What is the New Amazon Return Processing Fee?
The new Amazon Return Processing Fee, effective from June 1, 2024, applies to products with high return rates - officially to offset the costs of handling returns and reduce waste. This fee will impact sellers whose products exceed specific return rate thresholds based on their category.
- Description: The fee applies to products with return rates above a specified threshold, calculated based on the product category.
- Application Timing: The fee is charged for returns exceeding the threshold within the shipment month and the following two months. While the fee starts on June 1st, sellers will only see their first charges three months later - between September 7th and 15th, 2024.
- Exceptions:
- Products shipping fewer than 25 units per month.
- Products in the FBA New Selection program (for the first 20 units of each eligible parent ASIN within 180 days of the first inventory-received date).
- Apparel and shoes have a different fee structure, with no thresholds and fees applied per returned unit.
How is the Fee Calculated?
Amazon’s product return rate, which is the basis for the return processing fee, differs from the typical return rate calculation most sellers use. Generally, you might calculate your monthly return rate by dividing the number of units returned by the number of units shipped in that month. While this approach is straightforward, Amazon's method is more nuanced. Here's a step-by-step guide on how to correctly calculate your product’s return rate and determine whether it will incur the return processing fee.
Step 1: Calculating Your Product’s Return Rate
First, understand that Amazon calculates the return rate over a three-month period. Specifically, the return rate is the percentage of a product’s shipped units in a given month that are returned during that month and the subsequent two calendar months.
For example, if you shipped 1,000 units in June, you need to track the number of those units returned by the end of August. Suppose 120 units were returned during this period. To find the return rate, divide the number of returned units by the number of shipped units:
Return Rate = 120 units returned / 1,000 units shipped = 12%
Step 2: Compare Your Product’s Return Rate Against Category Threshold
Each product category has a specific return rate threshold that triggers the processing fee. You need to compare your product's return rate against this threshold.
For instance, if the threshold for your product category is 10%, any returns exceeding this threshold will incur a fee. Using the earlier example, your return rate of 12% exceeds the 10% threshold, meaning you will be charged for the excess returns.
Step 3: Calculate the Exact Return Processing Fee
To determine the exact fee, calculate the number of returns that exceed the threshold. Continuing with our example:
- Shipped units in June: 1,000
- Returns by August: 120
- Category threshold: 10% (100 units for 1,000 shipped)
- Excess returns: 120 - 100 = 20 units
The fee is based on the product’s size tier and shipping weight. Suppose the return processing fee is $5 per unit for your product’s size tier. The total fee would be:
- Total Fee: 20 units * $5 = $100
What are the Implications for Your Business?
Amazon’s new return processing fee is bound to have significant implications for many sellers, especially those with high return rates. As an Amazon seller, understanding these implications and proactively taking steps to mitigate the impact is crucial for maintaining your profitability.
Impact on Sellers with High Return Rates
If your products have high return rates, this new fee could hit your bottom line hard. The cost of returns will now directly cut into your margins, potentially turning a profitable product into a loss-making one. We conducted an analysis to understand the impact of this new fee on our clients' profitability, and the findings were concerning. For example, in categories with low return rate thresholds like Beauty, Health & Personal Care (5.5%), the impact can be significant. For one client, we calculated that the fee alone could reduce their contribution margin by more than 1 percentage point.
Understanding Category-Specific Return Rate Thresholds
Each product category has its own return rate threshold, and knowing these thresholds is critical. This means that while one product might incur fees for a certain return rate, another might not, purely based on its category. Familiarize yourself with these thresholds to assess the potential fees accurately and take necessary actions to minimize their impact.
Evaluating Your Unit Economics
Given the added cost of the return processing fee, re-evaluating your unit economics becomes vital. This means a detailed analysis of your profit margins for each product after accounting for the potential return fees. Calculate the effective profit margin per unit, incorporating the cost of the return processing fee, to see if your business remains viable. For instance, if your profit margin per unit is $10 and the return fee is $5, your net margin drops to $5. If this reduced margin isn’t sustainable, you may need to adjust your pricing strategy, reduce costs, or even discontinue certain products.
