Retail returns are unavoidable, and companies know they should anticipate a certain percentage each year. For e-tailers — many of which are facing soaring shipping costs and chronic freight bottlenecks — there’s an additional layer of complexity to reverse logistics.

Online holiday spending reached a record $204.5 billion last year, an 8.6% increase from the prior-year period. Meanwhile, Amazon.com Inc. launched an extended holiday returns policy that allowed for most items purchased between Oct. 1 and Dec. 31 to be returned until Jan. 31, 2022. In anticipation of early Christmas shopping, the policy was intended to give Amazon consumers flexibility in their purchases and reassure them that they had more than 30 days to return any items. 

The rate of return on Amazon items ranges from 5-15%; however, returns for consumer electronics and clothing can be as high as 40%. Let’s explore how returns impact sellers on Amazon.

Fee Assessments

Amazon passes the fees of returns, inspections, repackaging and/or disposal on to the sellers, so there is minimal financial impact to Amazon directly. According to reverse logistics company Optoro, two out of three consumers will return at least one gift during the holiday season, and at least $66.7 billion worth of product returns will be pushed back into the supply chain.

The process of returning e-commerce items and potentially re-selling them can result in as many as 10 billion extra trips each year. Any products sold via Fulfillment by Amazon (FBA) that are returned get sent back to an Amazon fulfillment center that specializes in returns. A reverse logistics facility requires an average of up to 20% more space and labor capacity per item than a forward logistics facility. Amazon, by default, will replenish returned products that are unopened back into stock for sale as new. However, if the product is opened or used, sellers have the option to request that Amazon conduct an evaluation of the product and determine whether it can be repackaged and resold as new. If the product cannot be resold, it is either sold to liquidation companies (who can sell to other wholesalers), destroyed or disposed of. 

With Amazon’s recently raised Prime membership pricing, sellers should anticipate an increase of 6% in FBA fees overall. Shipping prices across the board are also increasing as UPS, FedEx and DHL are all raising rates for 2022.

Customer Service

Both Amazon and its sellers benefit from a marketplace where consumers feel they have a degree of protection in their purchases. However, sellers may face direct financial impact when customers return products. If the customer had a poor experience with the product, this may also elicit a poor review and rating and impact future customers who may simply buy from other sellers with better overall product ratings.

But sellers are leveling up. Many are using poor ratings or reviews as an opportunity to go above and beyond in customer service. Sellers are now more actively addressing customer questions on their Amazon page so prospective customers are clear on the product details and are less likely to buy the product and return it if it didn’t meet their expectations. Additionally, sellers are also bringing intelligence into the e-commerce process. With data science, sellers can more accurately account for a percentage of returns and repackage undamaged items to help ease some of the financial impact of returns.

Suspension or Suppression

As Amazon wants to maintain the integrity of its marketplace, it may suspend sellers experiencing return rates above Amazon’s acceptable threshold. Amazon’s order defect rate (ODR) is a metric Amazon uses to measure sellers’ ability to provide a good customer experience and ensure they are abiding by every policy from the e-commerce giant. The ODR is a percentage of orders with one or more indicators of poor customer service in a given 60-day time period. The ODR consists of three key components: negative feedback rate, A-to-Z guarantee claim rate and credit card chargeback rate. 

Amazon sellers are required to maintain an ODR under 1% to sell in the Amazon Store. If a sellers’ ODR is above 1%, Amazon may restrict selling privileges. And eventually, this may result in a suspension of the account, suppression of offers, or worse, account deactivation.

As much as Amazon wants to maintain good customer service, the company also wants to serve good customers. Amazon has been more vigilant about suspending or banning customers who may be taking advantage of their return policy. It seems that Amazon is honing in on customers who have returned 8% or more of items purchased on the platform in the last year. While Amazon has confirmed this practice, it remains quite rare. If consumers do find themselves on the receiving end of a ban, it can be exceedingly difficult to reverse these decisions unfortunately.

With e-commerce booming year-over-year, product returns will only continue to climb. It’s important that customers are more mindful of their purchases and don’t just click “buy now” simply because they know they can return them. There is always a cost associated with a “free return,” and sellers pay the price.

Wiley Zhang is co-founder and chief operating officer of Acquco.