Implement a Dynamic Pricing Strategy for a Competitive Edge

Understanding what customers want has a massive impact on the success of your eCommerce business. One way you can become better at delivering on their demands is through the use of data. In our humble opinion, data drives everything. Comparing data price points on and offline is a great place to start. Understanding and developing a strategy based on the aforementioned is also referred to as an Amazon Dynamic Pricing Strategy.

Below, we will delve into these technical terms and apply them to real-world situations. By the end of this article, you will understand how to use Amazon Dynamic Pricing. If you’re already familiar, you can read up instead on Amazon customer lifetime value.

Build an Amazon Dynamic Pricing Strategy for Ultimate Pricing Control

1. What is an Amazon Dynamic Pricing Strategy?

Dynamic pricing is the process of allowing for flexibility in your pricing, based on changing elements. With large retailers like Amazon and Walmart, you typically see this process completed using a backend algorithm. As an Amazon seller, you need to follow suit. 

Airline ticket price fluctuations are a great example of flexible pricing strategy in action. Let's take a look at Southwest Airlines:

Dynamic Pricing

Start by comparing flights from your current location to another well-known destination. Have a friend who lives in another location test the same flight.

Your friend’s cost is likely to be different from your cost. You might check it multiple times throughout the same day (or week) to watch how it continues to change.

You will likely notice significant (or subtle) price fluctuations. You can apply the same test by viewing your competitor products pages on Amazon.

The point is this: product prices can change at any time depending on different factors.

2. Why Do You Need To Create an Amazon Seller Pricing Strategy?

At first, you might think that there is little point in creating an Amazon Pricing Strategy. However, choosing to ignore this strategy is one way you could end up losing some serious profit margin.

To understand the "why," it is crucial to understand different forms of dynamic pricing.

Time-Based Pricing

The use of time-based pricing can be observed on hospitality and travel sites. It is a change in the pricing depending on the time of day, week, or month.

For example, it is natural to expect the average (seasonal) price of candy to change if you're shopping just before Halloween. However, those Halloween candies are discounted immediately following because they lack the same holiday appeal.

Just on a general day, some retail stores, such as bakeries, reduce their prices in the evening. This allows products that have a quicker expiration to sell faster. This makes sense if your goal is to avoid having to sell day-old bread in your bakery.

On Amazon, you might find the price of winter gear to be much higher during the winter than during summer. This is intuitive. People are more likely to think about buying seasonal items if they are actively part of the season.

Bundle Pricing

Bundling is the process of combining two (or more) products into a single pack. This pack is perceived as a better deal, making it a perception-based pricing strategy.

A great example is the holiday gift packs many companies create. You will see many makeup gift packages, or chocolates available in a bundle. Check out more on product bundling here.

Value-Based Pricing

Value-based pricing strategy on Amazon

One of the most popular brands of cough drops is Halls Breezers. Because of the popularity of this product and brand recognition, people are willing to pay a higher price for couch relief than they would be willing to for a lesser-known brand.

Products of proven quality have a higher value based on perception. Amazon creates pricing controls to ensure you do not price your products too high, but value-based pricing is also dependant on availability and elasticity. Other less popular cough drops are less likely to fluctuate in price, as they do not have the same demand level.

Competitive Pricing

Amazon sellers who work in wholesale or retail arbitrage know about competitive pricing. Seeking a competitive price is typically a significant crossover with the lowest price.

Our previous pricing articles have talked about the importance of finding low-competitiveness industries. On Amazon, you can find out this information by checking out our product tools. Finding out the number of sellers and how often the buy box changes hands is a good indication of how competitive your target is.

If your competitors are the same size as you, you have a chance to outpace them. However, larger organizations with established customer bases can feasibly rely on other options, choosing to go with incredibly low prices to get you out of the market.

Also, the ability to bulk order 10 thousand units gives them a significant advantage that many smaller sellers cannot match. Targeting areas with fewer (less than 1000 reviews) with growing sales is crucial, enabling you to hit competitive pricing markets.

Cost-Plus Pricing

If you are an FBA seller (Fulfillment By Amazon), you've likely used Amazon's FBA calculator to determine how much it will cost to ship through them. Taking this price and saying you want to make a $20 profit per product is the simplest form of dynamic pricing: cost-plus pricing.

