diff --git a/docs/reference/cli.rst b/docs/reference/cli.rst
index c44ec3a02..9ab18f26e 100644
--- a/docs/reference/cli.rst
+++ b/docs/reference/cli.rst
@@ -317,7 +317,10 @@ import ...``.
 * ``-d DIRECTORY``: specify the library root directory.
 * ``-v``: verbose mode; prints out a deluge of debugging information. Please use
   this flag when reporting bugs.
-* ``-c FILE``: read a specified YAML configuration file.
+* ``-c FILE``: read a specified YAML :doc:`configuration file <config>`.
+
+Beets also uses the ``BEETSDIR`` environment variable to look for
+configuration and data.
 
 .. only:: man
 
diff --git a/docs/reference/config.rst b/docs/reference/config.rst
index 92b3135cb..040db565a 100644
--- a/docs/reference/config.rst
+++ b/docs/reference/config.rst
@@ -5,17 +5,14 @@ Beets has an extensive configuration system that lets you customize nearly
 every aspect of its operation. To configure beets, you'll edit a file called
 ``config.yaml``. The location of this file depends on your OS:
 
-* On Unix-like OSes (including OS X), you want ``~/.config/beets/config.yaml``.
+* On Unix-like OSes, you want ``~/.config/beets/config.yaml``.
 * On Windows, use ``%APPDATA%\beets\config.yaml``. This is usually in a
   directory like ``C:\Users\You\AppData\Roaming``.
-* On OS X, you can also use ``~/Library/Application Support/beets/config.yaml``
-  if you prefer that over the Unix-like ``~/.config``.
-* If you prefer a different location, set the ``BEETSDIR`` environment
-  variable to a path; beets will then look for a ``config.yaml`` in that
-  directory.
-* Or specify an *additional* configuration file to load using the ``--config
-  /path/to/file`` option on the command line. The options will be combined
-  with any options already specified your default config file.
+* On OS X, it is ``~/Library/Application Support/beets/config.yaml``.
+
+It is also possible to customize the location of the configuration file
+and even use multiple layers of configuration. Just have a look at
+`Configuration Location`_.
 
 The config file uses `YAML`_ syntax. You can use the full power of YAML, but
 most configuration options are simple key/value pairs. This means your config
@@ -554,6 +551,64 @@ fact, just shorthand for the explicit queries ``singleton:true`` and
 ``comp:true``. In contrast, ``default`` is special and has no query equivalent:
 the ``default`` format is only used if no queries match.
 
+
+Configuration Location
+----------------------
+
+Beets has three layers of configuration; each overwriting the previous
+one.
+
+The first layer is the *default configuration*. It comes with your beets
+distribution and cannot be changed. The second configuration layer is
+the *user configuration*. Here you can customize the configuration to
+use when running ``beet`` on your command line.
+
+The path for the user configuration is given by
+``$BEETSDIR/config.yaml``. Here ``BEETSDIR``, is the directory beets
+uses to store its application specific data and resolve relative paths.
+By default, ``BEETSDIR`` is determined by your system's convention for
+storing application configuration, but may be set by the ``BEETSDIR``
+environment variable.  This allows you to manage mutliple beets
+libraries with separate configurations.  To be more precise, the
+following algorithm is used to determine ``BEETSDIR``.
+
+1. If the ``BEETSDIR`` environment variable is set, then use it and
+   stop.
+
+2. Otherwise, generate a platform-dependent list of directories to
+   search.
+
+  - On Windows: ``~\AppData\Roaming\beets`` and then
+    ``%APPDATA%\beets``, if the environment variable is set
+
+  - On non-Mac Unixes: ``~/.config/beets`` and then
+    ``$XDG_CONFIG_DIR/beets``, if the environment variable is set
+
+  - On OS X: ``~/.config/beets``, then
+    ``~/Library/Application Support/beets``, and finally
+    ``$XDG_CONFIG_DIR/beets``, if the environment variable is set
+
+3. Look in each directory in turn for a ``config.yaml``. Set
+   ``BEETSDIR`` to the *first* directory that contains this file. If no
+   directory is found containing ``config.yaml``, then use the *last*
+   directory in the list.
+
+
+Finally, the ``--config CONFIGFILE`` command line option serves as the
+third layer. ``CONFIGFILE`` is the path of a YAML file that contains
+additional configuration overwriting the user configuration. This is
+helpful, for example, if you have different strategies for importing
+files, each with its own set of importer configuration.
+
+In addition some command line options overwrite configuration values.
+For example the command ::
+
+  $ beets --library /path/to/lib import --timid /path/to/import
+
+uses the ``library`` and ``importer.timid`` values from the command line
+instead of the user configuration.
+
+
 .. _config-example:
 
 Example