Latest / Seller Performance Solutions / Amazon's FBA Policy Overhaul: What Sellers Need to Know
Transcript
- [00:00:04] Chris: Hey everybody, this is Chris McCabe. Hope you had a good holiday and you've got a good New Year's one change we're seeing is with this reimbursement policy stuff. So we wanted to make sure, yes, I have a cat tail right here. A little companion, oops, that makes it harder. Yoni: Is that your keychain, popping its tail or is that a real cat? Chris: Exactly. No, this is a real cat joining us for this. The year ahead seems kind of scary for reimbursement stuff. Obviously, most people listening to this and watching this are aware from LinkedIn posts, which are in the dozens, that this change is happening March 10th, right? Is the date? Yoni: Yes. Chris: So we should mention the key points first, march 10th. But big change in the amounts that you're going to be able to request reinstatement on, right? Yoni: Reimbursement, not reinstatement. That's a keyword. Chris: I'm sorry. Did I say reinstatement? That's because I'm doing reinstatements. Yoni: [00:01:04] It's all about RE. Reinvestment, reinstatement. It's all about Yeah. Retail RE. Chris: REI, which, as soon as we finish recording, I'm here in Seattle, I'm going to be going down to the REI flagship store. Yoni: Okay, but your cat is on the microphone, just so you know. Chris: Oh, sorry. Yoni: That's a new, new version of muffling that I have, I've seen, but yeah, let's, let's just dive into it. Chris: I mean, give people, give people, I think most people who are looking at this have some background on the fact that there are major changes coming and that you're not going to be getting the amounts you previously did. 90 percent of the people in the community or that we interact with have some basic understanding of it. So let's do the basics real quick and then we'll just dive deeper into strategy. Yoni: Yeah, quick overview. So December 18th, Amazon came out with this, you know, announcement at Seller central, where they're kind of setting a few key points. One key point is that in March 10th, they're going to change the policy, the refund policy to refund or reimburse the seller for any unit, inventory [00:02:04] unit that gets lost or damaged within the warehouse before a custom order. Okay. They're going to change the reimbursement value from sale price, meaning the sale price you sell on Amazon or the retail price you sell on Amazon, to manufacturing costs. Okay. This is for any item that is lost or damaged within the warehouses, before a custom order. If it's after a customer order, meaning a customer ordered and then returned it, it was an issue. They're going to keep giving you the retail value of the reimbursement, or the sale price value. But like 90 plus percent of the issues happen prior to the customer return issues. So that's kind of the core of the reimbursements, right? So what this means for the sellers is a few things, but even before that, actually, they're saying, okay, we're going to give you the manufacturing price based on kind of two conditions. One condition, if you don't give us any information, we're just going to give you whatever, you know, manufacturing price we think in our system might fit for you based on our data. Chris: Right. Yoni: Unless you're going to go to this this feature and sell it inside of a seller central, which will become available at the end of January 2025, where you're going to be able to share with us your manufacturing [00:03:04] cost. Meaning your invoice or manufacturing information and your cost. So we can adjust our system to pay you that amount if we're paying you under your manufacturing cost. So that's kind of high level, the dates, the policy change, and what it means. But now I'm gonna give it a mathematical example to illustrate a bit more about the impact for sellers. So let's say you're a seller and your cost to manufacture the price is 5. And you wanna sell it and you're selling it on the platform for 30. Or 29.99 as they say in retail. So right now if Amazon pays your reimbursement, they're gonna pay you as if you sold it for 30. So after the selling fees and fulfillment fees you're probably gonna keep in your pocket. about 17.50. So your cost is 5, but they reimbursed you 17. 50 as if you sold it on Amazon. So you're able to get back your 5 and then you have the 12.50 as your margin, right? Your profit margin. That's right now. This is the status of the policy right now. When March 3rd comes in, you know, your, your sourcing cost, your manufacturing cost is 5. You sell for 30 and they got lost or damaged before customer [00:04:04] order, they're gonna give you five dollars. Okay, you're gonna lose twelve and a half dollars. Basically all that margin that you had before it's gonna be completely wiped out. It's a 72 percent drop from 17 and a half dollars to five dollars in this specific example in case. Yeah, so high level on a blended average, you know, FBA sellers can expect 50 percent or less Reimbursement. I mean less payments on the reimbursement side so that's kind of a heavy impact on the sellers for a few reasons. Because you know, manufacturing costs is a good start for the seller's ticket, but it doesn't really fix the problem, because it doesn't cost me as a seller, for example, 5 to place in Amazon's hands. It actually costs me much more. So if I send a million dollars worth of inventory to Amazon, I'm selling, you know, a few containers. So to manufacture it, it costs me a hundred grand. But to ship it and deliver it to Amazon, it's probably going to cost me a hundred thousand dollars. Chris: Yeah. Yoni: So I'm sending a million dollars cost of goods. But to prep it, ship it, custom duties, all that stuff is going to cost me like 10 percent of it, it's a hundred grand. So that, yeah, that million dollars gets lost in the warehouses for whatever [00:05:04] reason. They're going to pay me a hundred grand. Sorry, they're going to pay me one million dollars, but I'm still going to lose a hundred grand. So they're changing the policy to a degree where this is going to become a law center for the sellers. So if anything gets lost and damaged by Amazon, and they give you only manufacturing price, you, you are at a loss. They're placing you at a loss. As