In large e-commerce marketplaces like Amazon, selecting exactly the right price for products is both an art and a science. Amazon’s own competitive pricing strategy is to put the lowest-priced items in front of the buyer as often as possible. This helps build loyalty among Amazon’s customers by offering a plethora of affordable options.
For sellers, however, it can be a race to the bottom as brands either try to ride razor-thin profit margins to victory while constantly monitoring for unauthorized sellers, or work overtime to build enough brand loyalty with their unique offerings to overcome the hurdle of higher prices.
With so few organic SERP rankings available and so much at stake, having a competitive pricing strategy is more important than ever. Let’s explore some of the best tips and strategies to find exactly the right prices for your products.
Competitive Pricing in the Amazon Jungle
Normally, the laws of supply and demand dictate that if sales are high, increase the price, and if sales are low, drop the price. In the wild jungle of Amazon, however, this simple approach might not be your best option.
Before we dive into the inner workings of the Amazon algorithms, let’s take a moment to review the two types of pricing on Amazon, item price and total price. Item price refers to the price of the items itself without any taxes, discounts, or shipping costs. Total price refers to the final price customers pay at the end of the transaction with all of those extra factors accounted for.
This distinction is important to keep in mind, because Amazon lists products based on product price and shipping price, so a simple reduction in item price may not be enough to compete for the buy box. Make sure you take total price and shipping costs into consideration in your final competitive pricing strategy.
Pricing and the Buy Box
Amazon pricing is not only competitive, it also affects your product’s chances of winning the buy box. That said, Amazon doesn’t always award the buy box to the lowest bidder. As we discussed in the blog post, How to Win the Amazon Buy Box, there are many factors that go into securing this coveted spot. Here’s a quick breakdown of each of these factors:
- Amazon Retail Presence
- Vendor Central Exception
- Price After Shipping
- Shipping Method
- Delivery Speed
- Percent of Successful Orders
- Defect rate
- On-time Delivery Rate
- Late Shipment Rate
- Valid Tracking Numbers
- Seller Reviews & Rating
- Customer Response Time
- Available Inventory
- Cancellation Rates
- Refund Rate
Amazon has built its empire by prioritizing efficiency and customer experience. This is precisely why FBA products tend to have an advantage over their FBM counterparts, since the shipping rates, speed, and tracking ability are often better with FBA. As the list shows, however, there are several factors over which sellers have significantly more control, and many of these factors are an opportunity to gain a competitive advantage.
Common Amazon Pricing Strategies
What are the most common competitive pricing strategies on Amazon? While the names may differ, here are a few examples of proven strategies sellers can use when pricing products for Amazon:
Economy Pricing
This is a strategy that relies on small profit margins and low advertising costs, banking its success on a higher overall volume of orders. Ideally, products in this category have little to no shipping costs to keep the price as low as possible for the consumer and rarely relies on sale prices to move inventory. Products that do well in with this strategy are consumable essentials, such as toiletries and detergents
Premium Pricing
On the opposite side of the spectrum is premium pricing. These are high-priced items that rely heavily on brand name and perceived value to generate sales. Since brand names generally don’t have as much clout on Amazon, this strategy might have to turn to discounts and coupons to generate more sales. Brands selling a premium product can use this strategy but understand Amazon shoppers are there to find the lowest prices, so driving external traffic to these listings might be beneficial.
Value-Based Pricing
This adaptable pricing strategy doesn’t always adhere to pricing norms and instead looks at trends, costs, competitor pricing, and timing. A variation of this strategy known as skimming is when a seller prices a product based on the perceived value and maintains it until the competition can offer similar products to match before lowering the price to regain the competitive edge. This short-term-gain strategy is very common in electronics and gaming where customers are often willing to pay higher initial prices for the newest releases. Value-based pricing makes the most sense for established brands or private-label brands that offer unique products.
Penetration Pricing
This strategy is the one most often used by new brands or new product releases to generate more interest in products and gain a higher initial market share. Using this strategy, sellers initially abandon their ideal profit margins by offering lower prices to increase sales and ranking. Once interest and brand loyalty are established, they can then increase their prices to a more sustainable level. Niche-market brands, such as vegan products, can benefit from this strategy as it allows them to competitively price their products in the beginning to build a strong customer base.
Cost-Plus Pricing
One of the most simple and straightforward competitive pricing strategies in retail, sellers using this strategy determine the exact costs of a product then add a fixed markup percentage to reflect their desired profit. This can be a very effective strategy for sellers with a variety of SKUs and inventory who know the exact costs of manufacturing, shipping, and advertising those products. The only drawback to this approach is when these costs rise and cut into their rate of return. An effective countermeasure is to pay close attention to inventory metrics and consistently reevaluate pricing as costs shift.
Staying on Top of Pricing Trends
If staying on top of your competitive pricing strategy on Amazon feels daunting, fret not. There are many tools and strategies to help you track pricing so you can respond quickly to changes. Amazon’s algorithm can quickly detect drops in pricing and adjust product rankings, so it is critical that once you have a chosen pricing strategy that you develop a means for monitoring and responding to market changes.
Amazon itself offers a few repricing tools you can use, such as rule-based pricing and algorithmic repricing. You can choose a rule as simple as pricing products one cent lower than competitors, and you can even set minimum prices, so you never dip below a certain threshold. Although these services do save time through automation and can make your products and listings nimbler in competitive markets, they come at a cost and offer less insight into what helps and hurts your products.
Manual repricing of products in Seller Central does offer complete control over pricing and gives you a chance to test different strategies to find the most effective. The drawback is that it can be time-consuming and cumbersome, especially for brands with more SKUs. An Amazon agency can help offset some of these drawbacks as they often have the resources to make these manual adjustments more quickly and can offer expert feedback on different strategies based on available metrics.
As we’ve seen in this discussion, a variety of factors are at play when it comes to developing a competitive pricing strategy on Amazon. While there’s no one-size-fits-all solution, there are several proven methods you can test to find the one that works best for you.
How to Gain the Upper Hand on Amazon
These tips are just scratching the tip of the iceberg. For more strategic advice for Amazon, subscribe to our weekly blog newsletter. If you want advice tailored for your brand, consider reaching out.
