The Amazon marketplace is incredibly competitive, and pricing is a major part of how sellers compete. Not only do the prices you choose as a seller reflect your chances of winning the Buy Box, but they also have a major role to play in whether a shopper purchases your products. Learning how to set competitive prices can help you grow your profits on Amazon, which is what we’ll explore in this post.
Key takeaways
- Managing your pricing is an essential part of running a successful Amazon store.
- Using dynamic pricing can help you stay ahead of the competition.
- Both the item price and the total price are relevant to consumers.
- Pricing can help you differentiate your brand from the competition.
- A/B testing can help you find the right price for your products.
Understanding Amazon’s pricing
On the surface, pricing might seem like the easy part of being a seller on Amazon.
- If you have a popular product, you can try increasing your prices and see if sales stay high.
- If sales are poor, you can lower prices to attract more customers.
Amazon’s ranking algorithms can have a serious impact on the second strategy. Cutting your prices may reduce your margins; however, this action could also reduce the visibility of your listing in the marketplace. It’s important to reduce prices on your products gradually without compromising on quality while ensuring that your listings are properly optimized for customer visibility.
To have a chance of maximizing your returns, you’ll need to understand how pricing works on Amazon and how features such as dynamic pricing can impact the visibility of your products.
Why having a pricing strategy is so important
Having a pricing strategy is vital if you want to maximize your profits. If you don’t have a clear strategy, you’ll be flying blind when it comes to which products to sell, how much to spend on marketing, and what volume of products you need to move each month to increase your profits.
Price is a major part of branding, and it’s something many brand owners use to differentiate themselves from the competition. It is especially important for brands to position themselves as a value brand or a luxury brand. Economic climate should also factor into your strategy, as consumers right now are increasingly price-conscious. According to a recent consumer survey by Retail Insight, 68% of U.S. consumers have identified price as a major contributing factor to their buying decisions, going as far back as the start of the pandemic. The same survey says that 74% have become more budget-conscious overall.
If you have plenty of products, managing prices can quickly turn into a full-time job. Fortunately, there are tools you can use to monitor current and past prices and even adjust prices within pre-set parameters. These tools can save you a lot of time while helping you win the Buy Box as often as possible.
How do you price products on Amazon?
When pricing products on Amazon, your goal should be to set a price that allows you to make a profit. Consider advertising and administrative costs associated with the sale while also ensuring the price is low enough to attract customers. There are several approaches you can take when considering pricing in your PPC strategy, and we’ll explore some of them here.
Amazon pricing strategies
Competition within the Amazon marketplace is tough. Competitors are adjusting and engineering prices frequently; some even adjust their prices in real-time, a practice known as dynamic pricing. So, rather than trying to be the cheapest, it’s often more effective to have other factors in mind when setting your prices. Most leaders consider several factors, including:
Market penetration
Market penetration pricing involves setting a low price for a product at launch, then gradually increasing the price when you’ve built up a loyal customer base. This approach to pricing is popular with service providers and also with consumable products where people tend to become loyal to one brand and buy it regularly. The idea is that if the price increases are relatively steady, shoppers will stick with the brand despite the higher price.
Price skimming
At the opposite end of the scale, you have price skimming. This strategy involves setting a high price for a product, with the goal of capitalizing on the initial hype of a new item. Once that early wave of demand has passed, the seller then reduces the product’s price to bring it in line with other items, thus attempting to compete for the attention of more value-conscious buyers.
Profit-based pricing
Profit-based pricing focuses on maximizing profits rather than maximizing the number of units sold. Methods like target return, cost-plus, marginal cost, and contribution margin pricing calculate prices based on costs and expected profits. It aims to ensure profitability but needs consideration of market factors for competitive pricing while meeting profit goals.
Cost-based pricing
Cost-based pricing is a relatively simple way of deciding on prices. Simply put, you’ll look at the cost of the stock and any other overheads such as storage or fulfillment, and then add your desired profit margin (usually a percentage) to that cost to work out the price.
Cost-based pricing is easy to calculate since it’s based on factors already known to the retailer. However, it may not always result in competitive prices. If your competitors are priced lower due to the economies of scale or even because they’re currently running seasonal promotions, you run the risk of missing out on sales.
Value-based pricing
With value-based pricing, the perceived value of a product influences its price. Some Amazon sellers can use customer reviews to assess this. Products that are consistently highly rated by customers can command higher prices than ones with mixed reviews. If you’re considering implementing value-based pricing, ensure your product listing clearly conveys what the product has to offer and that you have a history of satisfied customers.
Buy Box pricing
When multiple brands sell the same product, they often compete for what is called “The Bux Box.” This is the section on Amazon where users can buy a product or add it to their cart. By being the default Buy Box brand, you improve your sales significantly since customers often don’t look at the other options available. Some research shows that around 83% of conversions happen from the Buy Box, so winning a placement there is essential if you want your products to be successful on Amazon.
Amazon favors products with lower prices for the Buy Box because it wants to offer the best prices to shoppers. However, simply discounting your products until they appear in the box may not be an optimal approach. This could trigger a bidding war with other retailers and force you to drive your prices down to unprofitable levels. In other cases, your price may not be the issue, and it might be related to your fulfillment options and reputation as a seller making your price reductions irrelevant while exacerbating reductions to overall profits.
If aiming for the Buy Box is part of your marketing strategy, consider your approach carefully. Manual repricing can be a good option for smaller stores, but as your store grows, you may wish to consider algorithmic pricing options to support a more holistic approach.
Decoy pricing
Decoy pricing is a strategic ploy where a seller lists some items with a higher price alongside similar items that are priced more affordably. The aim of doing this is to make the lower-priced items seem like a bargain. The higher-priced items may not sell well, but that’s not the purpose of having those listings. If they drive sales for the other products, they’ve done their job.
