If you’re on Amazon, your battle for eCommerce dominance takes place largely in the pricing arena. Pricing strategy is crucial for your Amazon business, but Amazon pricing strategy can be somewhat mysterious. It’s full of limitations, guidelines, and variations that can create confusion for new sellers. We look at some of these pricing principles to help you better understand how to get it right.
Table of content:
- Why is Pricing on Amazon so Vital?
- How to Calculate the Best Price for a Product?
- Why do Amazon Prices Change?
- Amazon Pricing Tools
- When to Cut Prices
- When to Raise Prices
- Amazon Pricing Strategy
- Final Word
Why is Pricing on Amazon so Vital?
Nowhere are consumers more cautious about cheap deals than on Amazon. If you want to sell products on Amazon, you must price them as competitively as possible. That means knowing how customers evaluate products and prices accordingly. Just as retailers rely on price differentiation to create a competitive market, so should Amazon sellers optimize pricing.
Pricing is one of the most overlooked areas of the Amazon business. But, the right Amazon pricing strategy can reap some serious rewards. See, customers always compare offers on Amazon to find the best deals on products they need. While it can be tempting to lower your prices to compete for bulk orders, you need to think twice, or it may come back to bite you in the back.
If you set your prices too high, your competitors may be taking advantage of competitive prices to acquire customers.
Amazon’s current pricing rules are about to tighten in 2022. They are aimed to provide low prices and can hurt your business if ignored. In 2022, Amazon web crawlers are going to put more scrutiny to detect differences in pricing. This is an especially important thing to monitor for sellers who operate across several channels at once.
What you want to do is to find the perfect price for your products without sacrificing your profits (if it’s too low) or customers (if it’s too high). Let’s figure out how to do that.
How to Calculate the Best Price for a Product?
To properly price your product from an ROI perspective, you’ll need to work out your cost of goods, subtract your marketing and sales costs, and then work out your margin. The price your product should be listed at should be your profit margin, minus your costs.
Here’s an accurate formula to help you find the right pricing for your products:
For this formula to work right, you have to keep in mind the products with the highest/lowest prices. Before deciding on a number, consider all the costs of buying the product to make sure you make a profit. These costs include shipping, customs duties, payment methods, Amazon commissions such as FBA or customer returns, etc.
Why do Amazon Prices Change?
At its heart, Amazon is a technology company, which is why it has an ongoing emphasis on increasing value for customers. This also explains why Amazon prices change. Amazon is constantly changing product prices – about 2.5 million times a day, which means that the average cost of a product changes roughly every 10 minutes. Because the market has a wealth of data, it is able to analyze customer buying habits, competitors’ prices, earnings, inventories, and an incredible set of other factors.
Amazon is also raising prices for unusual products, and then the most standard products turn cheaper. This way, shoppers assume that they have the best prices.
Amazon pricing algorithm is a great example of how competition can create value by pushing prices down. It is a crowded marketplace, so there is always pressure on the company to fight for market share, and lower prices are a way of doing that. Though these lower prices are sometimes achieved by skimming profits, sometimes they can create more value than the price itself. Amazon has been able to drive prices down by creating a platform that enables them to outsource their shipping logistics and process returns.
Amazon Pricing Tools
Finding the best price is not an easy task, so to make this process comfortable, Amazon has made available its own set of tools that should help you work out a fair price for your product.
Amazon Pricing Calculator
Amazon provides a free-to-use cost calculator to assist you in your estimation of pricing strategies. Keep in mind that it does not include taxes or any extra expenses such as shipping or warehouse expenditures.
Amazon Automate Pricing
Amazon’s automated pricing allows the sellers to set prices that can attract more customers. It’s because it sets prices lower than those of your competitors. So this is good for your customers but bad for your revenue.
Head to Seller Central and set the pricing rules according to what suits your business goals. You can also choose which ASIN will apply these rules to them. The disadvantage of this tool is that it usually works by decreasing your prices compared to your competitors’ prices.
Amazon Algorithmic Repricing Tools
While there are many variables that come into play before a seller decides to reprice a product or service, there is a general trend in pricing strategies that sellers are beginning to utilize. They are more and more turning to digital tools and software to help them autopilot this process and identify the most effective pricing strategies to be used in their business. More importantly, these digital tools and software are making pricing simpler and more transparent.
Third-party pricing tools and algorithms allow online sellers to compare prices in perpetuity, making their decisions based on current market trends and even state-of-the-art machine learning. They also enable sellers to grow their revenues seasonally, through the holidays, or even in a gradual fashion over time. Using repricing tools for building efficient Amazon repricing strategies grant the following advantages:
- automated pricing saves precious time
- minimized margin allows taking profit to the maximum
- maximizes ROI if you use the tool correctly
- facilitates the pricing calculation for huge listings.
Though, this kind of tool also has its disadvantages:
- most of them are expensive
- provides less insight into what helps your products.
