Effective Amazon Pricing Strategies for Sellers
In 2019, Amazon got rid of their “most favoured nations” clause — a stipulation that required third-party merchants to offer their lowest prices on Amazon if they sell products elsewhere as well. This has been resoundingly hailed as a win for Sellers, but it also makes strategy more complicated while raising the stakes. Amazon now sees about 2.5 million pricing changes on its products every day.
Your goal on Amazon is to generate sales, get positive product reviews and provide the best customer service to your Amazon customers. A key aim in pricing should be to increase your Amazon sales rank, which in turn should increase organic sales.
Since COVID, Amazon has grown in importance. Many new brands are entering the online space for the first time (Amazon specifically). This article should help introduce the nuances of Amazon pricing. However, if you’re an ecommerce native, we have advanced tips for you as well. Let’s get started.
Pro tip: Realistically, how much pricing variability you have available depends on whether or not you’re the only Seller of your product. As a reseller, you don’t have nearly as much pricing freedom because of your need to win the Buy Box. More on that later, but it’s important to keep in mind.
Pricing strategy 1: Cost-plus pricing
Cost-plus is the go-to when people consider "pricing strategy", This is the most basic method of pricing: sell something for more than it cost.
This pricing approach is undoubtedly a good starting point, with no overhead and an assured profit. But cost-plus pricing is not a sure thing. You won't necessarily know all your costs, especially variables like advertising and affiliates, and therefore can't really know if you're going to make a profit.
There are two main reasons to use this strategy:
- Simplicity: You add up all of the costs and add a profit margin to represent the value you are giving your customers. Particularly if you aren’t going to take an advertising-heavy strategy, a cost-plus approach lets you set specific margins and guarantee profit generation.
- New product introduction: Sometimes your product will be so unique that you don't have any alternative than to place it in the market on a cost-plus basis to gain some market intelligence and insight.
Tactics that help
Success on Amazon depends on the optimization of product, pricing and advertising. Getting your advertising cost of sale (ACoS) right — especially knowing your Break-even ACoS — is a crucial dependency for even knowing what your cost-plus basis should be.
You can start with cost-based pricing, but as soon as you have enough data, you can move to competitive pricing – or if you can – move to value-based in order to maximize profitability.
Pricing strategy 2: Competitor-based pricing
On Amazon, competitor-based pricing always seems like a logical step, especially if you’re introducing a "me-too" product. But in all circumstances, you may be unsure of the initial value of your product. Not wanting to go too high or too low, it’s a good idea to look at the other companies selling products like yours to decide your own price point.
A competitor-based pricing strategy is critical for resellers. In fact, if you are reselling a product, you need to be within a 2% price difference of the lowest price version to be considered for the Buy Box. And it's worth it, over 80% of sales on Amazon go through the Buy Box.
The biggest downside of "me-too" pricing is you don't really have a differentiated pricing strategy; you are reacting to others. What is missing is a view of the customer. Instead of focusing on trying to be different, you are offering something that they could get elsewhere.
Fundamentally, this isn’t a great strategy if you sell a unique product — but it’s critical if you are a reseller.
Tactics that help
To keep up with the pace of Amazon, Sellers will need to automatically adjust prices on SKUs in response to events in order to match the Buy Box winning price without having to revisit the SKU every time you want to change your price. Use Amazon automated pricing to match or better current Buy Box pricing.
You should also remember to take a holistic view. When it comes to winning the Buy Box, price is not the only concern. For the Buy Box dominance, you will also need to consider how to:
- Reduce your shipping time
- Reduce the number of returns
- Reduce your cancellation rates
- Consider Fulfilled by Amazon (FBA)
Pro tip: You need to make sure that your products are always turning a profit. The simple way to think about this is a direct short-term analysis — pricing your goods higher than the cost of goods sold (COGS), and within your break-even ACoS target if advertising is involved. However, if you understand customer lifetime value on an ASIN level, it’s possible to match competitive price drops and still turn a profit long-term without reducing advertising spend. Check-out this video if you want to learn more at 3 minutes 50 seconds.
Pricing strategy 3: Stable pricing
Customers tend to value products where the price is not too volatile. You also may not want to continually reduce prices on one platform (in this case, Amazon) and affect your ability to sell direct-to-consumers at a higher price. If possible, it pays to keep prices stable and as close to the market value as is possible.
Stable pricing is best suited for D2C (direct-to-consumer) brands, and brands that sell on multiple channels. If you are on multiple platforms, including your own website, price stability may be vital for your brand credibility. Stable pricing also has a distinct advantage for private labels who do not have to compete for the Buy Box directly — but more on that next.
Tactics that help:
Stability on a dynamic platform such as Amazon is difficult. Monitoring and analysis tools are crucial to identifying when price stability is viable and should be challenged. Also, pay attention to the Holiday season, and events such as Prime Day where a discount is expected from every retailer.
Pricing strategy 4: Value-based pricing
Value-based pricing could as easily be called "Customer-based Pricing". It gives an external view rather than looking inwardly at your cost-base or side-ways at your competitors. With value-based pricing, you look for signs on pricing from the people who are most important — your customers. This depends on having access to valuable metrics such as customer lifetime value (CLV).
The importance of establishing a brand comes to the fore with value-based pricing. Consumers start to value your brand offering rather than shopping by price. This is a good strategy for brands with an established brand profile, or those that are looking to do so.
Critically, this strategy only really works if you aren’t competing against resellers. For private labels, value-based pricing can be a great way to differentiate yourself as a quality merchant while pushing up your margins as high as possible.
Tactics that help:
Understanding your customers is important to effectively align your prices with their expectations. It’s a good idea to segment your customers and build customer personas. Without data-driven pricing measurements and analysis, you are only going to get approximations of the right pricing, packaging, and positioning for your product.
Pricing is just one part of the equation
To price well, you must understand how customers interact with your products. Data is the fundamental part of the equation you have to get right. For example, which products you should look to price in order to grow market dominance? Which should be cut from your catalogue altogether? And where can you effectively increase margin?
A lot of these questions are business-level priorities, and ultimately come back to understanding your customers, and how they engage with products long-term.
Fundamentally, your pricing dictates your profitability, and how much you can spend advertising your products. Advertising is just as critical to success as pricing — both need to go hand-in-hand, and you need analytics to get the data and PPC (price per click) part of the equation right.
Customer lifetime value is another important factor to consider. For example, if you know that certain product lines generate longer customer relationships (on average), the value of those products might simply be to get new customers through the door. This changes the type of pricing strategy worth pursuing by adding a dimension that is entirely removed from the first sale. It also provides additional context that will help you figure out whether or not you can drop prices to remain competitive while still ensuring that you turn a profit long-term.
At Nozzle, we work with Seller to put all of these pieces together using AI and machine learning to better understand their customers and products. If you want to learn more about how to focus on long-term growth and profitability, get in touch or check out one of our free eBooks on better understanding your Amazon customer data.