opposed to right now, where you're able to get your cost of goods, the cost of everything back, plus turn in a profit and margin. So they're really kind of pushing this, you know, pendulum, and it's swinging from one side to another, instead of being a profit center into a loss center. And obviously the ones that will have the margins in their pocket, a financial situation, we'll be more geared to Amazon's position instead of the seller's position. So that's kind of what we hear out there. The sellers kind of touch, you know, talking, discussing, and venting out on social media and that's kind of the scope of it. So hopefully this vividly explains the dates, the scope, the changes, and mathematically what kind of implications will be on the sellers. And I want to do remind sellers that right now, you know, FBA, discrepancies can [00:06:04] equate to potentially 3 percent of your Amazon revenue, okay? So in other words, up to 3 percent of your inventory might get affected with all these issues. So I'm going to push the mathematics a bit forward. So let's say you're doing 5 million on Amazon, right? In revenue, in FBA. And you got affected 3 percent with all these discrepancies of lost and damaged units. So Amazon right now, before the policy change, will be reimbursing you 150, 000 right? 3 percent out of 500, sorry, 3 percent out of 5 million is 150, 000. So let's say you're gonna lose 70 percent of that, of the 150, 000. Basically it means you're losing, you know, over 100, 000. So instead of getting 150, 000, you're only gonna get 50, 000. So you're losing more than 100, 000. So, let's push them out. So if too much for you, Chris, let me know. Right. So you're doing 5 million a year. Chris: It's not too much math. I'm just like, maybe we should pause and reflect on, you know, Amazon saying we lost your stuff and it's now your fault, you're going to pay for it. Like crunching it down to [00:07:04] something basic and straightforward and logical. If it's their mismanagement of inventory. You know, you have to pay to send your inventory in. If you have to remove it for any reason, you're paying to pull it out. And then on top of that, there's a third thing, which is now if we lose your stuff, you pay for that too. Yep. I just wanted to reflect on that. Yoni: That's the reality of it basically. You know, right now the policy puts the owners on Amazon to constantly optimize their systems. So they want to minimize it to the very brim because if they don't, and they keep, you know, having those issues, you know, they're gonna have to, you know, compensate the sellers at a certain standard. And now that that's kind of gone, you know, going forward, what's incentivizing them to do it. It's if they're only going to kind of cover the manufacturing cost, then I would assume that at this point, Amazon does have insurance for that as well. So it could be that this might, I don't know, I'm speculating, but it could be that they have insurances for all these issues. So it actually might reduce their premiums. Think about it, because instead of paying, you know, 30 per unit, you're only paying 5 per unit. Chris: That's [00:08:04] true. Yoni: Then you have to kind put a claim on your side. So the insurance is only giving you $5 instead of $30. All of a sudden your premium costs are down. So it's definitely a restructuring of their cost systems within FBA, but I'm sure with many other things. Andy Jassy, on a high level is, you know, comes from the margin world of AWS Amazon Webs, you know, Amazon Warehouse, Amazon web services, which is the cloud computing division they have, which is highly lucrative, highly profitable. You know, 70, 80 percent margins. So you're looking into all the cost structures of everything else and saying, Hey, I'm going to be able to restructure it in such a degree where I'm going to reduce the cost to a very minimum and increase the profitability of Amazon. And if we do look into the projections for the next, you know, two years, it looks like Amazon is really ambitiously trying to kind of move from 6 percent profit margin to more than 12%. So they're trying to more than double the profit margins within the next two years. And this is not like a couple million dollars here. This is tens of billions of dollars more in profit for them. So with this policy change, we sit on a micro level, but there's many other aspects of the business amazon is kind of looking into, to restructure, to bring all [00:09:04] these billions of dollars of cost savings. And, so I do want to end with this, you know, it seems like Trump was elected and, what's his name, Elon Musk is coming in with Doge with the department of government, efficiency, right. And to reduce the cost, I think Amazon is probably ahead of the game with that. You know, Andy Jassy has his own Elon Musk kind of team. The Doge kind of team. And they're doing it on the, on the reimbursement side, but plenty other things as well, I know on the associate side or the affiliate side, they also reduce payments there. So they're kind of looking around where you know, kind of reduce costs and increased profit margin. So they're definitely a few steps ahead of, yeah, they're a few steps ahead of the government and Elon Musk. So, hopefully this gives you guys kind of an understanding of the scope of things. Chris: This one I think is harder to defend. That's why we're recording this late December. I think that's why they put it out at a time of year where not a lot of people are putting a lot of eyeballs on it. That's deliberate. But yeah, I mean there's always going to be some new thing where they're trying to make it easier for them, that won't necessarily make it easier for sellers. I [00:10:04] think also not a lot of people are talking I mean, I haven't been talking about it posting about this beyond sharing your post, which, you know, we can include that link with this, your LinkedIn post, but not a lot of people have dwelled on how you're probably going to have a bunch of back and forth about what your costs are. Yoni: Yeah, so yeah, the issue there is that, you know, not everybody's inclined to share their cost A, which means there's margin calculation that can be done, and share that data. That's one consideration. The second consideration is their