As more business shifts to e-commerce marketplaces such as Amazon, understanding a brand’s cost serve each marketplace is critical. What’s more, knowing how to drive efficiencies in each of these areas is key to maintaining profitability of this fast-growing channel.
While you may have strong command of your negotiated coop terms and advertising costs, continuous asks from Amazon throughout the year, unexpected fees in the form or chargebacks or shortages, and other costs, such as Amazon-specific hard bundling or prep may be more challenging to not only track, but minimize.
What are chargebacks and shortages?
Companies like Amazon, Walmart, and Target have strict and unique requirements in supply chain management for manufacturers that deliver products to their warehouses, from the types of packaging and labeling used to shipping notifications. And according to PYMNTS, “failure to comply with those requirements can be costly, and eat into already-thin margins for those manufacturers.”
Chargebacks: Brands that sell on Amazon through Vendor Central must adhere to specific operational compliance processes and standards to avoid penalties…and to ensure they are paid in-full by Amazon. Discrepancies resulting from purchase orders, shipping, receiving, packaging, and data misalignment may result in infraction fees, or chargebacks.
Shortages: A shortage is assessed when Amazon believes that the quantity Amazon received is less than the quantity they ordered or have been invoiced for, and they withhold paying the vendor the difference. Shortages are often due to incorrect data in Amazon’s digital catalog, human error (warehouse, carrier), and labeling errors. Example: You ship a case of sellable units (12 units), but Amazon’s system believes the case is the sellable unit (1 unit.)
How much do chargeback fees and shortages cost?
It depends. A good goal is to target less than 1% of Cost of Goods Sold (COGS) in chargeback fees and shortages. However, for some manufacturers, the fees can be a blocker to e-commerce success. We’ve seen these fees much higher, reaching 20-30% of cost of goods, making e-commerce a less optimal platform and bringing into question the long-term sustainability of the vendor’s business on Amazon.
Is the money recoverable?
The good news is that there’s a dispute process and many chargeback fees and shortage claims are recoverable. For shortages specifically, vendors can go back several years and recover past monies withheld!
However, the dispute process can be tedious, and it often requires data from many sources presented in very specific ways to meet Amazon’s requirements.
How do I know if I have chargebacks and shortage claims?
For chargebacks, go Reportsà Operational Performance. On the Operational Performance landing page, you’ll see a list of chargeback types and fees you’ve been charged
I have both chargebacks and shortages. What do I do?
Based on our experience working with thousands of brands here are five ways to reduce chargeback and shortage claims for good:
- Ensure your item-level data is as perfect as possible. Amazon’s receiving process is highly automated, and there’s no person checking in products. Therefore, your brand’s data in Amazon’s system must be near-perfect to avoid mismatches and subsequent fees. Casepack sizes, inners, eaches, UPCs, GTINs, and other data fields must be filled in and correct.
- Clearly label your products to Amazon’s requirements. Follow Amazon’s requirements for product labeling. Extra labels, barcodes, or mislabeled products are sure to result in chargebacks and future shortage claims.
- Find the problem’s root cause. Disputing and reversing chargebacks and shortages is important, but identifying—and fixing—the root cause of the problem is critical to prevent future problems. Most issues stem from incorrect item data in Amazon’s catalog. Quarterly catalog “scrubs,” where the manufacturer compares their item-level data with the data in Amazon’s system and corrects errors that may have cropped up, are a best practice.
- Ship on time, and ship what you say you’re going to ship. The more the purchase order and shipment information in Vendor Central can match what (and when) you ultimately ship Amazon, the smoother the process and the fewest fees assessed. If you have an EDI provider, confirm the data is properly configured for all transactions.5. Design for online. Products that leak, spill, or break are subject to fees. Design your products well for online success. If your item is oversized, look at testing if it can be shipped in its own packaging. (SIOC)
Chargeback fees and shortage claims dig into vendor profit margins, but the good news is that they’re often recoverable and solvable with the correct reporting, technology, and experience.