Any seller of goods requires substantial equity with which to purchase from manufacturers, wholesalers, and other suppliers. Especially when starting a business, this fact often becomes a problem. Almost no bank grants an overdraft facility as long as the viability of the business has not yet been proven. Thus, the necessary equity capital for the purchase of goods and materials is missing. However, there is a way to purchase goods that only have to be paid for after they have been sold to the supplier. It’s called selling on commission. This system cannot be implemented in many areas. However, where possible, this facilitates business development and reduces the risk of unsellable goods.
The structure of sales on commission?
There are at least three parties involved in selling on commission. The focal point is the commission agent. He is the party involved who purchases goods, conducts customer advertising and finally sells his goods to the customer. When selling on commission, he obtains his goods from the principal, who initially gives him his goods free of charge. Only when the commission agent has sold the goods to the customer and the sales price has been paid does the latter pay the agreed price to the principal.
From a legal point of view, the principal remains the owner of the goods until the agent has sold them and delivered them to the customer or, for example, handed them over to a retailer for payment. Then the right of ownership passes from the principal to the buyer. In the commission contract, the commission agent and the principal only regulate that the goods are in the possession of the commission agent during the advertising phase and in the sales transaction, without any claim of ownership.
The pros and cons of selling on consignment
The certainly greatest advantage of the commission business has already been mentioned at the beginning. The commission agent does not need any equity capital and thus maintains his business activities even if he cannot generate any sales revenue for a limited period of time. But he also avoids the risk of buying goods that are difficult to sell. This fact, in particular, requires a great deal of experience and a sense of proportion, which a start-up founder usually cannot yet demonstrate due to a lack of practical experience. After all, sales success depends to a large extent on the trend-oriented and well-stocked purchase of goods by each retailer. His sales success is not yet secured with goods on commission. However, the commission agent does not yet have to pay any invoices from the purchase of goods as long as he has not yet sold them.
However, the commission model also has disadvantages. In most cases, the principal himself determines the final sale price of the goods and only agrees a commission from this sale with the commission agent. This eliminates any independent pricing and staging of sales campaigns by the retailer. The amount of the commission, on the other hand, is freely negotiable. Here it is in the skill of the commission agent to achieve a high commission, especially for goods that are difficult to sell.
Which products are sold on consignment?
The term commission sale is very old and originally meant “junk goods”. Inferior products or those with product defects were traded, which the retailer was not sure whether he could resell them to his customers. This business can still be found today, for example, in special item markets. As a customer, you often ask yourself with some junk whether a commercial transaction can exist with it. The answer lies in the commission, because as long as the shopkeeper hasn’t sold the junk, he doesn’t have to pay it to his supplier.
Trading goods on commission meanwhile also extends to high-quality products. A typical example are ready-made and stocked product stands that manufacturers of shavers place in electrical and electronics shops. A sales representative of this entrepreneur visits the retailer at regular intervals, accounts with him for the items sold and restocks the product stand. The retailer pays the sales proceeds minus his commission to the manufacturer and in this way avoids the costs of storing the goods.
Two other examples are securities that are sold by a financial broker on behalf of a financial institution or the classic travel agency with trips organized by the tour operator.
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