How to Craft a Dynamic Amazon Pricing Strategy
Understanding what customers want has a tremendous 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 this day and age, data is the fabric of our daily lives. 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.
- What Is a Dynamic Amazon Pricing Strategy?
- Why Do You Need an Amazon Seller Pricing Strategy?
- What Is the Difference Between Amazon Sale Price and Your Price?
- Why Does Amazon Make Changes to Your Pricing?
- Six Tips to Craft a Dynamic Amazon Pricing Strategy
- Final Remarks
What Is a Dynamic Amazon Pricing Strategy?
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 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.
Why Do You Need an Amazon Seller Pricing Strategy?
At first, you might think that there is little point in creating a dynamic 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 the five different forms of dynamic pricing.
1. Time-Based Pricing
Time-based pricing is a method that charges customers according to time. The use of time-based pricing can be seen on hospitality and travel sites. For example, it is natural to expect the average (seasonal) price of candy to change if you are shopping just before Halloween. However, those Halloween candies are discounted immediately after the holiday because they lack the same holiday appeal.
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.
2. Bundle Pricing
Bundling is a pricing strategy that combines 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. A bundle pricing strategy can effectively boost sales, introduce customers to other products, and reduce inventory on overstocked items.
3. Value-Based Pricing
Value-based pricing is the process of setting prices based on the perceived value of a product. Take, for example, Halls Breezers, one of the most popular brands of cough drops. Because of the popularity of this product and brand recognition, people are willing to pay a higher price for cough 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.
4. Competitive Pricing
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 meager prices to get you out of the market. Also, bulk ordering ten thousand units gives larger organizations 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.
5. Cost-Plus Pricing
Cost-plus pricing, also called markup pricing, is when a fixed percentage is added to the cost of producing one unit of a product; the remaining number is the selling price. If you are an FBA seller (Fulfillment by Amazon), you have likely used Amazon’s FBA calculator to determine how much it will cost to ship 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.
Some might argue this to be static pricing, but shipping costs and referral fees 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 will 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).
What Is the Difference Between Amazon Sale Price and Your Price?
What Is the Amazon Sale Price?
The Amazon sale price is set explicitly by Amazon. It is the price sellers use when they run a sale on an item. This sale price is typically limited to either a brand that Amazon owns or 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?
This can be more complicated, as Amazon is typically good at setting optimal prices. Regardless, Seller Central members are not entirely out of Amazon’s influence. In some cases, pricing might change irrespective of your best efforts.
Why Does Amazon Make Changes to Your Pricing?
According to Business Insider, it is estimated that Amazon changes product data every ten minutes. These ten-minute changes equate to roughly three million pricing changes, enabling them to focus on a competitive pricing model. In other words, 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 have 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 at a threat of being dropped entirely. If you are not willing to meet Amazon’s price matching guarantees, Amazon will not list your product. To stay on top of these changes, you can use DataHawk’s Amazon Market Research and Intelligence tool to receive automated notifications of any price changes. In addition, DataHawk’s analytics software allows sellers to map out more competitive pricing strategies to efficiently fuel eCommerce business growth.
Six Tips to Craft a Dynamic Amazon Pricing Strategy
This section offers Amazon sellers six effective pricing strategy tips to help them maintain a competitive edge and control their pricing.
1. Set Your Minimum Price
To craft a dynamic Amazon pricing strategy, 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 should aim to earn 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 create additional opportunities.
2. Raise Your Conversion Rate With Discounts
Whether through coupons or general sales, people are more likely to buy a product if it has a limited-time deal. Amazon allows you to do this through available coupons, lightning deals, and other sales. Announcing current or upcoming sales on social media platforms is a great way to attract existing and new customers.
Wholesale distributors or retail arbitrage specialists might also find their rank boosted, eventually winning the Amazon Buy Box from their effort. A big part of taking advantage of these pricing strategies is offering the most compelling product offer. The next step involves listing optimization. Optimization is the process of modifying and improving your product listing to influence Amazon’s search engine. Your ultimate goal is to meet buyers’ intent with the utmost clarity. You can do this by keeping the following targets in mind:
- Have the best image quality with images that illustrate your product’s usefulness.
- Choose a primary keyword to include 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 clearly and concisely with no grammar or syntax errors and offer reasons to persuade customers to buy your product.
Amazon SEO can be tricky. Be sure to use tools like Reverse ASIN lookups to help you understand how your competitors maintain top ranks. You can apply those strategies and ask yourself how to improve upon them—doing both allows you to ensure that you create a compelling and unique product that appeals to a variety of customers. Much like Google’s search engine, ranking on the first page of Amazon’s search engine 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.
3. Establish Pricing Alerts
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 provide you with the impactful tools to create a price monitoring strategy. In this way, you can change your product price by pennies to remain competitive.
4. Perform Price Raises Slowly
There will come the point where you own the Amazon 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 outcome.
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 will 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 without having to hit your price floor.
5. Establish an Amazon Brand
According to SEO experts, about 90% of customers purchase from brands they follow on social media. Brand loyalty is crucial, and you can develop 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 Amazon product inserts, as Amazon disallows you from using alternative buyer-seller communications.
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 than other sellers, as you are the sole seller of any product in your brand.
6. Refrain From Trying to Be the Cheapest Seller
While this might give 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 stellar customer response record and low order defect rate will destroy your competition. Above all, Amazon is about preserving the customer experience. While pricing is part of it, do not forget about other areas that make Amazon the most customer-centric eCommerce business globally.