The Easy Guide to Amazon Pricing Strategies

How much an item costs is a very important factor that goes into considering a purchase, and it’s not any less important on Amazon. The way you price your items can have a huge impact on your sales. There are many sellers who think that simply having the lowest price is the best way to get ahead of the competition. This is somewhat true, which is why we see things like Buy Box battles quickly turning into a competition over who can have the lowest price. However, there are many other Amazon pricing strategies that won’t jeopardize your margins, and they can be very successful. In fact, there are times when having a higher price can actually increase your sales.

Margins

The most important thing when it comes to determining your price is taking every piece of relevant information into consideration. Knowing exactly how much each unit of your product will cost you, and/or  how much money you need to make in order to break even, is the foundation for your pricing. There are several factors that go into your margins:

• The Amazon fees:
  • Referral Fees
  • Storage Fees
  • Fulfillment Fees
• The cost of manufacturing your item
• The cost of shipping your item to your Amazon FBA Warehouse

You want your margins to be at least 30% after all of these costs are taken into consideration. In order to calculate this properly, it’s best to use a specialized calculator. For example, AMZScout’s free FBA calculator calculates all of the fees for you. You simply enter your shipping and manufacturing costs, and you’ll know exactly what your margins are.  Take a look at the following example:

Pricing Strategies

Once you have your margins figured out, you will need to further analyze your product’s environment and competitive advantages. In general, you want your price to match the overall perceived value of your product. Depending on what that is, there are several standard strategies:

The Premium / High End Pricing Strategy

This is a strategy that is predicated on the fact that you are selling a high quality item that is meant for customers who are willing to pay more, and who are seeking a product that goes beyond what is standard. Let’s take a look at these 2 products:

They are both stand mixers, and they both seem like high quality, sophisticated items. However, the KitchenAid one costs almost 4 times as much, and is clearly doing much better than its competitor. KitchenAid is basically the Cadillac of stand mixers. When people are already willing to buy a sophisticated machine, many of them are also willing to pay a premium price for a high quality item that they know will last a lifetime. This is a great example of how a higher price actually makes a  product more attractive. The key is that you genuinely have the quality, which should be clearly evident in comparison to your competitors. Reviews are a great way to back-up your quality claims with real evidence from satisfied customers!

The Standard Pricing Strategy

This is the most common strategy you will see with any item that is dominating a given category. The idea is that you keep your prices on the same level as your competitors, while at the same time having  a clearly higher quality that comes with that price tag. Some great examples are products by the Joseph Joseph brand.  They are in the Home and Kitchen category and  have managed to dominate their niche due to creativity and superior design.  See the following:

The point is that, if you are going to sell your items in the same price range as most of your competitors, you need to have a product that stands out. High quality photos will go a long way in catching customers’ attention, as well as building trust in the quality of your brand.

The Value Buy Strategy

The final strategy is basically the reverse of the first one. The idea is that you are selling items that are not of the highest quality, but are affordable and will do the job. This pricing strategy only works if you can actually sustain the margins. We can find products like these pretty much all over Amazon. Here’s an example of 2 jump ropes- one is of a clearly higher quality with additional features and a price to match, while the other is basically just a cable with grip handles. Take a look at the following:

This general approach is usually not the best idea for private label sellers. In order to be competitive with lower prices, you need to order massive quantities from your manufacturer, which requires a large investment. Also, with slim margins, things like PPC and discounts are extremely hard to manage. On top of all of this, Amazon has its own line of products in most categories, called “Amazon basics,” which are almost all cheap items. In general, competing against Amazon is not a good idea.

Extra Tip: Psychological Pricing

So far we’ve only covered what your price range should be. Now we are going to be getting into more specific details. The exact digits that are going to be on your price tag can actually make a difference. We’re going to go over two well-documented and researched methods of pricing that have been proven to increase the chances of a purchase being made.

Replace the Leftmost Digit with a “1”

This is a very common practice that you’ve seen not just on Amazon, but virtually everywhere. There is a good reason why a price tag of $20 is much less common than $19.99 or $19.95. Of course we all know that both of these numbers mean that the item is “20 bucks”, since 1 or 5 cents doesn’t really make a difference. However,  there are psychological factors that come into play. When we see a price tag, we read it from left to right, so even though we know that we will need to give up a $20 bill in order to possess this item, our brain perceives a “1”  as a lower price. This is simply because  the digit “1” is the first one we see.

Pricing Based on Syllables

For many items, simply reducing the price by 1 or 5 cents will not give us the opportunity to replace the leftmost digit with a “1.” For such items there is another psychological effect we can utilize, and it’s based on how long it takes to read the price. Research has shown that when a price tag is easier to read, it makes it seem more reasonable. So for example, if your selling price is in the $25 range, you might stand to benefit more from pricing it at $25.11 as opposed to $24.99. The former price tag is 4 syllables, whereas  the latter is 6. 

In conclusion, the most important aspect of pricing is making sure that you protect your margins first. Then it’s all about finding out the relationship between your perceived value in comparison to your competitors’ value. Once you have determined a price range, you can apply some psychological effects in order to boost your conversion rate. When it comes to these effects, it might be wise to split test them for a while to see which one works better (if you have the option of using both). Overall, your price is as much a part of your product presentation as are your listing copy and images. So, make sure it matches the overall narrative surrounding your product. 

This is a guest post written by AMZ Scout for The Bunker Vault.

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