How to manage Amazon deductions and protect your profit margins
With more than 90% of UK shoppers buying from Amazon once per week, Amazon represents the biggest growth opportunity by far for ecommerce brands in today’s market. However, Amazon is also a master at eroding your profit margins through ruthless Vendor Central policies that can lead to deductions from your revenue.
Understanding how and why Amazon administers deductions can have a major positive impact on your ability to streamline finances for your Amazon operations, and free up capital that will help you develop your brand on the world’s biggest ecommerce market.
If you’re starting to feel the pressure of deductions on your profit margins, or you’re a new Vendor Central and want to take preventative measures, here’s a closer look at Amazon deductions and how you can minimise them for healthier margins.
What are Amazon deductions?
“Amazon deductions” is a catch-all term covering any financial deductions made from your revenues by Amazon. Usually, these are deducted from an invoice you’ve raised with Amazon, due to your Vendor operations going against one of their policies. However, there are also cases where Amazon can issue you a new, adjusted invoice to charge you for a specific infraction.
There are various types of deductions that Amazon can issue for instances where vendors have gone against their policies, requiring different approaches to prevent or dispute these. In all cases, however, Amazon deductions can eat into your projected profits from selling through Vendor, and it’s crucial to understand and minimise them to give your brand the best chances of success.
Types of Amazon deductions
If you’ve been a Vendor for a while, you’ll already know that your working relationship with Amazon is a minefield of regulations and approved practices that can be hard to navigate at the best of times.
Though there’s a variety of reasons why Amazon might issue deductions on a Vendor account, most of the deductions you’ll deal with fall into one of five categories:
1. Chargebacks
Usually the most common type of deduction, Amazon chargebacks are a financial penalty issued to Vendors for errors made in the fulfilment process, such as not packaging shipments in-line with Amazon’s policies or failing to submit essential documents.
With 13 different types of chargeback, it’s not uncommon for Amazon to issue these erroneously through automated systems, leaving Vendors with the difficult task of gathering evidence for a chargeback dispute.
2. Shortage claims
Amazon shortage claims are deductions made when vendors fail to send the amount of units they’d committed to in a given purchase order. In many cases, vendors may have sent all the units designated in a purchase order, but an error on Amazon’s side during the check-in process leads to a discrepancy.
Taking preventative measures at your own warehouse, as well as keeping thorough records of how orders are fulfilled, are essential for avoiding or disputing shortage claims.
3. Price claims
Price claim deductions are raised when Amazon identifies a discrepancy between a PO and the relevant invoice. These kinds of discrepancies can arise from many different variables in the relevant documentation, for example cost, currency, unit quantity, and ASINs. Because price claims begin and end with comparing purchase orders to invoices, the dispute process is relatively simple and usually doesn’t require additional documentation.
Any work to avoid price claims becoming too much of a burden on your Amazon cash flow is largely preventative, such as keeping accurate records of catalogue prices over time, and making sure real case pack quantities are accurate in Vendor Central.
4. CoOp
Amazon CoOp agreements are contracts between you and Amazon that outline variables of your business relationship, including operating costs like shipping or the fees associated with returning damaged or defective products.
Amazon will automatically deduct a certain percentage from any invoice raised in-line with active CoOp agreements as part of standard procedure. However, there are instances where you might see deductions from CoOp-based discrepancies, for example Amazon charging a CoOp rate outside of an agreement’s effective period, or incorrectly charging a rate from a previous, expired agreement.
Because your Amazon CoOp agreements are stored in one system, and your relevant line item transactions in another, the process of disputing CoOp charges is usually complex and time-consuming, and may require outside help from a Vendor management expert.
5. Returns
There are many reasons why Amazon might return stock that’s already made it to their fulfilment centres, such as stock not meeting sales projections, supply chain issues leading to overstock, or products simply being damaged or defective.
In some cases, issues on Amazon’s side can lead to stock being returned to you in an unsellable condition, breaching Amazon’s own agreements and eating into your margins. Deductions stemming from Amazon returns are relatively uncommon, and the process of disputing them is fairly situation-specific. However, with returns being a common experience for many brands that move high volumes of stock through Vendor Central, it’s still important to be aware of potential issues that could lead to a deduction in profits.
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6 Best practices for managing Amazon deductions
Deductions initiated by Amazon for any of the reasons above are a common obstacle for any Vendor trying to maximise their profits on the platform. However, that doesn’t mean that they’re unavoidable.
By adopting a forward-thinking approach to managing your Amazon operations, there are many steps you can take to soften the impact of Amazon deductions and ensure healthier margins for your brand.
Here are six best practices to effectively manage Amazon deductions.
