, feel free to post any questions below!

5 Comments

  1. August 6, 2012

    Thanks for confirming. “May” is a very good word and it May be that a shop which has been buying outright and now cannot and states they now cannot do so May actually be in cash flow trouble. Which is why you don’t want to be the New Product being consigned in the otherwise wholesale purchased inventory. But a start-up. Not the same comparisons.

    The real worry about wholesale purchasers is that they can just keep not paying and not paying and moving on to another and another vendor and you just think they are not paying you on time vs they never had any intention of paying you and are making whatever they can on whatever they can “purchase” on terms. They May pay upfront for the first order to lull one into thinking they are legit and to further the charade. They often keep a few vendors very happy and those vendors are the ones they will send you to for references. And those vendors have no idea that they rest of the inventory is being stolen and highly recommend the shop. It is much harder for a consignment shop to do this. Most are required to send in a report of the sales for the previous month. I further require mine to send me a quarterly report of what is on hand. It’s more work for me (and I require a higher pricing because of the paperwork) but it is fool proof. I also require a photo of the full inventory from time to time. Pictures are worth a thousand words. If a consign shop is doing anything questionable, I can at least get my work returned – some part of it anyway. Legally it is still yours and if they don’t return it, it is “stealing”. If a wholesale purchase is not paid for – good luck getting anything back – they “own” it. Legally, they don’t have to send you back anything and you end up in a battle that can end up being sent to collections. Yuck – Time is Money. Be careful with wholesale – you stand to loose much more. NEVER send another order with an outstanding invoice unless you have a long and very clear history of good business dealings. If I get an order from a newer account, I let them know I won’t ship until the current invoice is paid. If they really need the shipment – they will send a check that day.

    The good news is that neither business model can get very far if they don’t pay because the industry is watching and blogs/forum are talking and it is tiresome for anyone to not pay or not be paid. It is hard enough to run a retail business – having to look for new vendors all the time makes the model unpleasant and actually less profitable. Time is money!

    Get those references – and get them yourself – not the list they might hand you.

    As for not having “the financial means to buy wholesale” as you quote the New Boutique Owner, that has nothing to do with long-term successful business operations. Most consignment models – if they are starting that way – have the SAME costs per month eventually. Start-up costs kill most start-up businesses if they are not smart about how to run a retail location, but consignment is much more likely to survive those first months and years. I have a virtual single space two page list full of failed new retailers from the past 20 years, but only two consignment shops on the list (both were in the early 2000’s when all was “booming”) – mostly due to a 70% to artist (very bad model!) and seasonal location. One lasted 1.5 years and cost her dearly and was forced into total bankruptcy. Bad business model, bad location, bad market, bad business practices and complete lack of any business background. Had never even worked in a retail shop – or managed a business of any kind! She was an “artist” and wanted her own “gallery”. How red can a flag get?

    So, I always track inquiries from “new” businesses and put them on my waiting list. I stopped – many years ago – dealing with with anyone who is a “dreamer” (with either model) who has little to zero knowledge of the highly difficult world of retailing.

  2. August 6, 2012

    Absolutes weren’t used in our post…we used the term “may.” I recently spoke with a new boutique owner who stated verbatim, he could only buy on consignment because he didn’t have the financial means to buy wholesale. As with most things, there is a bell curve, shops can be on either end of the curve, with the majority possibly falling in the middle. How wide the data points are dispersed in the curve is anyone’s guess. Without seeing financial records, which is highly unlikely for any privately held business, no one cannot state for certain. Of course, everyone must do his/her due diligence and research each particular avenue so s/he can make an informed decision. I have heard countless artisans state “I will never do consignment again,” after having one bad experience. Our reply is to not turn one’s back on an entire business avenue because of one bad experience. Instead, understand there are many good points to selling on consignment…with the caveat one does his/her research and makes an informed decision. Your advice to survey other sellers in the shop is excellent, and we recommend the same.

  3. August 6, 2012

    There is no evidence – just an observation that “During our research, we have found that many artisans or crafters are under the impression that a consignment shop may not be as financially stable.” Be careful. There is nothing there but “feelings”.

    So my advice to anyone looking to get involved in selling to stores is this: Just like you would check the references of a wholesale buyer – if you were to enter an agreement with a consignment model business you do the same. Contact a few of the artists who do work similar to yours or in your category and randomly and ask what they are experiencing. How long have they been partnered, how is the turn, and are they paid on time… anyway… YMMV, but terms, contracts, agreements… THAT is where your safety net lies in any arrangement. If one has a specific set of terms – don’t compromise and jump ship if you feel any abuse from either business model.

  4. August 6, 2012

    McKenna,
    Thank you for sharing your insight and experiences. I believe a lot of artisans would benefit from reading your comment. During our research, we have found that many artisans or crafters are under the impression that a consignment shop may not be as financially stable as a wholesale shop. They will be happy to hear they shouldn’t paint with such a broad brush. This is proof positive that each shop should be researched and looked into individually, instead of being ruled out purely based on their business model. Thank you McKenna!

  5. August 6, 2012

    The idea that a shop might be financially unstable if it is a consignment model is completely erroneous. Several TOP (Niche awarded) galleries are consignment only. In my 20 years with my current line and with nearly 50 years experience, I have never seen any justification for this concern. I am in about 45 locations and several are consignment. I have only had issues with “solvency” with my wholesale buyers – never once with consignment.

    I would add one specific caveat about putting your work on consignment that is not included in this posting: DO NOT put your work on consignment if it is not a FULL consignment model. If they just want to “test” your work and you really want to be in that location – offer a 30 day trial. If you are surrounded in goods that are paid for – you will be a a great disadvantage. If everything else is consigned the playing field is level.

    Oh…AND there is a growing number of consignment galleries that only give the artists/artisans 45%. 2D art galleries often only pay out even less – down to 35% in my community.

    AND unless it is in the terms/agreement, there should never be a sale of your items that lowers YOUR percentage. If it is a store wide sale – it is not YOUR percentage that gets lowered unless you agree to that stipulation. I have a standing agreement that if someone is buying more than xx dollars and wants 10% off, I will split the difference, but I have had so few times when that has come up it’s hard to count on one hand in the past 20 years. The advantage of an all consignment shop is they can outright proclaim that they have no authority to reduce prices (with some small exceptions) that are set by the artists. And that is the truth.

    You will never see a storewide “30% off – one day only!” sale with this business model – which might be part of why they tend to be more financially stable.

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