Most Amazon sellers face difficulties when calculating their profit, and thus start to calculate their returns. It is, however, very important to take all of the returns into account, because they can reduce a big part of your profit.
Firstly, we should understand the process of returns on Amazon.
Let’s start at the beginning!
Here you can see how profit is calculated when an order comes in.
First, the customer pays a certain amount of money to Amazon. If your customer is not a prime member, he/she might have to pay for shipping. Amazon subtracts these shipping costs from the total sum (they call it “Shipping Chargeback”) which doesn’t really affect the profit.
The next thing they subtract is a “Referral Fee” (e.g. 15%, depending on category). In addition, you will pay the FBA Fee to Amazon, for the shipping of your item from the Amazon warehouse to your customer. Last but not least, sellers need to subtract is the cost of goods.
After all the above-mentioned subtractions, one is left with the (hopefully positive) profit.
How do refunds affect your profit?
For example, you received an order in July at the end of the month. Two weeks later, in August, the item has been returned. Here’s what happens then.
Amazon refunds the whole sum to the customer immediately, regardless of whether the customer sent the item back to the FBA warehouse or not.
Then, they charge a so-called “Refund Commission”. When the customer initiates the refund, Amazon will process the refund for you, if you are an FBA seller and they charge a commission for this.
Shipping Chargeback and Referral Fee are reimbursed by Amazon, which is a good news.
The next thing is the cost of goods. But this is optional. Why? Because two things might happen:
An item might be damaged by the customer or sellable. Amazon will identify the status when the returned item arrives at their warehouse. If it is sellable, Amazon will book it to your stock and it will be able to sell it again. If it’s not sellable, then the white bar on the picture becomes is part of your loss.
After all these calculations, your loss might is normally bigger than the profit, because some of the fees (which were paid after the order was received) won’t be returned to you. For example, FBA Fees or Refund Commission. Additionally, in some categories (e.g. clothing), Amazon might charge an additional FBA fee for every return: basically, they make the seller pay for the shipping back to their warehouse. This would increase your loss even further.
How Amazon sellers should calculate the losses from refunds?
You can download your transaction report, inspect a couple of returns manually and match them against the picture provided above to get a feeling of the damage they cause. Don’t forget that every returning is canceling profit you made previously on the sale, so you need to subtract your average profit per item from your bottom line for every return in your transaction report.
Here’s how you can see your true cost of returns 100% accurately and fully automatically in sellerboard (formerly known as amzcontrol), the world’s most accurate profit analytics tool for Amazon sellers:
The blue bar displays net profit, where the green bar is the refund cost.
For example, in February we had a refund cost of $532 when the net profit was $1473. It’s nearly 1/3 of the whole profit per month! You can see all the calculations of the Refund Cost below:
- Reimbursed amount $ -735.22
- Shipping $ -26.97
- Refund commission $ -21.81
- Shipping chargeback $ 22.66
- Commission $ 109.02
- Product cost $ 119.79
You do see a positive position, which is the Product Cost. It means that during this period (February) some of the products arrived back in the Amazon warehouse and they were sellable. In fact, there are 2 policies in sellerboard, which you can configure in the settings: an optimistic and a pessimistic policy for counting.
An optimistic policy means that when a user initiates the refund, sellerboard assumes that the item is still sellable. In fact, they book the cost of goods as a positive amount exactly at the moment when the refund is initiated. Of course, when the item comes back to the warehouse, sellerboard automatically checks if the item is actually sellable or not. If it’s not sellable, the system will automatically write off the cost of goods.
The pessimistic policy means, that at the moment the user initiates the refund, sellerboard assumes, that the item is broken. When the item arrives at your warehouse, sellerboard will check again, whether it really is unsellable. If it’s sellable, you will get a bonus to your “Product Cost” position, like on the chart above.
Make sure you know your true profit numbers, as they might really affect your business model. The easiest way to calculate your profit correctly, taking all the hidden fees -including your returns, into account, is to use special software.
Sellerboard includes all of these features, as well as an inventory manager, keyword tracker, autoresponder and review tracker. For all users of Algopix, we offer 2 months of free access to sellerboard.com (formerly known as amzcontrol.com), by using this link.