1. Streamline communication with Amazon
Having fast, reliable communication channels with your Vendor Manager and the wider Amazon Vendor Support team is essential for monitoring the impact Amazon deductions are having on your bottom line, and finding solutions to these issues.
Having a dedicated person or team at your company responsible for liaising with Amazon can help you contact Amazon promptly when deductions come up, and escalate the case as necessary. Furthermore, keeping thorough records of your communication with Amazon can be very helpful for providing evidence that you’ve been staying within Amazon’s guidelines, for example if you receive a chargeback for a supposed labelling error.
Though dealing with Amazon deductions can be chaotic and unpredictable, organising the way you communicate with Amazon and tackle disputes can help you develop templated SOPs over time and cut down the time it takes to dispute a deduction.
2. Adopt a chargeback management system
Chargebacks can stem from a range of different phases in the fulfilment process. As chargebacks are one of the most common drains on vendors’ profit margins, managing these potential sources of friction is another important step in keeping Amazon deductions to a minimum.
By investing in a chargeback management system, you can monitor deductions affecting your account in real-time, then flag relevant issues in your supply chain and take steps to minimise these.
In the same vein, if your management system shows a pattern of Amazon initiating chargebacks for an issue that you’ve been guarding against in your warehousing operations, this can help you organise evidence for a successful dispute.
Having trouble keeping up with chargeback management? Our ProfitGuard service gives you access to your own chargeback analysis dashboard, making it easy to identify issues in the fulfilment process, take preventative measures, and raise disputes. Schedule your free audit
3. Conduct regular shipment and inventory audits
Conducting regular audits on your shipment and inventory data will empower you to achieve better compliance with Amazon’s fulfilment policies, and minimise the errors that can lead to common deductions.
Common shipment and inventory audits might include checks on outbound shipments that verify you’ve packed the correct number of units, that everything you’re shipping is packed and barcoded according to Amazon’s policies, and that your pallets are labelled correctly.
Making these kinds of audits standard practice in your warehousing will not only help you catch shipments with issues before they’re sent to Amazon, but will also help you maintain a paper trail of evidence that can help you dispute erroneous deductions and retain as much profit as possible.
4. Leverage data for root cause analysis
Like regular auditing, frequently consulting your data on Amazon deductions can help you identify recurring issues that are eating into your bottom line, making it easier to get to the root of these problems, and implement the right solutions.
If, for example, you’re experiencing frequent price claims due to purchase orders not matching up with invoices, an in-depth analysis of the issue might help you identify a common source of the discrepancies, such as currency exchange rate fluctuations, inconsistent catalogue updates, or other issues.
By zooming in on the root cause of frequent deductions, you can inform more robust and automated processes in your fulfilment operations to ensure consistency with Amazon’s requirements, and reduce or eliminate fundamental issues.
5. Optimise packing and labelling compliance
Packing and labelling can seem like a fairly minor issue in the broader topic of ecommerce logistics. However, with Amazon’s stringent requirements, making sure your packing and labelling is optimised for compliance can be a very effective way to prevent some of the most common type of chargebacks, and minimise the impact of Amazon deductions.
Simple changes such as implementing clear, step-by-step SOPs for warehouse staff, and adding additional mandatory checkpoints to the order preparation process, can have a major, positive impact on the average quality of your shipments.
If you know it’s been a while since you reviewed packing and labelling processes, and these issues seem to be generating more deductions than usual, make sure that an audit of your processes is at the top of your to-do list.
6. Have periodic reviews for CoOp agreements
The costs associated with shipping and product returns outlined in your CoOp agreements can be key to understanding the root causes of Amazon deductions. As agreement details can be subject to frequent change, it’s important to schedule periodic reviews of these to avoid unexpected deductions.
If, for example, you’re subject to a CoOp agreement that states Amazon will deduct 5% of your invoices for return processing, you should have systems and processes in place to make sure this really is the percentage being applied to the relevant transactions. If you notice that Amazon is charging a higher rate than stated, possibly based on an expired agreement, you’ll be able to flag and dispute deductions more efficiently and recover any lost revenue.
Cross-referencing Amazon’s CoOp agreement deductions with your internal records can be complex and time-consuming when you first get started, but systematising frequent reviews of how your agreements are actually affecting cash flow can lead to major savings.
Final thoughts
Though Amazon deductions are something that all vendors deal with, by understanding the root causes behind them and building solutions that are right for your brand, you can effectively minimise their impact and boost your profits on Amazon.
We hope this guide has given you a good starting point for understanding how deductions are affecting your business and taking the right steps to remedy any relevant issues. For more support with optimising your Amazon cash flow, be sure to check out our other blog posts, or find out how our ProfitGuard service can help you retain as much profit as possible.
