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Vendor Central Return Rate: The Missing Metric (PRO TIPS)

Vendors have a damage or returns allowance deducted from their remittances. This is initially estimated by the Amazon Vendor Manager and is part of the of the legal agreements you sign in Vendor Central when you first get setup (Question: Do you have all your agreements downloaded? They are legal contracts!). A better name for it would be “Return Allowance.” On return to Amazon, products may be either placed back in inventory if unopened, refurbished/evaluated and sold on Warehouse Deals, liquidated, or destroyed. In any case, that agreement means they won’t come back. As this allowance agreement comes to the end of its term, your vendor manager will pull a report and review your returns rate. They will then negotiate with you to cover return costs if your return rate exceeds your current deduction.

Here are PRO TIPS to manage this:

1) Amazon doesn’t care what your national return rate is or that you “never get it back” from other channels. They have data on their rates and it can fluctuate up or down (preferably) during the year. Your only hope is to use data too! Get familiar with Amazon Retail Analytics Basic (or Premium if you have it) reports. You can see Customer Return Units in the “Sales & Inventory – Item Detail” report.

2)  Know your return rate as a percentage of the cost of goods sold (Amazon abbreviates it as “COGS”): Amazon gives you units, but they deduct a percentage of dollars of COGS from your remittances, so you need to know dollars over dollars. You calculate that from your item detail reports in ARA Basic at the month, quarter, and trailing twelve months level. Build formulas to calculate the item UNIT COGS from COGS/Units Sold then Unit COGS* Units Returned for COGS Returned. Do the basic math for COGS Returned/COGS to get your percentage per item, and using the totals get the overall return rate. Somewhere in there you will want to use an Excel Pivot if you want to really show off, as well as some logic to avoid dividing by zero: =IF(OR(O3=0,H3=0),0,(I3/H3)*O3).

3) Know your big returns offenders. Sort your products once you have the data by the Returns COGS as a % of Total COGS Returns. The Pivot Table will allow you to do that easily. Fix the reason why all of your dog blankets come back so that Amazon won’t have a reason to increase your damage allowance.

4) Amazon is your canary in the coal mine. Estimate remorse returns (I didn’t like the color!) versus product issues from packaging feedback. You can see this under Reports > Packaging Reports. If you have issues deal with them immediately. A high return rate is usually, but not necessarily, coupled with a low feedback rating. Both can initiate a deadly “Downward Spiral.” Don’t let this to happen.

5) Review progress on the metric–Amazon won’t do that for you. Pull reports monthly and analyze and store this data. Amazon will come back every year to set your damage allowance based on the previous year’s average performance. That measurement doesn’t reflect trend or recent improvements.

6) Don’t design products that come back. Returns can occur because of defects in packaging, product, or choice of carriers. Root out the defects and create satisfied customers the first time. Its the cheapest, most powerful marketing that you can do.

7) Provide accurate information on the detail page. You may have a low-defect product, but an Amazon detail page that doesn’t accurately describe the product, its value or its function. Your perfectly fine product may be returned to Amazon as a result of this gap in the expectations set on the detail page versus reality.

8) Get business geek help. Does this sound daunting, complex, and time consuming? It can be if you aren’t a business analyst with an MBA, supply chain training, engineering and process improvement skills. Consider hiring the right skilled person for this, or buying a chunk of an Amazon navigator’s time to help you out with setting this up.