To succeed as an Amazon eCommerce seller, it’s crucial to outpace competitors while maximizing profits. Balancing pricing is key: set too high, and customers may turn elsewhere; too low, and profits suffer. How can you offer value without compromising profits?
You do so by employing the right pricing strategies. In this article, we will share Amazon’s pricing strategy, how Amazon’s pricing algorithm works, and how to win the Buy Box.
What is Amazon Pricing Strategy?
Amazon’s pricing strategy is simple—to offer buyers the lowest price possible. It uses sophisticated machine learning algorithms to monitor and immediately change prices according to competition and market demand. This strategy is called dynamic pricing. Amazon prices are so dynamic that they change up to 2.5 million times daily.
Although the buyer will be getting a low price, it doesn’t compromise the value or quality of the product. This is how Amazon builds confidence with consumers. You can follow this approach to build a profitable brand on the platform.
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How Do Sellers Price Items on Amazon?
Product pricing is one of the first decisions you should make as an Amazon seller. You want to price your items carefully because price is often at the top of a buyer’s mind.
Your price has to comply with Amazon’s marketplace fair pricing policy, and it also has to be in tune with Amazon’s competitive pricing, as this sets you on the right path to winning the Buy Box position.
To price your products for profitability, you should consider your business goals, costs (production, marketing, shipping, and handling), and profit margin.
Then, compare your calculated price against the total price (price at the checkout page that includes the shipping fee alongside other related expenses) of your competitors’ products on Amazon to determine an average price range.
If your calculated price is much higher than your competitors’ prices, you should test and readjust accordingly.
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Types of Amazon Pricing Strategy
A good pricing strategy is more than just calculating your costs and marking up a fixed percentage. It should match your business’s short- and long-term goals and position you as an authority on Amazon.
Following are the types of Amazon pricing strategies:
- Penetration pricing,
- Price skimming,
- Cost-plus pricing,
- Loss leader pricing,
- Value-based pricing,
- Competitive pricing,
- Economy pricing,
- Peak or “surge” pricing, and
- Bundle pricing.
Penetration Pricing
This is a popular pricing strategy where you purposefully set your prices lower than the market price to gain market share and build customer loyalty.
It is suitable if you are a new Amazon seller because you are entering a highly competitive market with zero reviews and sales velocity.
For a short while, you should undercut your products, then steadily increase your prices as you start gaining traction.
Price Skimming
This is the opposite of the penetration pricing strategy. Here, you charge your product at a higher price and lower it gradually as new competitors enter the market, or new products are released.
Top brands like Sony, Apple, and Nike adopt this pricing strategy. It works best if you have a unique product you are launching and want to generate high short-term profit.
Cost-Plus Pricing
This strategy requires you to calculate the cost of your products and add a markup price. It doesn’t consider market factors like demand and competition, making you charge too little or too high. So, it is best used in a highly saturated market with highly similar products where pricing is a significant differentiator.
Loss Leader Pricing
Here, a seller intentionally prices their products at a loss to get customers in the door, hoping they will buy other items when they visit the seller’s store. It is similar to penetration, but the difference is in the motive.
The goal of a loss leader strategy is to make a profit on other items. Loss leader pricing is best if you offer gaming-related products or have a big brand with other products to compensate for the loss.
Premium or Value-Based Pricing
This strategy involves entering an established market and selling your products at a higher price than most of the market competition. If you wish to use this pricing strategy, you need to use your product listing to tell the customer, “Yes, I am priced high, and this is why.”
You should share the additional benefits or features they get from purchasing your products. You can use this strategy if your brand has been in the market for a while and has gained authority.
Competitive Pricing
Competitive pricing involves constantly monitoring the competition and adjusting your pricing based on your competitors’ actions and how the market is moving. You can use repricing tools to track how your competitors are changing their pricing and get price drop alerts.
Economy Pricing
This involves offering your products at a lower price than your competitors. The idea is to appeal to customers just looking for a good bargain and willing to sacrifice quality for a better price.
For this strategy to work, you must sell a high volume of your products because the profit margin is low. So, it is best for sellers whose products have low production costs.
Peak or “Surge” Pricing
This involves increasing the price of your product when it is in high demand and reducing the price when the demand is low.
This pricing strategy is best when a competitor is out of stock, and customers are demanding that product. So you can seize the opportunity to temporarily increase your price and lower it when competition is back.
Bundle Pricing
This strategy involves selling two or more similar products together for a single price. It is suitable for increasing customer loyalty and works best if you have complementary goods. However, you need to have a good margin to use this strategy so that it is sustainable to sell higher quantities at discounted prices.
