Once you have your craft business up and running and have worked out your pricing, you may start looking at different sales channels to sell your product through and wondering what the difference is between consignment vs. wholesale.
This article will explain the pros and cons of each and when one is better than the other for your business.
CONSIGNEMENT VS. WHOLESALE
Consignment and wholesale both allow your products to be sold by a retailer, but a consignment deal means you only get paid if your product sells, while a wholesale deal means you get paid for the product, whether or not it sells in the retail store.
The benefit of selling through retailers, whether on consignment or by wholesale, is that they’re taking care of the marketing and selling to get your products sold.
When you sell directly to consumers, you spend time and money to market and sell those products (e.g. Etsy listing fees, craft show fees, posting to social media, sending newsletters, shipping materials/shopping bags, transaction fees, trips to the post office, etc.).
If marketing and selling aren’t strengths of yours, you may want to focus on selling your products through retailers.
Yes, you still must market and sell to retailers, but you’re increasing your value per transaction and reducing how much marketing and selling you must do.
Retailers won’t just buy one item from you, they’ll purchase larger quantities so you’re selling much more to a retailer than you are to a consumer.
And if the product does well in a store, they’ll purchase from you again and again with minimal marketing effort required from you (perhaps just a follow-up email each quarter with your latest lookbook). On the other hand, if a consumer buys an item from you (e.g. a handbag), they likely won’t buy from you again until that item wears out or goes out of style.
Consignment shops are a way for the shop owners to “borrow” product from a variety of vendors to fill their store, without having to go into debt for that stock. However, any store may sell products on consignment, not just “consignment shops”. A retailer may buy most of their products wholesale while making consignment deals with a few vendors they want to test out in their store.
When an item sells, the vendor receives a portion of the sale, as does the consignment shop.
The commission each party is paid depends on the agreement. It can range from a 40/60 split, 50/50 split, 60/40 split, etc.
If you’re selling handmade items, typically you’ll receive 60% of the sale while the consignment shop receives 40%. You can learn more about what a fair consignment percentage is here.
- It can be a good way to get your foot in the door with a retailer as it’s less of a risk for them and it may eventually turn into a wholesale agreement if your products sell well.
- If you have a good relationship with the store owner, they may be a little more flexible with their inventory. Meaning if you have a big craft sale approaching, they may allow you to take some of your stock out of their store and re-stock them once the sale is over. It’s not a good habit to get into but it is an option with consignment.
- Some boutiques are more generous with their consignment commission giving you more than the 50%. However, this can work the other way as well with you getting less than 50% commission.
- It can be a great way to test the waters and get a feel for what sells and what doesn’t without damaging your reputation with a store. If you sell your items wholesale to a store and they don’t sell, that store takes a loss and they most likely won’t risk buying from you again.
- You don’t get paid unless your items sell, which can mean spending a lot of time and money to fill a consignment store’s “order” and you don’t ever get paid for it.
- Your commission can vary from store to store. Some may only pay you 30-40% of the selling price.
- Unsold items get returned to you which may mean you’re left with shop-worn or out-of-season products that are hard to sell.
- Because the store owner hasn’t put an investment into your pieces it may mean less commitment from them to make that sale. Pieces they’ve paid for and own may take priority.
- You must be very organized with each item they’re given, what sells and what is being returned to you. Don’t rely on the store to keep track of it for you as mistakes can happen and you have more risk if an item goes missing.
- For me, consignment resulted in a lot more running around. You not only have to get new items to the store but you also have to pick up what doesn’t sell. There was always touching up and re-tagging to do before I could sell the pieces myself.
- You basically need to put your trust in the store owner that they are going to pay you on time and take good care of your products. You should always do your homework to find out if they are a reputable company.
WHEN TO AVOID CONSIGNMENT
You may want to avoid consignment deals if:
You make very seasonal or time-sensitive products
If your products follow trends that are in one season and out the next, you’re taking a risk by loaning them to a consignment store that may or may not sell them.
If you give your seasonal product to a store and they return it 2 or 3 months later, you may then be stuck with that product, unable to sell it because it’s out of season or out of style. You then take on the entire loss.
