When selling products, either in-store or online, pricing is one of the most important factors to be considered.
As an Amazon seller, it’s important that you familiarise yourself with the Amazon pricing strategy as well as getting to know the different kinds of price points to use for your particular kind of product.
In this article, we’ll take a look at this useful guide to creating a profitable pricing strategy based on Amazon’s policy.
Amazon has strict policies when it comes to product pricing on its site and, this includes:
Fair pricing: Amazon’s policy states that sellers must price single or multiple products fairly at a price which is equal to or below the price charged by a competitor.
Limitations: With the exception of the sale of collectible books, Amazon imposes a price ceiling of $10,000 for any given item sold on the site.
The above refers to the item price and excludes shipping, handling and gift-wrapping. Amazon does reserve the right to disallow sale or promotional prices which are deemed to be unfair.
As long as sellers adhere to the above policy, they are allowed to price their items as they wish.
For those who are new to selling on Amazon, pricing can be tricky.
Although you want to make a profit, you also need to make sure that your products are priced competitively.
When setting a price for your product, there are a few things to keep in mind:
Buying price: This is the price at which you buy the product from your supplier. Work out the unit price by adding the product price to the price of shipping and handling.
Shipping: If you are offering free shipping for your product then your price needs to incorporate this to prevent you from selling at a loss.
Storage: If you pay to store your products, such as Fulfilled by Merchant, then you’ll need to factor this cost into your price. Also, you have to pay for storage fees if using Amazon warehouse.
Marketing: Any marketing costs including PPC should be included in your unit price.
Returns: Although this may be difficult to calculate if you’re new to selling, you need to think about the ratio of customers who may return the product for a refund.
Competitor comparison: Take a look at the price being charged by your competition for the same or similar product.
Historical sales: When calculating your selling price, don’t forget to take a look at your competitor’s historical sales to find an average price.
Once you have factored in the above, you can use a formula or tool to find the best price for your item. Some of these are:
This one is really easy to do and, best of all, it’s absolutely free!
Once you’ve added up your costs, divide the result by the number of products you will produce in any given time period to get your average cost per item (API).
Next, you need to work out your gross profit margin target (GPMT). This value is the profit percentage that you wish to generate per item sold.
To figure out your gross profit margin target, you can use the following formula:
(Price – Cost) / Price = GPMT
It’s best to set this formula upon a pricing spreadsheet to ensure that each and every one of your products are priced consistently.
This is a price tool found on Amazon Seller Central which will allow you to automatically adjust your product prices on individual SKUs. It does this by using sets of predetermined rules.
There are more Amazon pricing and repricing tools that can intelligently automate your pricing whilst protecting your margins.
Thus, investing in a pricing tool will help you save time and make wiser decisions on your selling prices.
Although the above will give you an idea of what to charge for your products, you need a proper strategy for long term success.
The following are some of the best strategies for use when selling on Amazon:
Penetration Pricing Strategy
This strategy works on the ‘slow and steady’ principle. Sellers set a low price for a product to begin with in order to make a lot of sales.
As people buy the product and spread the word to friends and family, sellers experience increased sales which offsets the low price of the product.
Some sellers find it helpful to highlight the fact that the initial low price is an ‘introductory price’ to avoid customers being suspicious of the quality of the item.
Competition based pricing
This strategy relies on a little research as, as the name suggests, it involves using your competitor’s pricing as a guide.
Once you know what the competition is charging, you can either match this or sell slightly lower in order to make sure that your product is highly competitive.
As the name suggests, this strategy relies on keeping prices as low as possible in order to encourage sales.
This is one to be careful with as you still need to keep an eye on your profit margins. Additionally, many customers equate a very low price with a low-quality product – which you do, of course, want to avoid at all costs.
Price Skimming Strategy
The opposite of Penetration Pricing, Price Skimming works by starting with a high selling price and then lowering it over time to create a perception of ‘getting a bargain’ at the lower price.
This can be quite a complex one to master but is effective when done right. Be careful not to lower the price too dramatically each time to keep the perceived value of the product high.
Psychological Pricing Strategy
One of the oldest pricing strategies around, this tried and tested formula involves setting a price point just below a whole dollar amount – for example, pricing your product at $19.99 rather than $20.
This has been used effectively for decades as it works on the principle that the customer focus is on the first number – in this instance, 19 not 20, and so a perceived cost saving is achieved.
Bundle Pricing Strategy
This strategy involves putting two or more of your products together into a ‘bundle’ and charging slightly less than you would when selling all of those items individually.
Often a customer will buy the bundle even if they had no intention of buying all of the products contained within it.
For example, if you’re selling a range of skincare products – each of which costs $10 – you may consider offering a bundle of three products for $25 in order to present a perceived value to the customer.
Discount Pricing Strategy
This is one most of us will be familiar with and, is the very simple process of marking down the price of products in order to make a quick sale.
This is often used when a seller wishes to clear old or slow selling inventory.
In some cases, you will need to show that the product has been offered at a higher price for a certain amount of time in order to show that this is an actual cost saving.
