Maximizing Profit at Amazon
By Shawn Oleson
Selling to Amazon is never easy, but it’s even harder if you’re receiving shortages and chargebacks that eat into profitability. These deductions to your invoices can be the difference between running a successful business or struggling to stay afloat. In today’s inflationary and profit-focused environment, it’s important to know what you’re up against. Amazon penalizes its 1P vendors primarily in two ways: chargebacks and shortages.
Vendors receive chargebacks when any aspect of their purchase order confirmation, shipment, or delivery to Amazon does not align with the retailer’s long list of specific standards. Amazon is built on streamlined processes and uniformity designed to move products through its fulfillment centers as efficiently as possible, often using automation and robotics. Any deviation from these processes adds additional (human) touchpoints, which costs Amazon time and money. To recover these losses and encourage compliance in the future, Amazon poses a financial penalty on the vendor for every defect or discrepancy they encounter. These include a wide range of infractions including mislabeled cartons, incorrect packaging/product preparation, unverified purchase orders, or timing and delivery issues, among many others.
For many types of chargebacks, Amazon could have mistakenly assumed the vendor was at fault even though the error could have occurred on Amazon’s end. The burden of proof is always on the vendor, as Amazon is not proactive about investigating any issues related to its chargebacks. If a brand decides to dispute a chargeback, then it must perform all due diligence in proving that no infraction occurred. The process can vary widely for each type of chargeback. Furthermore, time is not on a brand’s side. Disagreements must be resolved within 30 days, after which the vendor must pay the penalty.
Shortages are similar to chargebacks but decidedly less complex. They occur when Amazon has a purchase order discrepancy and receives fewer units from a vendor than what was promised. Since Amazon must pay its 1P vendors by the due dates on their invoices, they will pay the invoices on time, but only for inventory they have received up to that point. This will be followed by a subsequent shortage deduction. Again, vendors must file a dispute to determine if the fault lies with them or with Amazon for every shortage. If they do not, then they are likely leaving money on the table, as a sizable percentage of shortages are actually the result of products not being properly accounted for within Amazon’s network after it leaves the vendor’s control. Since shortages are not tied to particular evidence to dispute, they can be simpler to contest than chargebacks. The only required data is obtainable through Vendor Central, though the process is still tedious and time-intensive.
In addition to the unit shortages described above, a pricing shortage can also occur when Amazon pays the vendor too little for their product on a per-unit basis. Pricing shortages are more likely to occur if the vendor has recently raised the price of its product.
Amazon Smart Match
Unlike chargebacks, if Amazon later identifies products within its fulfillment centers within 35 days of the initial receipt of a shipment, Amazon will correct a shortage and resolve the issue in a vendor’s favor. This process is called Amazon Smart Match and it occurs automatically: No vendor intervention is necessary. There are some vendors whose entire shortage resolution strategy is to let Smart Match reconcile whatever it can. However, this process is far from as smart as it claims to be, and only solves the simplest issues and unit miscounts. According to our data, Smart Match only resolves anywhere from 20-55% of the total opportunity. Reliance on Smart Match alone is also dependent on vendor payment terms and can often prolong the recovery process well outside of acceptable aging limits for invoices. For vendors who want to recover as much as they can, they will still need to file disputes, and potentially file follow-up tickets for shortages not recovered through initial disputes. Though vendors can do little to impact the reconciliation processes directly, they can guarantee that if Amazon finds their product even after 35 days have elapsed, then they are entitled to all of their payment.
If the shortage is not resolved after this extended period, it can enter an arbitration phase where the supplier may try to settle for a split difference with Amazon if they can demonstrate that they are not at fault.
Impact on Your Business
In total, shortages and chargebacks can consume anywhere from one to five percent of your total annual Shipped Cost of Goods Sold, directly harming your margin profitability and market share! It also erodes topline growth and earnings. In an inflationary environment with rising costs, every percentage point of profit is worth fighting for since your bonus and bottom line are at risk.
However, brands are only entitled to recover revenue lost to these errors if they can review, dispute, and follow up on all of them. Validating and disputing all shortages and chargeback claims is a notoriously tedious and time-consuming process that most brands cannot tackle comprehensively. Many brands opt to go after only the largest invoices and write off the rest. It doesn’t have to be this way. What if there was a way to track, classify, and validate deductions while filing disputes every time a chargeback or shortage appeared on an invoice? What if this could all be done automatically so that you spent less time on these issues, not more?
Join CommerceIQ’s Chief Marketing Officer Chris Bauserman, Shannon Rendek of Reckett, and me for our webinar on Wednesday, June 8th at noon EDT, where we’ll discuss how you can better recover revenue from Amazon.