You have limited stock
If you’re only able to create a few pieces each month, you may not be able to keep up with the demand to stock your online store or craft show booth and a consignment shop.
The consignment shop will typically want a collection of your products to create a display; they don’t just want one or two pieces to float around their store. So that can be a lot of stock tied up in a store.
If you don’t have the hours or ability to create a lot of stock, you may prefer to place the stock you do make, in sales channels you have more control over.
If you place your limited stock in your Etsy shop and it’s not selling, you can play with your pricing, try different marketing methods, or take it to a craft show to get it sold. Once you place your stock in the consignment shop, it’s in the store’s hands and they may or may not make the same effort you would to get it sold.
A wholesale agreement is when a retailer places an order for your products and pays you wholesale prices for them. They may pay you when they place to order or net 30, 60, or 90 days. Net 30/60/90 may mean a few different things, but basically that you’ll be paid 30/60/90 days after an event. That event may be invoicing, shipping, or receiving (e.g. they send you a cheque 30 days after you ship them the product).
You get to set your wholesale prices and how much of a discount you offer, but typically, retailers expect wholesale prices to be 50% off the retail price.
This discount allows the retailer to mark the products back up by 50%, to your retail price, and when they sell your product in their store, that 50% markup covers their store’s costs and gives them a profit.
Wholesale is a better deal for you, the vendor, because it means you get paid for your product whether it sells in their store or not. You know you won’t be getting any product back at the end of the month that you then have to find a way to sell.
- You’re getting paid upfront for your products so you know how much money you’re bringing in that month from each store.
- Store owners have an invested interest in selling your goods because it means a loss for them if they don’t.
- They own that product so if it goes out of season before it sells or it is lost, stolen, or damaged, it’s in their hands and doesn’t affect your bottom line.
- You can set order minimums to be sure you’re making enough money to warrant selling your products at wholesale prices.
- There’s a little less wiggle room with wholesale sales. If your products don’t sell the first time around, the store owner likely won’t risk buying more stock from you. Consignment, on the other hand, allows you and the store owner to play with which stock works for their store, with less risk.
- You need to be capable of filling orders by their deadlines. Retailers typically buy for a season, months before that season approaches, so you must have product collections designed, lookbooks made, and orders filled ahead of schedule. Consignment has a little more back and forth with the retailer and you can usually work with them to stock their shelves with items you have available or what works for you at that time.
- Once a store buys an item from you, they own that product and are free to display it and sell it in their store as they please, which may not be cohesive with the brand and image you’ve built. But if you choose retailers that align with your brand, it shouldn’t be a problem.
WHEN TO AVOID WHOLESALE
Your craft business may want to avoid selling wholesale if:
You don’t have the margins
Retailers expect a significant discount on your products (typically 50%). If you haven’t set your prices properly or have high costs and low profits, wholesale may not be the path for you.
When you sell your products at 50% off, you must still be able to cover your costs and make a profit from that sale. If you can’t do that, you’ll either have to adjust your prices or avoid selling wholesale.
You have a hard time keeping up with sales
If you have a booming business as is and are approached by a retailer wanting to carry your products in their store, it’s okay to say no.
As a handmade business, you’re likely doing everything by yourself and may not have the time or ability to fill more orders (especially ones you must sell for 50% off).
Unless you have high marketing and sales costs, you likely make more money when you sell direct to consumers. If you have the demand, keep feeding that channel. Taking on wholesale orders means more work but less money. That extra work may be better spent growing your Etsy shop/website/craft show network, etc.
CONSIGNMENT VS. WHOLESALE AGREEMENTS
Whether you sell consignment or wholesale, make sure you have an agreement in place that covers the basics such as how much you’ll get paid and when you’ll get paid.
When it comes to agreements for consignment vs. wholesale, there are a few more grey areas to cover with consignment, such as who’s responsible if your product is stolen, lost, or damaged while in their store. You may want to draft up your own consignment agreement (here’s a simple guide to follow).
You may also be interested in reading:
- WHAT IS A FAIR CONSIGNMENT PERCENTAGE?
- WHAT TO INCLUDE IN A CONSIGNMENT AGREEMENT
- CONSIGNMENT INVENTORY TRACKING SPREADSHEET