Amazon Customer Behavior: The Missing Link In Profitability for Sellers

Amazon’s marketplace has become a haven for online shoppers, offering a vast selection of products and customer-friendly policies. If you’ve been an Amazon seller for more than a few weeks, you probably know the stigma about Amazon shoppers as a whole. 

They love to return products. 

Oftentimes, customers return products damaged, missing components or the original product packaging, and sometimes even a completely different product than what they originally ordered. For sellers, these returns can translate into a significant financial burden that often goes unnoticed. This is especially true for sellers that offer products that are returned more frequently, such as apparel. 

The reality is that this behavior oftentimes makes a product unprofitable because most sellers don’t factor this into their pricing. 

Are the costs of returns factored into your profits? If not, you may be wondering where all the profits are disappearing to.

Let’s dive into how we determine the costs of returns and factor it into true profit. 

The Basics

All returns aren’t created (or treated) equally. I break returns down into 1 of 2 categories.

Sellable Returns

These are returned items that could be immediately sold to a different customer without requiring any additional work and have no visible signs that they were returned. The product doesn’t appear to have been opened, the packaging is still undamaged, etc. 

Unsellable Returns

These are returned items that could not be sold again without intervention from the seller. The item could be scratched, broken, missing something, etc. Most sellers using FBA elect to have these items shipped back to them if they have the ability to repair the item or replace missing/damaged parts, while others elect for Amazon to dispose of the items. 

The Process

Now that we’ve talked about the different types of returns, let’s talk about how the process works.

When A Customer Buys My Product

Let’s imagine “John” buys my product on Amazon. Once FBA ships it, the referral fee and FBA fulfillment fee are deducted from the sales price. The rest is deposited into my account.

Example: I sell a product for $20. Once the order is shipped by FBA, Amazon deducts the referral fee ($2.00) and fulfillment fee ($3.99), then adds the remaining amount ($14.01) to my account balance. 

Don’t get this confused with profits. There are other costs that we would consider in our profit, such as the cost of the product, but we won’t get into that today. This is just the proceeds, so you can think of this as the amount of cash being deposited into your Amazon account balance. 

When A Customer Returns My Product In Sellable Condition

Let’s imagine that John returns my product 3 weeks later and there’s nothing wrong with it, the original sales price ($20) is taken out of my account and refunded to John. Amazon will keep 20% of the referral fee as a refund admin fee and refund the rest to me. My referral fee was $2.00, so they will keep $0.40 as the refund admin fee and add $1.60 back to my account. After all fees and credit are applied, $18.40 is deducted from my account. On the positive side, the product is ready to be sold again, so I essentially regain the value of the product. 

So does this mean that each sellable return costs me $18.40? Not necessarily, because there are other things that need to be considered. I’ll explain in a bit. 

When A Customer Returns My Product In Unsellable Condition

The process and costs are fundamentally the same as a sellable return, as $18.40 is removed from my account balance. However, there are 2 major differences that you have to consider that don’t hit your account immediately. 

1. The item is unsellable, so I don’t regain the value of the item. 
2. I will also have to pay Amazon to ship the item back to me or dispose of it. This will cost me an additional $1.53. 

Is There Anything Else I Need To Consider?

Yes, there is one more but it’s pretty simple. 

Cost of Goods Sold

Let’s say that it costs me $3.30 for my product after buying it from my supplier, importing it and paying for other miscellaneous fees for it to be ready in FBA. You would normally subtract this cost when you make a sale as part of your cost of goods sold.

When an item is returned that can be sold again, I’m regaining the value of it so it essentially decreases the amount that a return costs me.

The True Cost Of Returns

Ok, let’s dive straight into it. What does a return cost?

Sellable Returns

In the scenario I’ve described throughout this article, each sellable return has an effective cost of $15.10. 

We have to keep in mind that $18.40 is taken from my account balance when the refund is processed, but I also have to consider that the cost of my product from the original sale is being recovered so it lowers the total financial impact.

Here’s a visual illustration of how it’s calculated.