Amazon pricing is integral to your Amazon business. If you want to be more successful in your Amazon venture, deepen your knowledge about pricing and different Amazon pricing strategies.
What is Pricing?
Every business aims to profit, be it online or via more traditional methods. In order to succeed with this goal, prices are placed on products. The process of putting a value on your product is what we call pricing. Aside from assigning value to an item, pricing is also considered a marketing strategy because it influences consumers’ behavior and helps build relationships.
In general, Amazon’s pricing model is intertwined with the objective of becoming the world’s most economical destination for consumer goods. Amazon wants to offer consumers the most competitively priced items to drive loyalty and customer satisfaction.
Amazon has laid down two pricing definitions sellers should familiarize themselves with – item price and total price.
The item price refers to the amount payable by the Amazon shopper. It is the price that appears on your listing, which excludes the shipping and handling. On the other hand, the total price includes all terms of offer or sale, such as:
- Shipping method
- Low-price guarantees
- Shipping and handling charges
- Discounts, rebates, or special sales/promotions
When pricing your item, Amazon stipulates that you can list your product at any price you feel is fair so long as it is within limits set by Amazon and as long as it conforms with the policy on reference prices and parity requirements within your selling agreement.
One of the price limits set by Amazon, for example, is that Professional sellers can’t price an item exceeding $300,000. Individual Amazon sellers, on the other hand, have a price limit of $10,000. However, such a limit is not applicable for Collectible listings.
Things to Consider When Pricing Your Products
Placing value on your listing does not just concern your target profit. There are many factors to consider, including the following:
- Nature of your product
- Market price of your product
- Target audience
- Production cost
- External factors such as government policies, economy, and legal concerns
What are the Objectives of Pricing?
More than just placing value on your Amazon product, pricing has other objectives. Understanding these pricing objectives can help you set the course of your Amazon pricing strategy. Some of the common pricing objectives include the following:
One of your pricing objectives is to set an optimum price for your product in order to help your product or business survive in the market. Although this is considered a short-term goal, it still has a huge impact on your business.
At the onset of your business, additional profit is secondary. Survival is a primary objective. Once survival has been secured, your business can now strive for an additional profit margin.
Your Amazon business must first survive the competitive Amazon market.
Another pricing objective is the expansion of current profits. You can increase your profit by evaluating the demand for your item. If there is a high demand for your product, you can make some price adjustments to increase your profit margin.
Another pricing objective is ruling the market. Under this objective, you try to attract a good share of the customer segment by setting prices that the majority of consumers find enticing and reasonable.
Price is a perceptible communicator of the value of your product or brand. It contributes to how customers see your brand image. Hence, a more appealing price point means a better image for your company.
Before we delve deeper into the various pricing methods, understanding different perspectives will help you develop a more effective pricing strategy for your business.
For consumers, price helps define the value of the product. With this in mind, you can create a competitive advantage by either increasing your product’s perceived benefit or simply reducing the perceived cost.
If customers associate price with value, sellers relate price to revenue. Hence, sellers should be careful when pricing products. Setting a low price may result in insufficient revenue, while setting it too high may result in shoppers skipping the product. Therefore, price should be set considering sales growth, market penetration, and development cost.
General Pricing Methods
There are many approaches to product pricing. However, these approaches can be categorized under these three general methods, namely:
This is considered the simplest pricing method that a business could implement. This involves knowing the manufacturing or production cost and adding a profit percentage. And this leads to a selling price.
For example, if a product’s total cost is $1,000, sellers can then add 10% (profit percentage) of the cost to get its selling price.
($1,000 + 10%) x $1,000 = $1,100 selling price
As its name would suggest, demand pricing is a pricing method based on the relative demand for the product. It is considered as a customer-oriented form of pricing, for it is dependent on consumer demand.
Since it is more customer-oriented, prices are adjusted depending on fluctuations in customer demand and how customers perceive the value of your product.
Some of the forms of demand pricing include (a) price skimming, (b) penetration pricing, (c) and value-based pricing.
Competitive pricing is one of the highly implemented pricing methods in eCommerce, including Amazon. This method is widely used in a market where:
- sellers are selling similar products
- many substitute products are available on the same marketplace
- products have reached a level of equilibrium
The competitive pricing method involves selecting strategic price points that will create a competitive advantage for your product listing. In general, sellers have three options when setting the item price:
- Set price below the competition
- Set price at the competition
- Set price above the competition
To efficiently achieve this particular pricing method, the majority of Amazon sellers make use of Amazon repricers. A repricing software can help you perform manual, rule-based, or automatic repricing strategies for your Amazon business.
Strategies to Complement Your Amazon Pricing
Amazon shoppers do not necessarily spend a huge amount on each shopping experience. Most of the products sold in 2021 range around $11 and $25, according to Jungle Scout.
Therefore, suggesting that selling luxury items on Amazon is not required to obtain a significant income. If you can optimize your listings properly and implement an effective Amazon pricing strategy, you can make money on Amazon.
To help you improve your Amazon pricing strategy, here are some key points for improvement.
Evaluate Profit Margin
Profit margin is one of the profitability ratios used by sellers to know how much money their business is making. The percentage figure tells you how many cents of profit you make for each dollar of sale.
Simply put, profit margin represents what sales percentage has turned into profit. For example, if your monthly profit margin is 35%, it means that you had a net income of $0.35 for each dollar of sales actualized.