You might argue this to be static pricing, but shipping costs and referral fees do fluctuate. With this in mind, these are more variable costs than fixed costs.

Depending on how often your costs fluctuate, you might want to change your strategy. Being able to simplify your process is one way you can simplify cost-plus pricing.

As the most basic form of price management, you'll want to use this as your base price. Your final item price should be based on methods you can use to exceed your break-even point (where costs equal earnings).

3. What is the Difference Between Amazon Sale Price vs Your Price?

What is the Difference Between Amazon Sale Price vs Your Price?

Promotional pricing is an excellent way to attract new customers. This is a perfect example of increasing a customer's perceived value. However, newcomers to seller central will often see sale price vs your price.

Sale pricing on Amazon works just like other eCommerce dealers. It is a reduced price offered by you (or Amazon) to attract consumers.

We will explain the details here:

What is the Amazon Sale Price?

The Amazon sale price is set explicitly by Amazon. This sale price is typically limited to either a brand that Amazon owns our members of Vendor Central.

Vendor Central members are different from Seller Central members because vendors do not control their pricing. Instead, they sell their products directly to Amazon, resulting in lower profits (but usually faster turnaround).

The Amazon sale price is set explicitly by Amazon. This sale price is typically limited to either a brand that Amazon owns our members of Vendor Central.

Vendor Central members are different from Seller Central members because vendors do not control their pricing. Instead, they sell their products directly to Amazon, resulting in lower profits (but usually faster turnaround).

What is Your Price?

"Your price" is the price set by you. You can do this as either a vendor or a seller, but you have more price control as a seller. This is because you are not selling first-party products, which is where Vendors are limited.

Sellers have more control, meaning they set pricing and promotions. So "your sale price" is different from the Amazon sale pricing.

This can be more complicated, as Amazon is typically good at setting optimal prices. However, those who have the proper understanding can utilize this to change their pricing strategically.

Regardless, Seller Central members are not entirely out of Amazon's influence. In some cases, pricing might change irrespective of your best efforts.

4. Why Does Amazon Make Changes To Your Pricing?

It is estimated that Amazon changes product data every ten minutes. These ten-minute changes are almost three million pricing changes, enabling them to focus on a competitive pricing model. Simply put: Amazon changes your price to increase the number of sales your listing receives.

With control over the lion's share of eCommerce data, it can see how an initial string of customers will choose other products over theirs. If any of those customers are selecting a lower-cost product, Amazon will force down the overall price scope.

This results in the lower-cost competitors receiving a preference, sometimes overtaking those who emphasize a quality shipping process. If you've ever received a message about changing your pricing from Amazon, you know the situation.

In worst-case scenarios, Amazon can drive pricing down to the point where your listing is a threat of being dropped entirely. If you aren't willing to meet Amazon's price matching guarantees, Amazon won't list your product.

To stay on top of these changes, you can use our system to receive automated notifications of any pricing changes.

5. How To Create A Pricing Strategy To Take Back Control Over Your Products Pricing?

When it comes to creating a pricing strategy to control your pricing, here are some tips you can apply to your listing:

Tip #1: Set Your Minimum Price

When it comes to meeting goals, your first goal should be to exceed your break-even point to make a profit. This point is where you start making revenue, so your minimum price should break down on a per-unit scale.

In this case, if your manufacturing and product research process costs $500 and you get 100 products, you would ideally be shooting for making a 20% profit margin (or an extra $100). You can choose to increase this profit margin down the line once you gain more users.

This means you sell your products at $6, but you would ideally want to make more. Setting your price to higher numbers will give you further opportunities, leading us to tip number two:

Tip #2: Raise Your Conversion Rate With Discounts

Whether through coupons or general sales, people are more likely to buy your product if it has a limited-time deal. Amazon allows you to do this through available coupons, lightning deals, and other sales.

Announcing the existence of your sales on your social media platforms is a great way to attract existing customer bases. Wholesale distributors or retail arbitrage specialists might also find their rank boosted, eventually winning the buy box from their effort.

A big part of taking advantage of these pricing strategies is offering the most compelling product offer. This brings us to our next step.