Amazon Manual Repricing
Some sellers have taken to manually establish their list prices on Amazon to gain more control over their listings and avoid dangerous situations like iffy promotions that would impact their ability to run a profitable business on the platform.
While manual pricing can provide more control over your sales, you have to be proficient in this area to do everything right and spend a lot of time checking the prices of competitors in order to not lag behind. Selling online is a full-time job, and figuring out the best price requires a lot of tedious work.
If you don’t want to waste so much time and effort manually setting your prices and then have them change every day without warning, we recommend using software for this kind of job. You try a variety of tools and find the best one for building the perfect Amazon seller pricing strategy.
Manual repricing grants the following advantages:
- full control over your pricing
- useful insights into what works for your products
It has the following disadvantages:
- not suited for sellers with a huge listing
- takes too much time
- requires certain expertise and skills in the field.
When to Cut Prices
Everybody always wants to know the corporate reasons for a price drop. But it might be more helpful to ask why you should drop your prices. Here are some key factors to consider.
It can be overwhelming to figure out how to get more traffic to your site and drive conversions. But there are some specific tactics that you can experiment with, of which you could even see a significant increase in customer acquisition costs.
When you are going out of stock or simply want to increase engagement with your customer base, you can set up special offers to get a chance of sealing the deal. It can be anything: coupons, promotions, gifts, etc. The campaign depends on your goals and what you can giveaway for a decreased price.
Are you looking for a way to sell your new products at a lower price point? They may be more easily understood by the customer and get more traction if you can make the price more flexible than a fixed price.
Want to encourage customers to buy more products? Bundled products are a perfect way to accomplish this. You simply need to bundle several products together and sell them for one unit’s price. Or, for instance, you group together two products and offer a huge discount for a second one.
If you have an overload of inventory, stock clearance can help get rid of excess supplies. It will depend on the cost of the product, but you can offer a 60% discount. Take a look at this offer of a yoga mat:
This is a great Amazon pricing strategy to get your customers hooked.
When to Raise Prices
In the costly world of retail, the temptation to offer discounts can be strong. But when you offer discounts too often, you’re actually hurting your sales. The result is lower margins at stores and worse profits. In order to sustain a competitive edge, companies must do more to place premium value on their products and services while increasing prices slowly over time.
Higher pricing on Amazon can allow suppliers to increase their profit over their margin when selling with Amazon. High on the list of reasons to start increasing your prices is the company’s increasing dominance in online retail.
Increased Price Can Result in Raised Perceived Value
Sellers have long ago discovered a way to increase the perceived value of mediocre products by charging them an increased price. Given any product, you can alter the price by changing the number of items in stock, the duration for which you keep it on the shelves, and so forth. All of these changes have an effect on the perceived value of the product. If a product is priced very similarly to another known-to-be-good product in its category, increasing the price may increase its perceived value.
Increased Price Can Result in Raised Daily Income
Some people believe that the best way to drive income is to increase prices. Eventually, that may work in their favor, but that’s not always the most sustainable model for success. Depending on your market, you may be better off trying to push the product down to a lower price point than investing all revenue in marketing, promotions, and advertising. However, it does make sense to increase prices when your competitors are out of stock, or you have less inventory or going out of stock.
Increased Price Can Decrease Sales But Boost Profits
Many people believe that increasing price naturally leads to lower profit margins, but they’re wrong. In fact, according to a recent study, only 10% of companies who increase their prices see their profits fall sharply (-25% or more), and only 20% of companies see their profit margins decrease on average. Instead, companies who manage their pricing well with the help of data-driven analysis see a 10% to 20% increase in profits.
When a product’s price increases, it can often lead to decreased demand and result in impaired recognition opportunities. However, when a company deliberately raises prices for the purpose of causing price sensitivity, it can also have the opposite effect. This can give companies a chance to create demand for their products.
Amazon Pricing Strategy
When it comes to pricing Amazon, there are four general approaches you may want to consider to drive the most revenue and revenue growth. Deciding the best approach for your brand may be the difference between a top-line that trickles in and one that pours in.
Amazon pricing strategies vary according to the product classification and demand for the product in a specific time and location:
- Economy: using small profit margins with low ad costs. Its main goal is to push the product to a large market.
- Premium: on contrast to the economy, the premium strategy is about high prices and using branding to boost product interest.
- Skimming: with this strategy, an Amazon vendor often starts with a higher price until the competitors’ prices match. It’s best for sellers with a unique product that is about to struggle with competitors.
- Penetration: this is a trick of cutting prices in order to get a share of your competitors’ audience. It is commonly used by starting and new sellers to increase interest in their products.
Pricing on Amazon has a reputation as an “obvious” measurement, but in practice, it’s both complex and hard to achieve. If you need help with your pricing strategy for Amazon, contact Profit Whales, and we’ll gladly help you!