Mitigating the Impact of the New Fee
To help you navigate this new fee structure and minimize its impact, here are some steps you can take:
- Review High-Return SKUs: Identify which SKUs are likely to be affected by high return rates. Head to Seller Central, go to Inventory, and check the FBA Returns page. This page is updated regularly, allowing you to monitor return rates and identify any troubling trends.
- Ensure Correct Product Categorization: Make sure your products are listed in the correct categories since return rate thresholds vary. Misclassified products could inadvertently trigger higher fees. Double-check your listings and make adjustments if necessary to align with the appropriate return rate thresholds.
- Consider Returnless Refunds: Amazon’s returnless refunds option allows you to let customers keep the product while still issuing a refund. This can be a cost-effective solution for low-value items where the return processing fee might outweigh the product’s value. Implementing returnless refunds can reduce the operational costs of handling returns and eliminate the processing fee altogether.
- BONUS: Book a free call with our Amazon experts to find out the impact of the Amazon return processing fee on your business.
Strategic Product Management
Beyond these immediate actions, adopt a long-term strategy for managing returns. Improve product quality, enhance descriptions, and ensure customer expectations match your product offerings. By reducing the overall return rate, you can minimize the impact of the return processing fee and boost customer satisfaction.
Conclusion
Amazon’s new return processing fee is a significant shift in the cost structure for sellers, especially if you have high return rates. By understanding the fee’s implications, re-evaluating your unit economics with a tool like 3fin, and implementing strategic measures to mitigate its impact, you can navigate this change effectively. Proactively managing product listings, ensuring accurate categorization, and considering returnless returns are key strategies that can help maintain profitability.
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FAQ
What is Amazon's new return processing fee?
Amazon's new return processing fee, effective June 1, 2024, is a charge applied to products with high return rates. According to Amazon, it aims to cover the costs associated with processing returns and reduce waste.
When does the return processing fee apply?
The fee applies to products with return rates exceeding the threshold specific to their category (as defined by Amazon). The fee is charged for returns above this threshold over a three-month period.
How is the return rate calculated?
The return rate is the percentage of units returned over a three-month period: the shipment month and the following two months. For example, if 1,000 units are shipped in June and 120 are returned over June, July and August, the return rate is 120 / 1,000 = 12%.
If the return threshold for that category would be 10%, then 120 - 100 = 20 units would be above the threshold.
How is the return processing fee calculated?
First, calculate the number of returns above the threshold (see FAQ #3). Then, multiply this number by the fee per unit based on the product’s size tier and shipping weight. For example, a “large standard” product with a shipping weight between 1.25+ to 1.5lb will get charged $4.01 per unit returned (for each unit above the threshold). If 20 units were above the threshold, you would get charged 20 * 4.01 = $80.2 in return processing fee for that month.
What are the category thresholds for the return rate?
Each product category has a specific return rate threshold with the average threshold across categories being around 8.7%. Note that the thresholds greatly vary from one category to another. For example, for products in the Beauty, Health & Personal Care category the threshold is set at 5.5%. You can find the specific category threshold for your products on the FBA Returns dashboard in Seller Central.
How can I check which of my products might be impacted?
Go to Seller Central > Inventory > FBA Returns. Here, you can monitor your product’s return rates and identify SKUs that might be impacted by the new fee.
The return processing fee will also be shown in the Payments - Transaction View and in the SKU Economics dashboard.
What are the implications for my business profitability?
The fee will directly affect your profit margins on “high”-return products. Some of category return thresholds Amazon defined are surprisingly low, making it crucial to (re)assess your unit economics and adjust your pricing or product strategy accordingly. Depending on your return rate, category and shipping tier, the new return processing fee could ham your profits by several percentage points.
What can I do to avoid the return processing fee?
Although this fee is mostly outside of your control, there are a few things you can do to limit its impact:
- Ensure your products are correctly categorized
- Improve product descriptions to reduce returns
- Consider using the returnless refunds option for low-cost and or damaged items
We recommend proactively checking the FBA Returns dashboard now to see which of your products are at risk.
Are any products exempt from the return processing fee?
Yes, products that ship fewer than 25 units per month and items in the FBA New Selection program (for the first 20 units) are exempt. Apparel and shoes have a different fee structure.
When will I see the first charges for the return processing fee?
Since the fee starts on June 1st, the first charges will appear between September 7th and 15th, 2024. This allows time for the three-month return rate calculation period.
