As an Amazon seller, your Amazon pricing strategy can make or break you.
Money is the name of the game, after all. The ultimate goal of being an Amazon seller is for people to give you money in exchange for a product (with Amazon as the middleman of course). A key component of this is agreeing with your customer on the ideal price for that product.
There’s obviously many more things to consider, to be successful selling online. But it can all be worth nothing if your pricing strategy is off. Keep reading for some key tips that are going to help you get your Amazon pricing strategy right.
Why Your Amazon Pricing Strategy is So Important
So why is it so important to get your pricing right?
First, basic economics. When a shopper comes across your product, they need to make their minds up as to whether the price is something that aligns with what they believe the product is worth.
If the shopper doesn’t think it’s worth it to pay the listed price, you’re not going to make the sale.
At the same time, Amazon sellers want to get as much as possible from each sale. You need to cover what the product costs you, for a start, so you can actually make a profit. Then you need a healthy margin on top of that, so you can make money to grow your business.
Again, these are all very basic business practices. For any brand – from Coca Cola to Nike to a private label Amazon brand – pricing is something strategic that the brand likely decided at an early point in its existence.
And you can argue that pricing on Amazon is more important than many other platforms. That’s because of the competition on Amazon, and how pricing plays into visibility.
With so much competition on Amazon, there’s very little margin for error in your strategic decisions. When thousands of products appear in the search results for a single search term, customers have no shortage of alternatives if they don’t like the price of your product.
On top of that, Amazon actively wants products on its platform to be at their lowest price. They don’t want people to be able to buy a product cheaper somewhere else. And lower priced products means a higher chance of a sale for them. Remember, Amazon doesn’t care what it costs to source your product. It’s all profit to them.
A tiny decision, such as whether to price your product at $10 or $10.15, can have a huge ripple effect on your business. So take time to get it right.
Figuring Out the Best Price For Your Product
What’s the “best” price for your product?
That’s hard to say. There’s no answer that fits every situation. That’s why we’re talking about “strategy”. You can adopt any number of different pricing strategies, and more than one can be valid.
There are some basic factors that apply in all cases though. To start with, you’ll need to understand your profit margins.
What is profit margin?
Your profit margin is how much you stand to make after subtracting all costs and expenses from the price of the sale.
Profit margin is calculated at:
Sales – COGS (Cost of Goods Sold)
Multiply by 100 to get a percentage figure.
COGS includes the price you paid for the product, shipping costs, packaging, Amazon fees, etc.
So if your product sells for $10, it cost you $5, plus an additional $2.50 in assorted fees and expenses, your profit is $2.50, and the profit margin is 25%.
You’ll want to use profit margin to get a basic idea of what your pricing should look like. Your margin should be positive, of course – no business can sell products below what it costs them. But you also need to make enough profit to reinvest in more stock.
What’s a good profit margin?
Anywhere under 10% profit margin is generally going to be far too low to be sustainable. Under 20% is not ideal either. But it depends on the situation.
Here are some things to consider in regards to profit, and Amazon pricing strategies:
- Remember you don’t get paid for your sales immediately, and you probably aren’t receiving new stock immediately either. You need to make enough profit to keep a buffer of a few months (at least) to keep stock coming in, while waiting for payouts from Amazon.
- Since it’s a percentage metric, the price of your product matters. High-priced products may be able to get away with lower % profit, as the total dollar value is higher.
- Faster-moving products can afford to have lower profit margins.
- Margin doesn’t include marketing costs – but you’ll need to factor this in at some point, unless all your sales are organic sales.
It’s hard to say what is good or not in terms of profit margin. But you’ll want to know this to have a place to start, and ensure you don’t end up selling at a loss after repricing or promotions come into play.
Psychology plays a key part in pricing strategies.
The goal, remember, is to convince Amazon customers to pay the price your product is listed at. So you can use certain psychological tactics to influence this mental decision in the shopper’s mind.
Some common psychological pricing tactics, like price anchoring, might not be possible on a platform like Amazon (where you don’t have any control over the rest of the site).
But probably the most common psychological pricing trick is “charm pricing”. This is a research-proven effect that finds prices ending in a 9 tend to sell better than round numbers.
I.e. – instead of pricing your product at $11, you’ll price it at $10.99.
It doesn’t specifically need to end in a 9 – $10.95 has much the same effect.
This feels to the customer as much closer to $10 than $11 (even though the opposite is true).
You’ll find examples of this anywhere you go – from the grocery store, to the Amazon SERPs. Just look at how many products follow this method in this Amazon SERP:
So that’s just one example of how psychology can influence your pricing strategy. It’s unlikely to make a massive difference – for example, if all your competition is priced between $5 and $10, it won’t matter a lot that your product costs $99.99 instead of $100.
But you should certainly read up on pricing psychology and take this into account with your Amazon pricing strategy.
How Pricing Affects the Buy Box
Another important thing to consider when coming up with the right Amazon pricing strategy is the Buy Box.
The Buy Box is the section on the right side of a product listing, with the big, bright “Add to Cart” and “Buy Now” buttons.