sources. Who is their manufacturer? Where's the manufacturer? So I know there's definitely sensitivity there expressed by the sellers, being uncomfortable. So if the situation is that Amazon system is severely under compensating you, meaning that your cost of manufacturing is 10, but the system thinks it's 1, so only give you 1, you have an issue there. You're gonna have to open up and open up your chest and show what's out there. So yeah, it's a consideration. So, so there's, there's definitely a, you know, considerations out there and concerns that the sellers are expressing. [00:11:04] Another thing is that on one hand, Amazon did kind of reassure the sellers that on 2025, there's no Amazon FBA fee increases, which is first time probably ever because usually every year there's a kind of a some sort of increase or inflation. Yeah. Last time they announced nothing, but then they came out with this policy change, which if they the sellers are really looking in hard, you know into what it means to them, It's probably much much much more expensive than if they were regularly up their fees, you know, a couple of points. A couple of percentage points. That will be probably a better outcome for them. Just to complete the example I was giving before on the profit margin impact potentially for the sellers. I'm gonna be very quick about it, very sharp. You're doing 5 million a year, 10 percent net margin, which means it's 500 grand, that's your net profit. Out of that, there's 150, 000 coming from the reimbursements, if your reimbursements get chopped 70%, 100 grand of that is lost. So it just means 100 grand out of the half a million that you're making in profit, which is 20 percent of your profit, might be gone because of this policy change. So this is a quick, you know, scenario example for the sellers to consider, because the impact of FBM [00:12:04] reimbursement from profit margins can be anywhere between 1 percent to like in this example 20%. So it could be that, you know, a good amount of your profit margin is on the line here. So whatever it is that you can do to restructure and reduce your costs or improve margin, and especially if you're a brand, do whatever you can to push it. Because FBA, by the way, this is FBA, FBM no changes, you know, no issues there. So it could be that FBA will not be a good fit for some of the low margin sellers. Chris: For some people. Yeah. Yoni: Yeah. But if you have high margins and you are, you know, you're able to take this impact. And you're okay with it and just write it off. That's fine. But if you're not here in the borderline, you're already struggling with your margins and you're listening to this, you're going to have to adjust and quickly. Cause this is if you never heard of this and this is the first time hearing about it, do whatever you gotta do to adjust so your margins in the right place, so they don't get wiped out. Chris: Yeah. So, I mean, some people will be hearing this roughly two months before this kicks in. So if you have questions, reach out to Gutita, reach out to Yoni himself, if you know where to find him. Yoni: Yeah, I'm pretty available on social media. I'm pretty [00:13:04] out there. And of course the Getida. com website, we have a chat over there and the contact us page. Happy to, you know, educate on the sale as much as possible, support them. That's a little commitment there. And I hope that helps. Chris: I mean, I think you need a high level strategy for this. And I know there's a lot of firms that came along kind of copying your business, or offering this as a service or a side service, like a side hustle thing that they were doing. But it seems like you need some sort of years long accumulated expertise to make a good decision with what's coming down the pike. So, I mean, people coming to us, our site e-commerceChris, we're probably going to send you, you know, straight to to Yoni or to Getida to get some answers. Because we see this on our side too. A lot of things that are changing are favoring larger sellers and larger sellers will be able to absorb, even if it's not costs, even if it's just, you know, or it is costs, but it's like just resources associated with fixing problems, let's say. Yeah larger sellers, of course, are making more. [00:14:04] Presumably they have more dominance in their category. They have more profit coming in every year. So they have the resources to allocate, to fix problems. This is just another example. The more resources you have, and the smarter you spend, and the better you manage and allocate those funds, the better off your, the health of your whole business, right? Yoni: Yeah. They say, I don't know if you guys realize this. So anybody listening and watching to this. As entrepreneurs, you gotta keep in mind, you know, a lot of entrepreneurs just completely miss out on this. And I think this is something that Jeff Bezos was a genius at. It's capital allocation. What an entrepreneur is, is really a kind of a person that takes capital and he knows how to allocate it really, really properly, so that capital allocation creates even more and more capital. So you're buying goods and selling goods and you're doing all these things in between, but it's essentially underneath the surface, it's capital allocation. So it's capital, capital allocators and the ones, and you want to extract the most capital out of it, which means ROI, return investment, think is those, those degrees. So make that shift, make that, make that mindset. I know Jeff Bezos did and took him very far. I'm trying to [00:15:04] do it. You know, I did well in life, I thank God, but you the sellers, you know, listening and watching. Cost reduction is very important, building a really strong brand with modes and defendability and all that stuff is important, so you can really charge a premium pricing and that's how you facilitate well, the capital location game that you're in, not even realizing that you're in that game, capital allocation. Chris: Yeah. So we'll, we'll post this in February, in January, and maybe we can circle back in February and do kind of a part two discussion based on what changes and decisions people are making. So very good questions for everyone. Let us know. We will hopefully see you again soon. Thank you everybody