Optimization is the process of modifying and improving your listing to make it compelling to Amazon's search engine. Your ultimate goal is to meet buyer intent with the most clarity. You can do this by keeping these targets in mind:

  • Have the best image quality showing people how your product is used.
  • Choose a primary keyword to include once in the title and a few times in the product details.
  • Have a list of secondary and backend keywords to ensure you can meet secondary goals.
  • Ensure you include all product variants under the same listing
  • Write with no grammar errors and provide compelling reasons for customers to buy your product

Amazon SEO is somewhat tricky, so utilize tools like Reverse ASIN lookups. These tools enable you to understand how your competitors maintain top ranks.

You can apply those strategies and ask yourself how to improve upon them. Doing both ensure that you create a compelling and unique product that appeals to numerous people.

Much like Google's SEO, Amazon Search Engine Optimization for the first page enables you to boost your sales heavily. When you rank higher for specific search terms, you have more control over how you price your items.

Tip #4: Establish Pricing Alerts To Remain Competitive

Using our automated report system, you can receive regular notifications of changes. When it comes to monitoring changes in price, it is typically done to snag the buy box.

With many Amazon listings, you will notice differences by only a few pennies. This comes from Amazon's strong preference towards those who have the lowest price.

By using DataHawk's monitoring systems, you can track two of the most critical aspects to remain competitive:

  • Changes in price that make your competitor's products cheaper than yours
  • Changes in who currently owns the "featured offer" section

Utilizing both notifications will give you the most crucial aspect of your price monitoring strategy. In this way, you can change your product price by pennies to remain competitive.

Tip #5: Perform Price Raises Slowly

There will come the point where you own the buy box, outperforming all competitors across the board. However, you still have to address any potential price increases carefully.

Suddenly selling your product for an extra $5 in a competitive market can harm the customer experience. This increase can discourage prospective buyers from returning and purchasing your product.

When you raise prices slowly, it reduces your chance of creating this experience. Having differences of $1 or a few pennies might not affect the customer buying one item. However, it will have a much more dramatic impact on your bottom line.

Ideally, you'll want to set your starting price slightly higher than your expectations. This setting enables you to understand how dynamic pricing can work, allowing you to reduce your cost, as you haven't hit your pricing floor yet.

Tip #6: Establish An Amazon Brand

Creating a brand on Amazon has numerous advantages. One of the most consistent advantages of using the Amazon Brand Registry is a greater chance of brand loyalty.

Looking at Amazon will reveal this in action. Brands like Tide, Clorox, and Pampers hold many of the top slots. Our earlier example showing Halls also provides an excellent model for why brands have an automatic advantage.

Taking this one step further, about 90% of customers purchase from brands they follow on social media. Brand loyalty is crucial, and you can establish it by being reactive to your customer's needs.

To establish your social media empire, it is a good idea to ask people to follow you. You can do this through product inserts, as Amazon disallows you from using alternative methods of contact.

By creating a brand, you give people something to follow. That way, you can rely on multiple sales channels beyond PPC and SEO.

When you establish a brand, it is up to you to set the pricing standards. In this case, Amazon has less control compared to other sellers, as you are the sole seller of any product in your brand.

Tip #7: Do Not Always Try To Be The Cheapest

Amazon would have you and its sellers believe that being the lowest-priced item is the best result. While a short glance at most product listings will give you this impression, it is vital to be aware of other factors.

Much of this relates to item quality when it comes to being at the top of the buy box. Often, low-cost competitors of similarly sized companies may source their product from a low-quality provider.

While this might end up giving the competitor short-term profits, seller feedback will likely tank their listing. So when you, who emphasizes product quality, come to the buy box listing, your steller customer response record and low order defect rate will destroy your competition.

Above all, Amazon is all about preserving the customer experience. While pricing is part of it, don't forget about other areas of what makes Amazon the most customer-centric eCommerce business globally.

6. Final Tips for Pricing Strategies

When it comes to dynamic pricing strategies, it is crucial to be ahead of the curve. Many sellers make the mistake of being reactive, causing them to be behind constantly. While you should use data and focus on strategies that work, it is important to implement those strategies with your goals in mind.

Being aware of your pricing options is step one. Knowing cost-plus, competitive, and value-based pricing are all the basics. Using those basics and applying them to notifications through our information tools is how you take those strategies and bring them to the next level.  

 

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