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Amazon Pricing Algorithm
Amazon uses a complex, built-in dynamic algorithm to change its prices automatically and ensure that it offers the optimal price at any moment. For years, Amazon has used this algorithm to fluctuate prices and provide the lowest competitive price from other retailers.
What is a competitive price? A competitive price is a price that is less than or equal to the lowest price for an item from other reputable competitor retailers. Amazon regularly monitors and shares competitive external prices with sellers in Sellers Central, so you know when your prices are competitive.
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Tips for Pricing on Amazon Model
When selling in the Amazon store, offering a great price keeps the customers happy, gets you positive reviews, and keeps your customers returning.
But how do you stay on top of Amazon’s dynamic pricing algorithm to offer the best prices? Here are some tips to follow:
Monitor your competitor’s price
No matter how long you have been selling on Amazon, you should still pay attention to your competitors’ actions. This helps you stay up-to-date, know your product’s viability, and know when to alter your prices.
Use charm pricing
This is a psychological pricing strategy where you price products to appeal to a customer’s emotional side. The most famous example of charm pricing is ending prices with odd numbers instead of whole figures.
Most buyers would rather purchase a product priced at $15.99 or $15.95 than $16. This tip works because our brain perceives whole prices to be bigger than prices that end with 9.
Get the feature offer
Also known as the Amazon Buy Box, getting featured in this section can boost your visibility and sales tremendously. The following section will discuss how you can win the Buy Box.
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Winning Buy Box on Amazon
Most shoppers will purchase through the Buy Box without looking at any other product or listing, which is why it is a cherished spot for sellers on Amazon.
To win the Buy Box and boost your sales, having a great price is merely enough. You have to be eligible and implement some strategies to get an edge.
To be eligible for Amazon’s Buy Box:
- You must have a professional selling account.
- Your products must be in new condition. Amazon does not consider refurbished products for the Buy Box position.
- Your account must be in good health.
Once you have checked all the eligibility boxes, you can increase your chances of winning the Buy Box with these strategies:
- Maintain your inventory. This helps Amazon know you have enough stock to fulfill orders when they start coming your way.
- Have a competitive price for your products.
- Choose Fulfilled by Amazon (FBA). Sellers fulfilled by Amazon have the advantage of winning the Buy Box because Amazon takes care of the shipping, packaging, and returns.
- Offer fast delivery to your customers if you ship your items yourself. If you are FBA, you don’t have to worry about this.
- Maintain a high seller rating by providing excellent customer service. Amazon analyzes your response time to inquiries, A-to-Z claims, customer reviews, and other factors to calculate your Order Defect Rate (ODR). Amazon expects you to maintain an ODR under 1%, and you can check your performance using your Account Health.
While Amazon has not revealed the exact tactics it employs to award a seller the Buy Box section, with great seller metrics and competitive pricing strategies, you put yourself at the top of the race.
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How to Change Price on Amazon
There are two ways to change your product(s) price on Amazon: manual and automate Pricing.
Manual Repricing
Manual repricing involves manually making changes to your prices. You can manage and update your prices using the “Manage Inventory” page on Amazon Seller Central. This strategy is viable if you have limited product options or sell seasonal products like summer wear or holiday-specific items.
However, Amazon is a fast-paced marketplace, so it can take time and effort to keep changing your price manually. That’s why Amazon offers an Automate Pricing option.
Automate Pricing
Automate Pricing allows you to maintain control of your pricing while automating the manual update process. You must have a professional seller account to access the Automated Pricing tool.
Go to your Seller Central homepage, click “Pricing,” and select “Automate Pricing”. You will see three pricing rule types: category level, predefined, and customized.
You can use Amazon’s predefined rules on your products to automatically match your total price with the current price in the Buy box. You can also create customized pricing rules that set your total price to match or be above or below the Boy Box or the lowest price in the Amazon store. You can also set a minimum and maximum price, for which your prices should not go below or above.
The good thing about Automate pricing is that it only applies to the SKUs you designate, not across your entire catalog. So, you are in total control and can easily pause it anytime.
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Takeaway Points
When choosing a pricing strategy, consider your customers’ needs and expectations. Will they be happy or upset with your choice? Prices can impact your customers’ loyalty if they feel your prices take advantage of their needs.
Research and make sure that whatever Amazon pricing strategy you choose, you are delighting your customers and making a profit. Also, remember that pricing is just a fraction of what makes a well-rounded shopping experience.
Great article Paula. I completely agree with your advice about trying one strategy out at a time and keeping a close eye on the data to get an understanding how things think your Buy Box percentage are changing.