Some third-party brands selling on Amazon’s marketplace say the economics of operating on the platform have become difficult. One of the big reasons behind this unprofitability is returns.
The founder of one automotive brand, which sells car accessories and DIY auto kits, told Modern Retail that he stopped selling through Amazon in the middle of the summer this year after coming to the conclusion that his company wasn’t making any profits on Amazon, largely due to a high return rate. At times, the brand’s return rate on Amazon was roughly double what it was on Shopify. He chalked it up to Amazon shoppers not having as much familiarity with the brand as Shopify shoppers.
This brand’s trajectory is indicative of a growing predicament that many brands are starting to face on Amazon. Overtime, Amazon’s friendly return policy — along with its fast shipping — has been one of the biggest selling points to customers. Typically, customers can return items bought on Amazon within a 30-day window from the delivery date. Depending on the nature of the return, sellers can close a request or issue a refund. But, as the high cost of processing returns continues to be a thorn in the side of every e-commerce business, some brands are realizing the cost of doing business on Amazon is no longer worth it.
In May 2023, the founder said he “stayed up all night just running numbers,” before deciding to pull the plug on his Amazon business. “I ran my first numbers and I was like — holy shit, this is really bad,” the founder said in an interview with Modern Retail.
The brand, founded in 2019, clocks about $4 million a year in annual revenue primarily selling online through its Shopify store. The company also has a very small wholesale business, which contributes less than 10% of sales, mostly for international distribution outside the U.S. At its peak, Amazon accounted for around 15% of the brand’s sales.
“We made topline revenue that was pretty high,” the founder added. “But profit was almost non-existent. We were really losing money at the end of the day.”
In our latest Confessions series, in which we offer anonymity in exchange for candor, this Amazon seller walked us through his decision to stop selling on Amazon. In an emailed response to Modern Retail, an Amazon spokesperson wrote that, “Automotive is a large and fast growing category for independent sellers in Amazon’s store, with many sellers seeing strong growth and continued success. We continue to work with our selling partners to reduce returns, including by ensuring accurate product descriptions, images, and other information that can help customers make informed purchase decisions.”
This conversation has been edited for length and clarity.
What has your journey been like since you first started selling on Amazon’s marketplace in 2020?
It’s been hard. In the beginning, I thought that was a strategy that we needed to go [with], because it’s one of those things, where if you’re an e-commerce brand you have to be on Amazon. People say that it’s inevitable. But then you don’t realize how unprofitable it can be. So, you need it, but you can’t really complain to Amazon about a lot of the stuff. [Amazon] can move the needle whenever they want. Their platform isn’t bad, but I just feel like the way they set it up, it makes it somewhat difficult for e-commerce or DTC brands to really succeed.
In the first year, I think we made a few hundred thousand dollars in revenue, but I know that we weren’t highly profitable. It was one of those things [where] it’s like it’s okay not to be profitable right away because we’re building the Amazon line.
For us, it wasn’t really the percentages that [Amazon was] taking out, necessarily, because their shipping prices, to be honest, aren’t bad. They have insane rates with UPS and their shipping is unreal. But, I think where it gets really difficult is returns.
Why were the returns a problem?
I think people often talk about return percentages, but they don’t talk about what happens after the returns come back. On average, return percentages vary from 5% to 15%, it all depends on the industry. I can tell you that it was much higher on Amazon compared to our DTC site powered by Shopify. I would say at least double. Our returns, some weeks, have been as high as 30% on Amazon, which is insanely high.
But, what was more difficult was that a lot of times when our customers return stuff we couldn’t resell it. On Amazon, we had a good amount of returns that were just absolutely unsellable. To give an example, customers shoved in all the things that they didn’t use and stuff and then they return it back to us and then we get to see it and then we just put it back into trash because none of it is retrievable. So then our COGS is all gone, our shipping is gone, our labor is gone. And then we would eat all of that cost. When I actually did the math later down the line it just didn’t make sense for us to work so hard to get so little.
I think the level and the quality of customers [on Amazon] is a little bit different compared to those buying from a regular e-commerce brand, where they might be more invested in the brand. Whereas, for us, on Amazon there was almost no [brand] relationship. I think it’s very unemotional when the purchase happens and the decision is mostly dictated by price. I think still to this day, if you think about people who purchase on Amazon and you probably still use them a lot. But we often forget what we bought on the platform.
Did your brand face any other challenge when selling via Amazon?
I don’t have venture capital. Also, I’m completely bootstrapped. So, I don’t have a parent company or private equity to go back [and say] — hey, we’re out of money selling on Amazon, but we brought it in $10 million, or something like that, that’s arbitrary.
So, when I’m not making money, that’s actually affecting my ability to hire people, continue to employ people, so I just had to pull the plug. I talked it over with my GM and I said — ‘Hey, here’s the numbers. Can you verify this?’ And then she verified it. And then she was like, ‘Yeah, that was true.’ And then I was like, let’s pull the plug. I’m done. And then we brought everything back. We got all our stock back. We tried to fire sell as much as we can. I think we still have a presence, but it’s almost non-existent at this time.
Would you reconsider selling on Amazon?
There are some benefits to selling on Amazon. I consider Amazon an organic search engine. It’s kind of like Google. If your stuff is on Amazon, you will get more backlinks and those backlinks are very powerful from an SEO standpoint. So in some ways by being there, you just will get more traffic to your website as well.
So, if you have a good strategy, I think it works really well. I am going to be back on Amazon, but my strategy will be completely different. I might launch different type of products that I know are not going to be returned as much. And then, I’m going to create like a nice page so that people can bring traffic back to our website. I think I will have to be back in a very different strategy.
This story was updated to include comment from Amazon.