Multiple Amazon sellers can be selling the same product on the same listing, but only one can get the sale when someone clicks “Buy Now” from the Buy Box. As you can imagine, the vast majority of sales come this way.
Your pricing decisions can affect your chances of winning and holding the Buy Box. There’s no public data on how this works, so nothing’s for sure. But it’s widely accepted that lower prices are generally favored to win the Buy Box.
In addition, consistent, big changes in your price may end up in you losing the Buy Box. Even if there are no other sellers on your listing, there’s still a chance this section is removed if your pricing is erratic.
Basically, Amazon wants to be able to offer low prices, and consistent pricing that doesn’t confuse their customers. So if your pricing strategy isn’t in line with this, their algorithm may respond by stripping you from the Buy Box.
Dynamic Pricing vs Static Pricing
Think about whether your Amazon pricing strategy features dynamic pricing or static/manual pricing.
Dynamic pricing means you’re constantly adjusting your price. This is a data-driven approach where you’re constantly looking to be at the optimal price to maximize both sales and profit.
You might utilize dynamic pricing to keep your pricing competitive with (or ahead of) your competitors prices, or to adjust to market conditions or stock levels.
On the other hand, manual or static pricing means keeping your pricing mostly the same. Static pricing is easier to manage than dynamic pricing. Less can go wrong with this approach, however you risk missing out on sales and profit, or potentially losing the Buy Box, by not changing your price.
Neither approach is clearly better than the other. Both have their merits, and both can be effective if managed correctly.
Tips to Ensure Your Amazon Pricing Strategy is On Point
We’ve covered some of the key bases to do with pricing strategies on Amazon. Now let’s go through some tips that are going to help you come up with the ideal pricing strategy for your product.
Decide whether to price your product low or high
One of the earliest decisions you’ll make in the pricing area is whether to go low or high.
By default, you might think your product’s price should be lower than, or close to, the competition. After all, customers are looking for the lowest price, right?
But you could also make the strategic decision to position your product at a premium price point. This can result in a huge bump in profitability, if it comes off. However, you need to be able to justify the price, by providing a higher-quality product than alternatives with more competitive prices.
Consider what differentiates your product from the others on the market. If you can’t come up with something, you may need to join the race to the bottom in terms of price.
Don’t go too low or too high
Unless you’re specifically positioning at the top or bottom of the market price-wise, you want to be careful not to go too high or too low.
Examine the market, to come up with an average range that most similar products are priced at. Your price should then be around that same range.
Too high, and you’re not going to make many sales. But too low, you’re not going to make enough profit.
In addition, pricing your product too low can lead to a lower perceived value with your customers. If people see something that’s crazy cheap, they naturally think it’s lower-quality.
As such, you might find that you actually make more sales if you raise your pricing slightly, rather than drastically undercutting the competition.
Leave room in your pricing for marketing costs
Cost of goods sold technically doesn’t include marketing costs. But it’s important to factor this into the equation.
Let’s say you work out your margin and find you make $5 profit per item, which works out to 20% profit margin. Great! Right?
But then you see that you need to spend between $3-5 in marketing costs per sale. All of a sudden, you’re barely making any profit at all. You need these marketing costs – such as PPC, ad spend on social media, etc – to get sales. So realistically you needed to price your product higher, to take this into account.
Use a repricing tool for dynamic pricing
If you do an automated pricing strategy, you’ll probably need to use an algorithmic repricing tool.
Unless you only sell one product, and sales are low enough (and your time is free enough) that you can constantly check prices and adjust it manually, this is going to result in far too much work.
There are a lot of Amazon pricing tools on the market that are built for this exactly. These make it far easier to constantly make small adjustments to your price, in line with what the competition is doing.
Amazon also has this feature in Seller Central (under “Pricing”, you should see the option for “Automate Pricing”). But it’s generally going to work better (if cost a little more) if you use a third-party tool.
Use discounts over cutting prices
Finally, if you want to discount your product, or clear some stock quickly, it’s usually best to do this with promotions, instead of changing the base price.
There are a few reasons for this. One, is something we touched on before, that big swings in price may cause Amazon to take the Buy Box away from you.
If you cut your price 50%, then put it back up later, Amazon probably won’t like it.
Second, another thing we’ve already mentioned is that a lower price comes with a lower perception of value. We naturally think something that costs $5 is worse quality than something that costs $10.
However, if your product has the base price of $10, but a 50% discount, it looks like a good quality product at an amazing discount.
Humans are naturally drawn to discounts. If you tell us we’re saving 50% on a product, it’s often too hard to pass up, even if we’re actually paying more (even after the discount) than a similar product.
And on top of all this, you can use discounts as an incentive to get people to opt in to your email list (if you’re marketing your product in external traffic channels). You can make your discount look exclusive this way, which can drive up sales even more.
For any Amazon seller, pricing strategy matters a lot.
Of course, there are many moving parts for Amazon sellers to master to be successful. You need to get your marketing strategy right, manage your inventory levels, and ultimately sell a good product in a market that’s not too competitive.
But pricing is definitely up there as well. Put some time and effort into finding a pricing strategy that maximizes sales, as well as providing enough profit for you to invest in new products, grow your business, and make a good living on top of it.
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