How to price Amazon products is a commonplace question. It seems simple but is very complicated. In the theory of market economics, price strategy is also a very important part of the entire market strategy. It is not advisable to blindly raise prices to increase profits or blindly lower prices to enhance market competitiveness. We need to formulate reasonable price strategies based on product characteristics, competitive environment and our own actual situation, so as to achieve a virtuous cycle and make steady progress.
The price strategy of Amazon products is not static, and there is no fixed pricing method. Instead, we need to consider multiple factors to complete the final product pricing.
1. Cost consideration
When pricing, sellers often consider multiple factors such as production costs, profits, and their own product quality before pricing. If the price is set without considering the cost, it is very easy for the seller to suffer losses. Even if the so-called “strategic loss strategy” is adopted, it is necessary to understand the overall cost before making plans, otherwise the loss may be a bottomless pit. It is recommended that Amazon sellers refer to the following cost price formula when pricing.
FBM product price = product cost + product shipping fee + platform commission + expected profit + other
FBA product price = product cost + platform commission + FBA first-mile fee + FBA fee (warehousing & distribution) + expected profit + other
*Amazon’s sales commission for most categories of products is 15%.
*In other aspects, sellers will include promotion costs, tax costs, site costs, and labor costs.
2. Consumer psychology
(1) The hypnotic effect of the number “9”
On major cross-border e-commerce platforms, many product prices end with “g”. For example, $9.99, $49.99, and $99.99. On the Amazon platform, a children’s tablet is priced at $99.99. You may ask, wouldn’t it be more convenient to sell it directly for $100? Why set it to $99.99?
This is related to consumer psychology. Pricing the product at $99.99 will make consumers feel that they do not need to spend $100 to buy the product. Compared with a tablet priced at $100, consumers will be more willing to buy a product priced at $99.99, even if the actual price is only $0.01 different.
When setting prices, sellers should consider not only costs and profits, but also the psychological factors of consumers. Sellers can go to Amazon to take a look. They will find that many products have prices ending in “9”, which means that many sellers are using this pricing method.
(2) Differential pricing
When setting prices, sellers can list and price similar products in the same series together, and try to influence the lower-priced products with higher-priced products. For example, in a street clothing store, the store owner always likes to display three clothes with different prices of 39 yuan, 69 yuan, and 99 yuan together. These clothes look and feel similar, and in fact, the materials and workmanship are similar.
If you encounter a thrifty consumer, they will think that the 39 yuan clothes are cheap compared to the 99 yuan ones. If you encounter a wealthy consumer who is not sensitive to price, he may be more willing to buy expensive products. “Expensive is good”, there are many people who hold this view. Economics calls this phenomenon “price discrimination theory”. The same is true for pricing on the Amazon platform. Through tiered pricing, there are price differences between products, which has a great stimulating effect on sales. This stimulation is also two-way. Both expensive and cheap products can have good sales.
3. Different stages of product development
(1) New product launch stage
When a product is first launched, there are no good reviews, no star ratings, no loyal fans, and the product is in a non-competitive state. If the product price is set to the same as the price of mature sellers, will anyone buy it?
Of course not. Therefore, when new products are first launched, in order to quickly attract buyers’ attention and quickly enter the market, sellers may set the price lower, and even consider strategic losses. However, the price should not be set too low, otherwise it will not only fail to earn the profits it deserves, but will also make buyers underestimate the value of the product and even suspect that the product is fake.
(2) Product growth stage
When our products have made some breakthroughs in sales, good reviews, star ratings, etc., and are in a rapid growth stage overall, we can slightly increase the price and control the price to a level slightly lower than that of competitors. At this stage, there is no need to pursue profits too much, but at least to break even, that is, not to sell at a loss.
(3) Product maturity stage
When the product sales are already very stable, the ranking, traffic, star rating, sales indicators are all very good, and it has accumulated a lot of popularity in the market. Its performance has far exceeded that of ordinary sellers. From all aspects of data, it can be seen that this is a hot product or a quasi-hot product. Then the price comparison function of this level of product has weakened. It represents the brand image and store positioning. Sellers can safely adjust the price higher than the market price. As long as it is not too high, you will find that it will not have much impact on sales.
