For many Amazon sellers, pricing feels like an ongoing mystery. Price items too high, and they may stay in your warehouse for years. Price them too low, and you risk starting a price war with your competitors. So, how do you find the sweet spot of being competitive while still turning a profit and building customer loyalty?
First, you must understand that nothing is set in stone when it comes to Amazon pricing. Sourcing costs, product demand, competitor prices—these all can impact your pricing strategy. That said, there are a few proven techniques that will help you determine the right price for your products.
How to Create an Amazon Pricing Strategy
1. Add up your expenses
The first step is to calculate the costs involved in getting each item out of the door. This Amazon calculator helps you factor in your landed cost, storage fees, Amazon fees, shipping and customs charges, and operational expenses (packaging, labels, etc.). With these costs accounted for, you can determine the minimum price—the cheapest you could price your product and still break even. Knowing the minimum prevents you from losing money for the sake of beating the competition.
2. Add a profit margin
Once you’ve got an idea of product-related cost, it’s time to build profit into your price. Here, you’ll need to decide on a profit margin you’d like to earn on your products. For reference, most Amazon sellers set a profit margin above 10%. Some successful sellers are able to extend that to 21-50%.
If you’re already selling on Amazon, you can calculate your existing margin by using the formula below:
- Profit margin = ((Sale – Total Expenses)/Revenue) x 100
To add the profit margin to your price, take your total product-related cost and divide it by 1 minus your desired margin (expressed as a decimal).
For example, if your product cost is $20 and you want to earn a 25% margin on sales, you can calculate your target price as follows:
Target price = $20 ÷ (1-0.25) = $26.66, which you can round up to $27.
When you’re calculating this price, make sure to consider the overall market and choose a price range that still falls in a competitive price bracket for your product. Also, as your desired profit margin changes, remember to update your base price. And finally, leave some wiggle room in your margin for future promotions and discounts as well as returns. This will help you avoid selling at a loss while running a deal.
3. Set a maximum price
Besides the minimum and base price, you need to set a maximum price for your product. The maximum limit is used to avoid price gouging, which happens when the price is increased to a level that’s much higher than what is considered fair or competitive by Amazon. This is especially helpful if you’re using a repricing tool, which dynamically raises an item’s price when there is a sudden increase in demand.
And just so you know, Amazon monitors the prices on its marketplace and other sites to maintain the shopping experience for customers. If you set a price that’s much higher than the recent prices of other sellers, you may see your offer taken down or even lose your selling privileges. Always set a fair price that’s within limits set by Amazon.
Common Amazon Pricing Strategies
Pricing strategies will always evolve with market trends, and as long as your price covers your costs, you can test and iterate as you go. Here are some common pricing strategies Amazon sellers use:
Value-based pricing involves setting a price based on your customer’s perceived value of your product or service. It lets you command higher prices for your products, as well as helps generate a positive perception of your brand.
To set a value-based price, you’ll need to think about the needs and wants of your target audience and the unique value propositions you have to offer. Additionally, you’ll need a solid brand, high-quality, in-demand products, and creative strategies for marketing. Fashion, art, and collectibles often do well with this pricing tactic.
Coupon-integrated pricing allows your customer to add a small discount to their purchase to lower the price. This makes your customer feel like they’re getting a great deal and encourages them to purchase quickly before the offer is no longer available.
Amazon displays a small label next to items where customers can apply coupons. While it’s easy to dismiss the cheapest item on a page when browsing for a product, the option to apply a voucher and save money grabs your customer’s attention and makes them feel as though they’re getting something special.
You can even raise your price slightly when working with coupons to earn a higher margin—customers will still likely consider it a great deal and opt for it over lower prices without coupons.
Also known as “psychological pricing,” charm pricing purposely prices products in a way intended to influence customer behavior with psychology. For instance, customers are more likely to see $19.99 as being closer to $19 than $20. Pricing at $19.99 makes it seem like your customer is getting a better deal, even if you’re only losing a single cent.
If you’re selling an “impulse” purchase product, this pricing strategy can be enough to convince your customer they’re getting a good deal. Notably, it’s worth experimenting with your options when it comes to charm pricing, as sometimes .95 or .90 can perform more effectively than .99. Alternatively, if you’re selling a luxurious product, it makes more sense to use a round number like $30 because customers expect to pay more for a high-quality item.
Repricing is one of the most common pricing strategies used on Amazon. It involves manually or automatically adjusting the price of your products to match the most competitive price on the market. This helps you avoid being undercut by your competitors and determine the best possible price for generating the highest ROI.
Using a repricing tool is usually better as it saves you from the time-consuming task of monitoring competitors’ prices manually. Profasee is an example of a repricing tool that helps Amazon brands predict the perfect price for every product by analyzing hundreds of real-time data points through dynamic pricing.
Don’t Forget to Split Test Your Amazon Pricing Strategy
Experimentation is the best way to ensure the optimal price for your products. A/B testing involves listing your product at two different prices for a set time, then comparing their sales performance during that period.
You might price your product at $26.95 for one week and $24.99 for another. Many sellers on Amazon use this strategy to help them understand what kind of numbers are most likely to attract their audience. It can also be a good way to determine how customers value your item if you’re going to be using value-based pricing.
Choosing an appropriate Amazon pricing strategy can mean the difference between becoming the Featured Offer or losing out to your competitors. But that doesn’t mean you need to rely on one method alone—experiment with different types of pricing and monitor results to see what works best for your products, brand strategy, and target audience.
Need more help with pricing? Contact our experienced Amazon consultants. We’ve helped create more than $2 billion in Amazon revenue. We’ll help you price for success and improve your Amazon sales.