Annual Terms Update

Do You Understand Your Annual Terms Agreements?

It is that time of year when Amazon will be reviewing their annual agreements. If these aren’t where they need to be, Amazon will be pushing vendors for improvements. Before you negotiate, are you clear on what the different terms are?

Amazon will typically focus on the following areas when requesting improvements:

Payments Terms 

These terms typically vary from 30 to 90 days net, or end of month (EOM) with an early payment discount. Amazon pays less attention to this unless your payment terms are very short. Amazon has recently started trying to incentivize vendors. This means Amazon will give an early payment discount in exchange for shortened payment terms.

Freight Allowance 

Freight allowance is more common in North America than in Europe. This covers the cost of Amazon collecting the shipment from the vendor’s warehouse and delivering it to the Amazon Fulfillment Center. The percentage amount will vary depending on the size and weight of the vendor’s products. This is one of the easier allowances to measure. Vendors should already have an idea, on average, how much shipping costs and what percent that is of the COGs of an average shipment. Therefore, if Amazon is asking for a crazy percent allowance, you should be able to spot it. Amazon will often give vendors the choice to increase it, or to manage your own shipments. If the allowance is way above your average shipping cost and you aren’t successful in your negotiations with Amazon, you might want to consider shipping the inventory yourself.

Damage Allowance

This allowance covers the cost of any damages and customer returns, including any expired product. This is also an easier allowance to measure. You should already have an idea of your percent returns rate. If Amazon then asks for a percentage way above your average, this should raise alarm bells. Although,  note that Amazon does have a very customer-friendly returns program. You may find the returns rate is slightly higher than on your own website, for example. If Amazon asks for a significant jump that looks unusual to you, it may be that a couple of products have a high returns rate because of an issue that can be easily resolved, e.g. incorrect product image or info.

If it seems too high and you aren’t successful in your negotiations with Amazon, you could manage the returns yourself. Keep in mind you do need to pay for the return of the inventory, and this only makes sense on high-retail products that can be resold or refurbished.

Marketing Allowance

Marketing allowance is also known as discretionary coop and marketing development funds (MDF). This is can be a hard allowance to calculate, unlike shipping and returns, as you have nothing to compare it against. This allowance helps cover activities that drive impressions and sales to products. These include in-store promotions, PR pitches, merchandising activities, emails, paid search and sponsored links to products, associate referrals from external websites, basic site placement, and improvements in the catalog.

In addition to these allowances, depending on the size of your account, product category and country, you might find that Amazon requests some more specific allowances such as Subscribe and Save, Overstocks, and Amazon Vendor Services.

If you want more information and tips on negotiating with Amazon, you can upgrade to an Annual Membership. This will give you access to watch our pre-recorded webinar hosted by ex-Vendor Manager Carina McLeod, talking about “How to get the best out of your annual terms negotiation with Amazon.”

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Carina McLeod

Carina spent over seven years working in Vendor Management at Amazon UK and now is the CEO and Founder of a consulting agency, eCommerce Nurse, helping vendors and sellers grow their business on Amazon. She is also the Founder of Vendor Society.

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