Why Understanding Your Profit Margin is Important
One of the usual mistakes of newbie or even tenured Amazon sellers is that they forget to compute the profit margin ahead of time. Profit margin calculation is of paramount importance in any business, for it can help you identify the following:
- The money your business is making
- The general health of your business
- The pricing problems within your business
How do you Calculate Profit Margin?
Profit margin is the percentage of income left after all expenses have been paid. In Amazon, expenses may include but are not limited to the cost of goods sold, referral fees, FBA fees, advertising fees, and other expenses.
To calculate your Amazon business’ profit margin, you can follow the generally used formula:
Total Revenue – Total Expenses (cost + fees)
_________________________________________ X 100
To get a rough estimate of the profit margin, you can also follow the “Rule of Threes.” This means breaking items into 1/3 – 1/3 – 1/3. A third goes to fees, another 1/3 goes to landed costs, and the remaining 1/3 serves as your profit.
To illustrate, using the aforementioned formula and rule of threes, let’s say that your total revenue for an item sold is $90. The calculation would be:
[ $90 – $60 (cost + fees) / $90 ] x 100 = 33%
The ideal profit margin for Amazon private label items is between 25% to 30%. According to Jungle Scout, 2/3 of Amazon sellers operate above 10% profit margin, while 1/3 have over 20% profit margins.
As mentioned above, fees or costs are included when calculating the profit margin. To help you determine potential Amazon fees, Amazon has provided a revenue calculator for sellers. We have discussed this in a previous post on how to use an Amazon Revenue Calculator to determine fees.
Understanding your profit margin will help you identify pricing problems in your business and repricing opportunities to offer a competitive price to shoppers.
One of the factors to consider for Amazon pricing is product differentiation. During the product research stage, look for a product that answers specific consumer needs. Focus on consumer pain points and highlight your product’s unique and more advanced features than competitors. This will create a significant value proposition to consumers and justify why your product pricing differs from your competitors.
In a separate article, we discussed how to use Amazon Coupons, especially during holidays and Amazon events. Apart from its marketing command, coupons could also help with your Amazon pricing strategy.
Coupons can complement a price increase of your inventory. With the help of discount coupons, you can raise item prices and then add a discount coupon to keep shoppers engaged on your listing. It is as if you are simply lowering a product price. However, such an approach is more effective from a psychological standpoint.
Shoppers find more value when shopping armed with coupons. The majority of shoppers shared that they feel smarter when shopping with coupons. And they are less likely to search for the same product elsewhere with your coupon.
A split test or A/B test can help you determine the price points that are still acceptable for shoppers. This Amazon pricing strategy involves listing a product at two different prices.
For example, you can list Product A at $10 for at least two weeks and then relist the same product for a higher price, applying a similar timeframe. Afterward, you can compare the conversion rate of both listings.
The data from such an experiment can give you an idea as to which price point your product can generate more profit for your business. Take note that the ideal time frame for split testing is no less than seven days but no more than 30 days.
To improve your Amazon pricing strategy, you can make use of psychological pricing techniques. This strategy involves setting your Amazon prices lower than a whole number.
This method rests on the idea that when a customer sees or reads the slightly lowered price, the customer will treat it lower than its actual price.
As an example, pricing your item at $4.99 will be interpreted by shoppers as $4 rather than seeing it as $5. This concept works because our mind is trained to read from left to right.
We see number 4 first and perceive it closer to $4 than $5. In essence, ending your price with 9 in a way convinces consumers that you are offering a great deal and they are saving more from what you offer.
As mentioned in the preceding paragraphs, competitive pricing is one of the widely used eCommerce pricing methods. Amazon sellers, in particular, rely on this kind of Amazon pricing approach to gain a competitive advantage over numerous competitors.
Delving deeper into this method requires an understanding of competitive pricing from Amazon’s standpoint. The tech giant considers your product to be competitively priced if it is at or below the prices for the same products from other online retail stores.
To illustrate, if Product X is sold at $10 in Market B, the product would need to be priced at $10 or below on Amazon for it to be considered competitively priced. If the product is priced above $10, then Amazon considers the price as uncompetitive.
Thus, decreasing your chances of the listing appearing in the Amazon Buy Box or Featured Offer section.
Competitive pricing is important to Amazon as it contributes to a great customer experience, which encourages customers to return and purchase more products from its platform.
Achieving a Competitive Price
Since Amazon is teeming with sellers, achieving a competitive price can be challenging. In order to achieve a competitive advantage, it is recommended that you utilize an AI repricing software.
As compared to the traditional manual and rule-based repricing methods, automatic repricing is far more efficient and effective in achieving your Amazon pricing goals. Utilizing a repricing software like Seller Snap can help you win more Amazon Buy Box and avoid Amazon price wars.
With Seller Snap’s algorithmic repricing, you can simply turn repricing “ON” from the settings and let the advanced AI technology handle repricing for you. The AI repricer will implement strategic price changes to win Buy Box share at the highest possible price.
Another feature that makes Seller Snap highly effective is its unique function that allows the combination of pre-defined repricing rules with the AI algorithm to meet your specific business goals.
A competitive price is necessary for your business because Amazon considers it as a prerequisite to becoming the Featured or Buy Box Offer. With Seller Snap handling the repricing aspect of your business, you can be assured that prices are always competitive.
Price is one of the key factors that shoppers consider when purchasing an item. Applying the strategies mentioned above can significantly help improve your sales conversion.
However, beyond sales, you should focus more on the value you can give to customers rather than on pricing techniques alone.