Keep discounts realistic otherwise, you may risk the customer being distrustful of the quality of the item.
Dynamic Pricing Strategy
This strategy allows a seller to constantly amend the price of a product depending on market fluctuations and is an extremely effective way of staying competitive.
Here’s how it works: price changes are made automatically – usually by a software program – and will be based on a number of programmed rules which may include:
- Location of customer
- Time of day
- Day of the week
- Different levels of demand
- Competitor price comparisons
This extremely effective strategy is used widely by companies that sell tickets for concerts, events, and travel.
Seasonal Pricing Strategy
Another very simple concept, this strategy is all about repricing items that are out of season – for example, if you are selling beachwear, you may discount these items during the winter months to encourage customers to buy them for next summer.
Similarly, if you’re selling products such as fancy dress costumes, you’ll be aware that some of your products, such as perhaps a Halloween costume, will have a very limited window at which you can charge optimum prices.
For the rest of the year, you may still be able to sell these products but only if you reduce the price considerably.
If you’re selling a number of products, keeping the prices competition can be a bit of a juggling act.
Thankfully, there are some awesome tools out there to automate your repricing. Some of the best are:
Appeagle A real-time repricer that will give you insights and strategies to optimize your pricing and boost your profits across multiple platforms.
Repricer Express: Starting from $39 per month, Repricer Express is a full suite of tools to help automate your pricing and keep you ahead of the competition.
Repricer: From $59 per month, Repricer promises to boost your profits by automatically amending prices.
Bqool: An Amazon pricing and repricing tool which automates your pricing whilst protecting your margins. Bqool is priced by speed and packages cost $25, $50, $75 and $100 dollars per month.
Check more pricing tools here: Top 10 Amazon Repricing Software Comparison and Reviews
Which strategy is right for you?
This depends very much on what you are selling and, when you are selling it.
If you are brand new to selling, it would be a good idea to begin with Penetration Pricing as this helps you to increase your profile and start to generate some income.
If, however, you are selling a niche product a competition-based strategy may work best for you.
When selling items that have fluctuating sales throughout the year, a dynamic pricing strategy will help you to keep sales steady all year long.
Of course, there are no hard and fast rules and, you may find that using a combination of strategies throughout the year works best for you and your product.
When starting out with selling on Amazon, it’s inevitable that you’re going to make the odd mistake or two.
There are some common pricing mistakes that are all set to trip you up. Some of these are:
Insufficient competitor research
A lot of sellers do their sums in order to set the price of their product and then wonder why it’s not selling.
Often, this is because they haven’t effectively researched the competition.
If you’re selling a product for $10 and, your competitor is selling the same item for $8, guess which one the customer is going to buy?
Sales & Seasons
Too many sellers make the mistake of leaving their products at the same price all year round which, put simply, is just unrealistic.
Different seasons and events such as Black Friday all mean changes to the perceived value of a product so, you need to monitoring your prices on a regular basis in order to stay competitive.
It’s natural to want to sell as many products as possible, particularly when first starting out.
This means that lots of sellers give in to the temptation of pricing their products at rock bottom in order to attract customers and beat the competition.
This is a mistake for three reasons:
- Firstly, this will cut into or even completely wipe out your profit margin which, essentially, means that you’re working hard for nothing.
- Secondly, cheaper isn’t always better – often, a very low price on a product will make the customer suspicious as to the quality and authenticity of the item.
- Finally, even though the competition may be selling the product cheaper, you don’t know the price that they are buying at – which can make a huge difference and will explain why they are able to sell at a lower price.
There’s an awful lot to take into account when doing your pricing calculations and, at first, it’s easy to miss something which can throw your pricing off completely.
Set up a spreadsheet and record every single stage of the process which will help you to make sure that you’ve covered every single expense which may alter the price point of your product.
When you first start selling on Amazon and a particular product does really well, there will be a temptation to hike up the price in order to increase your products. Don’t.
To begin with, the price point is probably a big part of the reason that the product has been selling so well and, you’ll find that sales drop off as you increase the price.
Next up, customers will notice and will tell others – which is a really good way of gaining yourself a bad reputation as a seller.
Finally, you may attract the attention of Amazon itself who may choose to investigate meaning that there’s a small chance that you’ll receive a penalty.
As an Amazon seller, your pricing is probably the most important decision that you will make on a regular basis.
Whenever you see a customer survey about buying behavior, price is almost always listed in the top three priorities.
As we’ve mentioned, the strategy that you choose is down to the individual product and when you are selling it but, if you keep the following in mind, you won’t go far wrong:
- Be competitive but don’t reduce prices too far as you risk alienating customers and competitors.
- Be sure to check and double-check all of your expenses to make sure that you’re starting with the right buying price.
- If you are selling a common product, use an automation tool to make sure that your competitors don’t run away with your customers.
- Don’t get so hung up on being competitive that you end up actually losing money.
- Always keep Amazon’s price policies in mind to avoid penalties.
- Use a spreadsheet and formula to keep your prices consistent.
Once you get the hang of it, pricing your products will become an integral part of your selling business and, when done properly, will be a major part of your selling success.