From squeezing scarce resources to hurting our bottom lines, returns have a huge impact on the operations and profits of Amazon sellers. What exactly are these impacts? And why is that many don't appreciate the full effect they have on our bottom lines?
The first issue is the increased time that sellers have to spend on managing returns. Every return has to be inspected. If possible, claims have to be made for damages or incorrect returns. This sorting, inspecting, restocking, and reselling takes up precious time unavailable to busy sellers in the first place. Which is why returns often end up stockpiled in storage.
Next - returns impose a higher financial burden than most sellers estimate. According to the research - returns expenses can amount to as much as one-third of monthly profits. This leads to cash flow problems in the short term and financial losses over the long-term.
Returns may include products that have been sent back either faulty or in an unsellable state which is an immediate loss. If your purchase price for a product is £100 and the profit is £25, then you would need to sell at least 4 items to make up the loss.
Next - for most sellers it's not always clear how to account for returns accurately. To explain this - let’s begin by working out how profit is calculated for every incoming order. The total sum paid by the customer for an order can be split into the these components:
- Cost of goods – the total cost paid for the acquisition of the item;
- FBA fee – a flat shipping fee per unit, based on the size and weight of the product;
- Referral fee – Amazon’s sales commission, a percentage of the price;
- Shipping chargeback – what the customer paid Amazon for the shipping (may be optional);
- Profit – this is what we are all here for, right?
What happens when a customer applies for a refund?
I've broken it down for you below using numbers from one of my orders so you can see the £££ impact easily.
Amazon immediately reimburses the total price of the product to the customer. But, not only that - they also charge the seller for selling and return costs.
The image demonstrates how every return means a loss for the seller even if the product is returned intact.
Obviously - the best counter is to avoid returns in the first place. This can be done by, firstly, improving your product listings and providing as much information to the customer as possible BEFORE they purchase the product. And secondly - prioritising packaging so that your products aren’t being damaged on the way to the customer.
It's also important to anticipate the impact of seasonality and other factors on your business returns. Be prepared for a potential significant increase in returns, particularly after holiday periods, and the subsequent rise in return costs.
Hope this has helped!
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