This post is by James Thomson, a partner at Amazon consultancy Buybox Experts.
Why is it so hard to get your pricing right on Amazon?
You want to win the sale, but you also want to make profit. Any decent MBA student will tell you that no matter how skilled a business owner is at building, marketing and distributing products, only those efforts around pricing will bring revenue (and hopefully profits) into your business.
Correspondingly, no matter how attractive the Amazon marketplace may look to a third-party seller, long-term success is not possible without a comprehensive understanding of how to price products profitably. Unfortunately, the vast majority of retailers/sellers – whether online or brick-and-mortar – under-invest in building effective pricing strategies. But we can fix that right here, right now.
Having worked first-hand with several thousands of Amazon sellers over my tenure in Amazon’s marketplace business and later as a consultant, I am comfortable saying that pricing is easily the most miscalculated, under-optimized activity of Amazon sellers every day.
When Web Retailer asked me to write about effective ways to price on Amazon, I was excited about the opportunity to discuss what actions and insight enable sellers to use “strategic pricing” to drive their businesses towards superior margins.
View Top Amazon Seller ToolsGeneral Approaches to Pricing
Let’s start with a review of pricing approaches commonly used in retail settings. There are basically three overarching approaches to pricing. You can use:
- Competitor-driven pricing,
- Cost-driven pricing, or
- Value-driven pricing.
Competitor-driven pricing
If you use competitor-driven pricing, you gauge what other sellers are doing with their pricing, and you try to stay aligned (using some standard range above, at, or below their prices).
While you need to be aware of competitors’ general prices, the competitor-driven pricing assumes that a) your competitors know that they are doing with their own pricing, b) you have a cost structure consistent with your competitors, and c) your business objectives are consistent with your competitors.
If any of those three aren’t true, you’re likely in trouble and not going to make the levels of profit you expect or deserve for the risks you are absorbing as a seller. Now look at many of your competitors on Amazon: how often would is it fair to say that these three implicit assumptions are not all true?
Cost-driven pricing
If you use cost-driven pricing, you’re taking your own costs, marking them up some level, and using that as your means for pricing. The challenges you may face here are a) you may not be explicitly including all of your costs, b) your costs may be very different than those of much more efficient competitors, or competitors with more buying power, or c) customers don’t care about your costs – they care about the value that the product bring them.
Cost-driven pricing is a very common approach on Amazon, with sellers buying products, marking them up some fixed amount, and holding on for dear life, hoping that positive profitability follows.
Value-driven pricing
If you use value-driven pricing, you’re trying to establish some overall value that customers get from your products. Essentially, you’re assuming your products are so positively differentiated from alternative offerings that you are able to extract higher prices from customers.
The primary challenge with this approach is that, with more than two million sellers on Amazon, there already exists a massive catalog of alternatives for most products, including well-known national brands. So unless you have an exclusive sourcing relationship on a brand that everyone wants, you’re not likely going to get unusually higher prices from customers.
Instead, we are seeing a lot of sellers able to make more margins because they own and develop the brands they are selling – so by sourcing directly from the manufacturers, the sellers get products at much lower costs, giving themselves more margin opportunity, even when pricing competitively with similar products in the Amazon catalog.
So, let’s review the market conditions on Amazon:
- Competition continues to grow, with more than 100,000 new sellers joining Amazon each year.
- The number of competitors with business costs lower than yours continues to grow.
- The number of product alternatives for almost every brand and category also expands rapidly each year.
- It’s getting easier every day for companies to develop and source their own brands.
- Customers are getting more sophisticated with finding good deals, and asking questions about how products differ from one another.
- Amazon’s return policy favors the customer, who can try out products, only to return them immediately if not fully satisfied.
- The recent advent of inexpensive third-party repricing tools (combined with sellers not fully factoring in all appropriate costs) is leading to the downward spiraling situation where too many sellers are actually unknowingly chasing sales units and sales revenue ahead of positive margin.
The Buy Box
To understand which pricing approach makes most sense, we must first understand Amazon’s Buy Box – the mechanism used to decide which offer among competitors will be “awarded” the sale when the customer decides to buy a product, and clicks the “Add to Cart” button.
Because Amazon prefers to display all competitive offers of the same product on a single product detail page (rather than let each seller create a separate product detail page for its own offer), it is critical for each seller to know how competitive offers are getting displayed, ranked and given priority by Amazon.
Today, over 90% of all sales in non-media categories go to the seller whose offer is “in the Buy Box”, meaning its product will be added to the customer’s cart when the customer clicks the “Add to Cart” button.
In the example above, the company Buy 4 Less Shop is the Buy Box winner, such that when a customer clicks on the “Add to Cart” button, a unit of product from this seller will be added to the customer’s cart, rather than a unit from any of the other sellers with offers on this same item.
Bottom line survival on Amazon: if you’re not driving towards winning the Buy Box, your business on Amazon isn’t going to flourish, regardless of your choice of pricing strategy.
