How Amazon Manages Its $100 billion River of Returns
Platforms | Innovation | Circular Logistics
Digital platforms have become central to managing returns in e-commerce, offering efficient solutions for retailers to handle the growing flood of returned items. These circular marketplaces and auction platforms streamline the returns process, reduce costs, and help recover value from returned merchandise. Digital platforms have transformed returns management in several ways. They have contributed to automating the returns process, reducing manual effort, and improving efficiency. They provide real-time fraud detection to identify and prevent suspicious returns. They offer valuable data to help businesses understand return patterns and optimize strategies. Finally, they provide APIs that can integrate with existing systems to significantly reduce the transaction costs associated with reselling goods.
Amazon’s return ecosystem
In this article, I explore Amazon’s return ecosystem paying special attention to the role of platforms. Returns are an often-overlooked element of its platform business model. The Amazon flywheel is a concept that has become legendary in the business world.1 It was reportedly sketched on a napkin by Jeff Bezos during a meeting with strategist Jim Collins in 2001. This simple diagram encapsulates Amazon's strategy for growth and success. It is a concise way to illustrate the power of network effects. As more customers and sellers join the platform, the value for all participants increases, creating a powerful ecosystem that becomes increasingly difficult for competitors to replicate.
However, the classic Amazon flywheel model does not include returns, which I highlight in red (see diagram above). The focus is on growth through customer satisfaction, selection, and competitive pricing.2 It is a linear economy model focused on the first customer of a product.3
Yet, Amazon’s return policy has been an integral part of the platform, playing a crucial role in driving the company's business growth. Early on, Amazon adopted a generous free 30-day return window on certain items (e.g. clothing, apparel, and bedding), which helped to build trust and reduce the perceived risk of online shopping for consumers. This was then expanded cover millions of additional items that weighed under 50 pounds.4 By offering to accept returns without charge, Amazon assured customers that they could easily send items back if unsatisfied, encouraging more online purchases. The policy also set Amazon apart from other retailers, attracting more customers and increasing brand awareness and loyalty. It also attracted more third-party sellers to Amazon's platform, expanding the product selection and further enhancing the customer experience. In short, returns were a key force propelling the flywheel.
A River of Returns
While the strategy contributed to Amazon's phenomenal success in the e-commerce market, it also contributed to producing a river of returns. The exact number returns that arise from Amazon’s marketplace is unknown. Amazon does not break out these numbers in its financial filings. However, we can make a rough estimate. In 2024, Amazon's GMV was $753 billion.5 This comprises Amazon's total Gross Merchandise Value (GMV) derived from both first-party (1P) and third-party (3P) sales, which differ significantly in their operational structure. First-party sales involve Amazon purchasing products wholesale from manufacturers or brands, and then selling them directly to customers, with Amazon managing pricing, inventory, fulfillment, and customer service. In contrast, third-party sales occur when independent sellers list and sell their products directly on Amazon's marketplace, retaining greater control over pricing, inventory, and branding, while potentially utilizing Amazon's fulfillment services.
If we use the average return rate reported by the National Retail Federation of 17 percent, then the first-party returns were approximately $40 billion in 2024.6 If the same percentage is applied to third-party returns this comes to an additional $88 billion. Taking these estimates together, we can assume that Amazon’s marketplace has to manage over $100 billion in returns annually.
These returns are as broad as the categories Amazon sells. Common product types include electronics (such as smartphones, laptops, gaming consoles, and networking equipment), home goods (like furniture, bedding, and kitchen appliances), clothing (for men, women, and children), and toys (including action figures, puzzles, and board games). Other categories often found in liquidation loads include books, beauty products, sporting equipment, pet supplies, and daily essentials like cleaning products or lightbulbs.
These products come back in a wide range of conditions. Some items may be unboxed but never used. Others are damaged or unsellable items. While some sorting happens, it is typical for returned products to be combined into pallets that vary greatly in the type of merchandise and their condition. Buyers may find brand-new items, slightly damaged goods, or even defective products that have been refurbished for resale. Liquidation pallets are coveted among resellers due to their discounted prices and the profit potential when reselling individual items.
Managing Reverse Logistics
Amazon faces a variety of challenges in managing product returns. Three stand out. The first is minimizing losses associated with returns processing. This necessitates quick and accurate decision-making regarding the disposition of returned items to curtail expenses linked to storage and handling. Efficiently processing returns and determining whether to restock, refurbish, donate or dispose of items are critical components of this challenge. For example, Amazon offers a repackaging service to sellers through its FBA program (Fulfillment by Amazon) for items returned in "like-new" condition, making them ready for resale on Amazon’s marketplace.
Another key challenge is maximizing revenue recovery from returned goods. Amazon endeavors to recoup as much value as possible through strategies like resale or refurbishment. This entails initiatives such as selling returned items as used or refurbished products via programs like Amazon Renewed. For FBA sellers, Amazon manages the majority of return logistics, but sellers retain the option to create removal orders for unsellable inventory, enabling them to assess items and determine if refurbishment or resale on alternative platforms is feasible.
Finally, there is the challenge of finding ways to improve the overall efficiency of the returns process. Automated triage plays a key role in minimizing delays and reducing the need for manual intervention. To streamline returns, Amazon employs various tools and systems, including providing detailed return reports to sellers, implementing Return Merchandise Authorization (RMA) systems, and leveraging advanced analytics to monitor product quality and customer feedback.