(4) Product decline stage
After a product has become popular in the market, it will slowly enter the decline stage. For example, some sellers sell iPhone 7 cases, but iPhone X has been released, and fewer and fewer people will use iPhone 7. Correspondingly, the demand for iPhone 7 cases will gradually weaken, and sales and profits will be much lower than before. Sellers do not need to continue to push this product.
If there is still a large amount of inventory backlog, sellers can consider clearing out the inventory at a low price as soon as possible. Here is a suggestion for all sellers. If you want to choose a product with a relatively short life cycle, such as iPhone 7 cases, you must ensure that the profit of the product is high enough and the sales volume is large enough. Otherwise, you will find that it is very easy to lose money, and you may just start to make a profit but then go downhill. For novice sellers, I also recommend that you give priority to products with a long life cycle, that is, products that will enter the product decline stage after a long time.
Reasonable and stable prices can enable sellers to obtain more profits and a larger market share. However, prices cannot remain unchanged. It is necessary to adjust prices in a timely manner according to actual conditions.
1. Adjust prices according to market demand
The price of a product will not remain unchanged. When a product is in short supply, even if the price is raised, people will rush to buy it. When a product is declining, it may be necessary to lower the price very low to sell it. Therefore, sellers need to flexibly adjust prices according to the different development stages of the product, such as new products on the shelves, growth period, and market demand.
2. Adjust prices during promotional seasons and holidays
Each e-commerce platform and store will have promotional activities with different themes at different times. On the Amazon platform, in addition to Member Day, there will also be promotions on major holidays in European and American countries and regions, such as Valentine’s Day, Halloween, Thanksgiving, Christmas, etc. During the golden period of marketing such as holidays, sellers will definitely formulate promotional strategies and adjust product prices on a large scale.
3. Adjust prices due to other circumstances
In other circumstances, such as rising raw material costs, rising freight costs, and rising labor costs, sellers can consider adjusting prices.
After the price is raised, sales will be affected to a certain extent. According to Amazon’s A9 algorithm, sales will affect the overall search weight and keyword ranking of the product. Therefore, when we adjust the price, we must pay close attention to changes in sales. When we promote new products and maintain the stability of old products, there is a very important indicator, which is the number of orders on the home page of the core keyword. Once the product sales fall below the number of orders on the home page of the core keyword, the product ranking will definitely drop. So how is the number of orders on the home page of the core keyword calculated?
For example, I sell power banks. If I want to know the number of orders on the home page of the core keyword “Power Bank”, I will directly search for “Power Bank” and find the top five products in the natural ranking. I will use the product selection tool Jungle Scout to find out their respective daily sales, and then add up the daily sales of the five products and divide it by 5 to get the average daily order volume of the top five products. Next, we assume that the contribution ratio of the core keyword to the daily order volume of this product is 50%, then divide the average daily order volume by 2, which is basically equal to the number of orders on the home page of the word “Power Bank”. If my product wants to be ranked in the top five search results under the core word “Power Bank”, it must reach this order volume, otherwise even if it is in the top five, the ranking will drop quickly.
When we want to increase the price of a product, we must not raise the price too high all at once. It is recommended to increase it by US dollars a day and observe the daily order volume of the product at any time. Once the daily order volume is lower than the order volume of the core word homepage, it is necessary to take immediate price reduction actions to avoid affecting the product ranking.
Due to the current fierce competition in Amazon e-commerce, in general, when sellers find that the daily order volume has fallen below the threshold of the core word homepage order volume, the product ranking may have dropped, and it is too late to reduce the price. In order to prevent such things from happening, I recommend using a tool called “Automatic Pricing” in the Amazon Seller Backend. According to the tool description, we can set pricing rules. For example, when the product sales volume is lower than a certain threshold value, the price will automatically drop. We can set the core word homepage order volume to this threshold value. When our daily sales are lower than the core word homepage order volume, this tool will automatically lower our product price.