Loss leaders
Supermarkets have been using loss leaders for decades, and the practice is used online too. A loss leader is a product that’s sold at a loss in a bid to bring customers to a store with the hope that they’ll then make other purchases while they’re there. Amazon sellers use loss leaders to attract customers and then attempt to sell other related products once the customer is in the brands’ ecosystem.
Dynamic pricing
Advanced sellers use dynamic pricing to keep their prices competitive in a rapidly changing market. A dynamic pricing strategy uses A/B testing to take into account current levels of demand by price, and competitor prices to adjust.
You can introduce dynamic pricing to your store through an out-of-the-box solution like the one provided by us. Here are some instances of when you might want to use this kind of tool:
- Surge prices: If demand is high and your stock is running low, Dynamic Pricing could increase your prices to effectively pace the sales of your remaining product.
- Personalized pricing: While difficult to pull off on Amazon, some businesses like Uber and airlines show tailored pricing based on a consumer’s shopping history.
- Seasonal pricing: Altering prices based on the time of year or even the time of day.
- Competitive pricing: Changing the price based on competitor prices, during sales or to win the Buy Box.
- Pricing for profit: If you are simply looking for more sales, you can use Dynamic Pricing to toe the line between conversion rates and average order value to maximize overall profits.
If you opt to use dynamic pricing, keep in mind that large price fluctuations may trigger Amazon’s algorithms to block your products from making it into the Buy Box. Try to keep your prices within a reasonable range.
A/B testing
A/B testing, also known as split testing, is a way of optimizing your product listings to maximize conversion rates. With A/B testing, you’ll run multiple versions of your listing and compare their performance. While changing your listing is difficult, you can test your price with relative ease to maximize impact.
Each price should run independently for a fixed period to monitor the exact change in conversion rate and sales. By doing so, you can find prices that increase overall revenue or overall profit, we call this “Price Profiling.”
It’s a good idea to run A/B tests regularly to keep track of how the market is moving.
What is repricing?
Repricing is the practice of using automated tools to alter the prices of your products. This is something a lot of sellers do on the Amazon marketplace because so many product niches are saturated, making them highly competitive.
Using automated tools to monitor your competitors’ prices and adjust your prices accordingly to appeal to buyers can save you a lot of time while increasing your sales. Before doing this, consider it a best practice to configure the tools you’re using carefully so they don’t raise or lower your prices outside of a sensible range.
While most repricers on the market today are quite reliable, there have been some high-profile cases of automation tools going wrong, such as the time a repricer accidentally reduced prices on thousands of products to just one pence. The glitch was fixed promptly, but many products were purchased at that price.
Even if you’re planning on using a repricer, it’s still important to have a good understanding of how to price your products. There’s a lot of skill in finding the best balance between profit margins and appealing pricing.
Should I use AI in my pricing strategy?
AI tools are becoming increasingly commonplace in online marketing. If these tools are fed accurate data, they can be incredibly useful because they can filter through the prices of a number of products quickly and accurately, ultimately recommending prices for your Amazon storefront.
AI tools can help you ensure your prices stay within the range that you’d like them to while still being competitive. Some AI tools can even take into account things like promotional activities and general market conditions to ensure your pricing changes make sense.
Adding AI to your existing pricing strategy could save you a lot of time, but it’s still a good idea to keep an eye on your prices manually and do your own pricing research. Treat AI as an extra tool, not a shortcut.
Should I price higher than my competitors?
One of the challenges when pricing products is trying to find the right range.
- If you price your products too low, not only do you need to sell more of them to meet your monthly profit targets, but you also run the risk of alienating consumers who perceive your cheaper product as being low quality.
- In contrast, if you price too high, you run the risk of driving price-conscious consumers away who don’t believe your items offer good value for their money.
The term “Goldilocks pricing” nods at the fairytale character and refers to the idea of a price that is not too high or too low but “just right” to maximize your revenue.
There are other cases where pricing a product slightly higher than your competitors can work. If you’re trying to market your product as being a high-quality luxury item, having a price that reflects the nature of the product can make sense. However, to attract customers and get good reviews, you’ll need to actually provide extra value that is reflected in the higher price.
Keep in mind that most consumers are willing to pay more to get a product that’s higher quality, more durable, delivered more quickly, or otherwise “better”.
What is Amazon’s price history?
Search records and CTRs aren’t the only metrics Amazon sellers can benefit from tracking. Following the price history of products in your niche can also be beneficial. There are many tracking tools that offer updates on product prices, helping you monitor past and current pricing trends. One of these tools is our Free Amazon Chrome Extension which allows you to see the specific price history of competitor products in your category.
You can use this data for several purposes, such as looking back at previous seasons to see how prices tend to change. You can also view discounts on your top keywords to stay in line with customer expectations.
Reviewing historic prices can be informative, but always keep an eye on the present. Just because a product cost $60 last December doesn’t mean people will be willing to pay $60 this December. Pricing products in response to changing economic conditions is important, whether those conditions are a time of prosperity or a downturn. Consider how much your target audience can afford, what their priorities are, and what you’re competing against when pricing your products.
In summary
Managing prices is one of the most important activities for any seller with an Amazon store. When you’re selling on this platform, it’s important to keep in mind that you’re not only trying to market a product, you’re competing for the Buy Box, keywords, and brand exposure.
There are many approaches to pricing that largely depend on your brand and your offering. Perhaps you want to corner the market with lower prices, or tempt shoppers with a higher price point because of your quality products. You can employ one of these pricing strategies or a combination of them, just ensure to review and revise your pricing over time in response to changing market conditions.
At Trellis, we offer a variety of AI and automation tools to help you align your prices with your marketing efforts, research competitor pricing, and plan marketing campaigns. Contact us today to request a demo.