In years past, Amazon’s approach to returns has sparked controversy, particularly in Europe. Investigations in 2019 revealed the company was destroying millions of unsold products annually. This practice sparked public outrage and governmental action, leading to increased scrutiny and new legislation. In Germany, the "Obhutspflicht" law was passed to curb the destruction of new goods.7 The scandal spread to other countries, including the UK, and ignited discussions about environmental impact and wastefulness in e-commerce.8 Although Amazon claimed only 1% of its own goods were destroyed, critics argued this didn't address the broader issue of excessive and improperly managed returns. As a result of the backlash and new regulations, Amazon has taken measures to revamp its return practices and improve its environmental image.9
Recent Reforms
Last year Amazon implemented important changes to its reverse logistics and liquidation programs, aiming to reduce costs, improve efficiency, and address environmental concerns. The company updated its FBA return policy, introducing a new fee structure and reimbursement system in June 2024.10 This included additional charges for returns exceeding normal thresholds and fees calculated based on product category, size, weight, and return rate.
Amazon also revamped its liquidation program, making free liquidations part of the FBA New Selection program and funding removals via FBA Liquidations instead of disposals. This change allows sellers to recover value from excess and customer-returned inventory while avoiding storage and disposal fees.11 Additionally, Amazon launched the Fulfillment by Amazon Returnless Resolutions program, enabling sellers to issue refunds without requiring customers to return items for products under $75, excluding certain categories.12
These changes aim to reduce costs for both Amazon and sellers, minimize waste, and improve sustainability. Sellers need to adapt their strategies to the new fee structures and liquidation options, while customers may benefit from increased convenience for certain returns. The emphasis on liquidation may also lead to growth in the secondary market for Amazon products and influence industry-wide practices in reverse logistics. Overall, these changes represent Amazon's efforts to balance customer satisfaction, cost efficiency, and environmental responsibility in its reverse logistics operations.
Not all companies have benefited from these changes. One casualty has been Essex Technology Group, which operates as Bargain Hunt. The company filed for bankruptcy in January 2025.13 Amazon's decision to terminate its reverse logistics partnership with Bargain Hunt in 2024 significantly impacted the company's revenue. This partnership had been a major source of income for Bargain Hunt, as it specialized in reselling returned merchandise from Amazon and other retailers. Initially, Amazon reduced its business with Bargain Hunt by 25% before completely severing ties, leaving the company unable to recover financially.
When Amazon terminated the contract in 2024, it not only reduced the company's revenue streams but also eliminated a key component of its business model, leaving Essex unable to recover financially. This loss was compounded by the fact that Amazon's updated liquidation programs allowed sellers to directly liquidate or refurbish inventory through Amazon's own channels, bypassing third-party liquidators like Essex Technology Group. Essex has 92 retail assets across 10 states, including Alabama, Arkansas, Georgia, Indiana, Kentucky, Mississippi, North Carolina, Ohio, South Carolina, and Tennessee.
Leveraging Third-Party Platforms
Amazon's returns ecosystem also taps into companies that run liquidation platforms.14 This part of the ecosystem operates as a two-tier system. At the top are companies with direct contracts or partnerships with Amazon, like B-Stock, TDW Closeouts, Liquidity Services, BULQ, and Direct Liquidation. These companies compete for contracts for a specific Return Facility (“LPN”) or a fulfillment center (“FCs”) and agree to take supply for terms that are typically set at a minimum of 12 months. These companies get first dibs, bidding on and buying returned pallets directly from Amazon.
Then there's a second tier of players, such as Bin Depot, Ollie's, The Bins AZ, and Kaiya's Pallets. These businesses source their inventory from those primary auction platforms or contract holders, purchasing pallets or truckloads to resell to consumers or smaller resellers. This setup creates a multi-layered distribution channel for Amazon's returned and liquidated goods, accommodating different scales of operation within the market.
Amazon gains numerous advantages by leveraging this liquidation ecosystem. The auction platforms allow Amazon to quickly offload excess inventory and customer returns, thereby reducing storage costs and freeing up valuable warehouse space. Instead of taking a total loss on unsold or returned items, Amazon and its third-party sellers can recoup some of the value of the merchandise through liquidation sales. By using third-party platforms, Amazon can manage liquidations without the need for dedicated staff or resources, reducing overhead costs. These platforms provide access to a large network of registered buyers, ensuring a steady demand for Amazon's liquidation inventory. This approach also promotes sustainability by encouraging the reuse and recycling of products, helping Amazon avoid sending unsold goods to landfills.
Conclusion
Amazon's returns ecosystem is a largely overlooked component of its famous flywheel. Nevertheless, returns are a critical feature, driven by a confluence of business, environmental, and regulatory pressures. The sheer volume of returned goods, likely exceeding $100 billion annually, requires innovative strategies to minimize losses, maximize value recovery, and improve sustainability.
Amazon's recent reforms, including adjustments to its FBA return policies and revamping its liquidation program, reflect a need to balance expectations of customers buying new products with efficient circular logistics. While these changes have disrupted some players in the reverse logistics market, such as Essex Technology Group, they have also opened new opportunities for others and spurred growth in the secondary market for liquidated goods.
By strategically building an ecosystem of third-party platforms for liquidation, Amazon benefits from reduced storage costs, capital recovery, and a streamlined reverse supply chain. This approach allows the e-commerce giant to focus on its core business while entrusting the complexities of liquidation to specialized partners. As e-commerce continues to grow, the challenge of managing returns will intensify. Amazon's ongoing efforts to optimize its returns ecosystem serve as a model for other retailers, highlighting the importance of embracing innovative solutions, fostering collaboration across the supply chain, and prioritizing sustainability in the age of the customer-centric economy.
The river of returns is unlikely to dry up anytime soon, but with strategic management and a focus on continuous improvement to circular logistics, its currents can be better navigated to balance the interests of businesses, consumers, and the planet.
Footnotes
For a description of the linear economy see: https://www.ellenmacarthurfoundation.org/what-is-the-linear-economy
A fascinating article. Thank you Peter Evans!