Saturday, September 14, 2013

The Business Chat - Is consignment worth it? A business case study.



Getting your work into a store on consignment is really really easy. It a great situation for a business owner, inventory with no costs! Of course they want your work! But is it the best situation for you, the maker? 

A couple of weeks ago I was approached by a small local gallery that wanted to carry my work on consignment. I talked to you about the questions I had for the store before decided if it would work. After visiting the store and doing a quick business analysis I decided no. When I mentioned it to a colleague her question was “how did I come to that conclusion?” So I thought you might be interested too. 

My decision was based on more than just a feeling. I liked the store. I liked the owner. But for me, the numbers just didn’t add up. Here’s how I ran the numbers. 

The retail cost of the opening inventory is $2000. 
Does that sound like a lot to you? Well it’s not. Here’s how that breaks down:

15 necklaces $35  - $525
15 earrings $35 - $525
6 necklaces $45 - $270
6 bracelets $79 - $474
4 necklaces $69 - $276

for a total retail cost of $2070. Let’s round this down to $2000 to make it easier. 

Note: This is not a huge selection of jewelry but it is enough to fill a small space well. Display is really important for sales and having just a few pieces sitting on a shelf will kill your sales. 

Now to the business analysis part: 

My costs run at about 20%. (You must know how much it is costing you to make your work. If you don’t you will lose money, it’s that simple. Costs include materials and labour.)

So, my cost to make this work is $400. 

The consignment rate for this store is 50/50. If the store sells everything I give them I will receive a cheque for $1000, a net profit of $600. That’s decent. BUT....

It is a small store. They have a lot of work, and not just jewelry (which I make). The price points are quite low and the owner asked for no work over $100. 

You cannot predict what you will sell. The following predictions are an educated guess. Most likely the store will sell $300 a month of work. I will receive a cheque for $150 a month. BUT, remember that part about display being really important? I will continually add more work to the store as it sells. 

If the store sells $300 a month then I will receive a cheque for $150. I will add $300 of new work each month to maintain a full and good display. So I will break even in month 5 and then start to profit after that. 






profit


my cost
my sales
$0.00
investment

$400.00

-$400.00
sales
$300.00

$150.00
-$250.00
restock store
$300.00
$60.00

-$310.00
sales
$300.00

$150.00
-$160.00
restock store
$300.00
$60.00

-$220.00
sales
$300.00

$150.00
-$70.00
restock store
$300.00
$60.00

-$130.00
sales
$300.00

$150.00
$20.00
restock store
$300.00
$60.00

-$40.00
sales
$300.00

$150.00
$110.00



Using this same formula I calculated the numbers if the store sells $400 a month. At this point I break even in month 3. 







profit


my cost
my sales





$0.00
investment

$400.00

-$400.00
sales
$400.00

$200.00
-$200.00
restock store
$400.00
$100.00

-$300.00
sales
$400.00

$200.00
-$100.00
restock store
$400.00
$100.00

-$200.00
sales
$400.00

$200.00
$0.00
restock store
$400.00
$100.00

-$100.00
sales
$400.00

$200.00
$100.00
restock store
$400.00
$100.00

$0.00
sales
$400.00

$200.00
$200.00




Of course no store will sell consistently every month. There’s Christmas, that will add a huge spike in sales. The holiday season is then followed by the dead months of winter when sales are very slow. For a quick analysis like this I just assume that it all evens out over a year. 

After I look at numbers like this, I then think about some other factors. How long will it take you to pack up, label and track your sales at the store? I assume 4 hours a month. Then there’s the time to go to the store and drop off work and check how everything is. There’s answering emails, possibly providing display items. 

When it came time for me to decide last week I looked at the numbers and decided no. For this to be worth my time, the store would have to be selling $1000 a month of work consistently (not just in December). 

And I looked at the store, even though it is lovely and thought, no. 

Not this time. 

ps. this is a really simple analysis done on a basic spreadsheet. Your profit starts at 0. Add in a formula of profit = sales - expenses. While it doesn't reflect all sorts of things like Christmas it does give you something to start with. Are you doing stuff like this? You should be. 

1 comment:

Jane Perala said...

I like to see your ideas on consignment - it only solidifies my belief that consignment for the most part is a winning situation for the shop owner, but not for the artist. Especially at a 50/50 split. I think consignment is more reasonable at 60/40 split (60 for the artist). I have done consignment, wholesale and direct sales - there are pros and cons to all types. I guess my feeling is that consignment is making the artists be the "bankers" for the store, and that is not what I wish to do.
Ok - I'll get off my soap box now - lol!