Definition: Consignment sale is a trade arrangement wherein the goods are entrusted with a third party (often on commission basis) to be sold on the owner’s behalf.
What Does Consignment Sale Mean?
What is the definition of consignment sale? The owner sends goods to the seller without immediate payment. The seller is entitled to pay the owner for the goods when the sale happens. Any leftover stock that isn’t sold is returned to the owner after the agreed arrangement expires.
The consignment arrangement is particularly helpful for the businesses with niche products and limited reach. A business that does not a brick and mortar store benefits from this arrangement, as the goods are still being sold through other sellers. Thus, it saves on the infrastructure costs. The revenues are often structured in a split arrangement wherein a fixed share/incentive is agreed prior to entering the arrangement. While in most cases the consignments are set for a time and are supposed to be returned upon expiry, it can also be extended upon mutual agreement.
Let’s take a look at an example.
For Instance, Company A wants to promote its sale without actually setting up different stores. Company A approaches an online aggregator, for Eg. EBay, and plans to leverage the online channel to reach more and more customers which conventionally would be infeasible. Company A and EBay enter into an arrangement wherein Company A is supposed to stock ‘n’ units of the product at EBay’s facility for a month and EBay is trusted to enlist the product on its product portfolio for the agreed duration.
Now, as the customers order the product (actual sale), EBay gets a share for its contribution and pays the rest to Company A as the revenue from the goods sold. Any leftover units after the agreed period are to be returned to Company A (without payment). As such, consignment sales may block the revenue for a while and provide unreliable income streams. It does, however, give an unmatched visibility and a relatively easier channel to sell.
The important thing to note is that the seller of goods never takes possession. In this example, Ebay never owns the goods. They are merely selling them for Company A. Thus, the inventory always stays on Company A’s balance sheet.