How to Optimize Your Amazon Pricing Strategy: A Comprehensive Guide

Amazon is one of the most competitive marketplaces around, so sellers have to find new ways to differentiate their products from the rest. But nothing is as effective as smart pricing strategies, because they can cause changes in customer behavior pretty quickly and significantly. Find out which pricing strategies work best for Amazon sellers, and which ones can increase your business’s revenue.

Why is it crucial to follow a pricing strategy when you sell on Amazon?

1. It allows you to keep your rates competitive and continue attracting customers. The ability to adapt to the market is crucial because the e-commerce industry is very dynamic, and customer’s requirements and price references are constantly changing.
2. It attracts buyers. Many of them are looking for the best deals possible, so you can drive more sales by providing great bargains.
3. It helps you grow your profit. Increased sales mean more revenue, which can be reinvested in growing your business.

Amazon utilizes proprietary algorithms that optimize prices regularly. Prices on Amazon change about 2.5 mln times a day, so the average cost of a product may fluctuate every 10 minutes. These optimizations are based on customer buying behavior, competitor prices, stock, seller revenue, and many other factors.

Another trend on Amazon is raising the cost of unusual products and offering bargains on regular products. This allows the majority of shoppers to enjoy the best prices.

All in all, Amazon’s pricing model aims to encourage sales and lower prices – sellers with competitive rates are more likely to be featured in the Buy Box. This is one of the world’s biggest marketplaces, so retailers are always pressed in terms of pricing freedom. At the same time, Amazon keeps prices lower by streamlining shopping logistics and handling returns (via the Fulfillment program).

Amazon sellers need to do in-depth research before setting a price: aside from production and distribution expenses, they need to take into account the overall level of competition and the cost of similar items, as well as market tendencies and other aspects.

However, the process can be simplified once you identify your margin requirements. You can calculate them by using the following formula:

((Sales - Total Expenses) / Revenue) x 100 = Profit Margin

Defining the lowest and highest price limits will help you calculate the average price. Aside from the above-mentioned factors, you should also consider expenses from Amazon, such as shipping, customs, fees like FBA or customer return fees, and other commissions. Sellers are also charged allocation costs. Amazon’s Seller Central provides many useful resources that can help you optimize prices, even manually. It also allows you to sell goods at discounts by using coupons and monitoring sales.

How should you choose a suitable pricing strategy when you sell on Amazon? Depending on the type of seller, different approaches can turn out to be profitable. Let’s find out how it works.

Private label sellers on Amazon find popular products with a small number of reviews, then brand and resell them. Such sellers can charge a higher price than competitors for a certain product to make it seem more valuable in buyers’ eyes.

Retailers that work via Fulfillment by Amazon (FBA) let the marketplace handle shipping, customer service, returns and other processes; that’s why they can charge more than an average price. With the FBA program, the level of service is pretty good (orders usually arrive on time and consumers have no problem with returning goods), so customers are ready to pay more.

Amazon sellers with few or bad reviews should consider charging a low price in order to increase their sales and rank higher in Amazon search. When implementing this pricing strategy, they also need to ensure that they are delivering a decent quality of goods and services for their Amazon reviews to be positive.

Short-term sellers may offer new products at very cheap rates to undercut competitors' prices and grow market share. However, as the number of consumers grows, sellers have to reprice products and charge more to ensure profitability.

Now that we have observed pricing approaches used by different types of sellers, it is time to take a look at various Amazon pricing strategies and ways to optimize them for better results.

Manual pricing of products provides Amazon sellers with more control over their positions and allows them to avoid risky situations when huge discounts and promotions put their profits at risk. However, manual pricing requires a lot of work: you have to spend hours checking competitors’ prices and calculating the best rates. Depending on the number of goods in question, this task might require full-time specialists, which means extra expenses.

If you don’t want to waste time on checking competitors’ prices every day, consider automating this task with the help of special software. For example, Priceva’s price tracker can crawl Amazon product pages and deliver up-to-date pricing information up to several times a day.

Today, buyers can easily compare prices online by using price matching tools, and it’s not surprising that Amazon stores with the cheapest prices have larger sales volume. To survive such fierce competition, sellers have to keep monitoring all the offers on the market and adjust their prices accordingly, sometimes even several times a day.

That’s where dynamic repricing software comes in handy. Instead of checking and changing prices manually, retailers can set up such a solution and streamline the repricing process. The software will analyze the market by using up-to-date information and update prices in Amazon stores automatically. This is the best way to deal with such a complex task as real-time price optimization.

One of the biggest advantages of repricing software is scalability. You can set up repricing for certain goods or categories of products and update prices for hundreds of positions.

Rule-based pricing implies setting prices according to your own requirements and formulas. For example, you can set a rule that a product’s price needs to undercut the lowest price by 1% or $0.50.

This strategy is recommended for well-established businesses that know how their market functions and can manage their profit margins well.

As the name suggests, economy pricing means charging less than competitors. It implies small profit margins with low advertising expenses, but its major advantage is that the product is available to a large market. You can start with economy pricing to raise brand awareness.

Note that economy items usually have no or minimal shipping costs and rarely rely on sale prices. This strategy is often applied to basic consumer goods that fulfill everyday needs.

A premium strategy suggests the opposite of the economy pricing strategy. In this case, a seller exploits the brand name to charge higher prices and boost profit margins. When it comes to selling on Amazon, premium brands often rely on sales and discounts to generate interest in their items. This strategy is recommended for well-established companies that already have many loyal customers and positive reviews.

A skimming strategy is typically exercised when a seller launches a new product. It implies charging the highest price to maximize the profit margin at the beginning of the product’s life cycle. Consumers are ready to pay extra for products as long as there are no analogs on the market. When competitors introduce substitutes, the seller lowers the prices and can generate revenue from the price-sensitive market segment.

This strategy works well for maximizing profit in the short term. It is often used by such brands as Sony, Microsoft and Apple, which overprice their electronics when first released. A few months later, they reduce prices with sales and leave them permanently lower as competitors release their devices.

A penetration strategy means charging less than competitors to win a market share. This pricing method is recommended for new brands or established companies that are releasing new products. A penetration strategy is implemented as a part of promotional campaigns. When the seller gains enough market share, prices are raised back to normal.

Similar to skimming, penetration pricing is a short-term strategy because it cannot generate enough profit in the long run. The major risk here is that customers may lose interest in your goods when they no longer seem to be a bargain. Besides, charging less does not guarantee you getting into the Buy Box, so this strategy should be used wisely in combination with the other methods that we will describe below.

The above-mentioned strategies can be efficient for certain types of sellers. After picking one of them, you can enhance the results by adding the useful tools mentioned below.

Algorithmic pricing is similar to a rule-based approach, because rate calculation is based on certain variables. However, this Amazon pricing model takes into account a larger number of factors, for example, competitor prices, number of products in stock, supply and demand, etc. It makes it possible to achieve the best ROI and helps you get into the Buy Box.

This way of pricing requires automation and, consequently, use of repricing software. These tools are more expensive and are mostly recommended for seasoned sellers. If used correctly, algorithms can help you keep your prices competitive 24/7 without requiring much effort.

You can execute your Amazon pricing strategy using tools designed for managing prices particularly on the Amazon marketplace. They can automate the whole repricing process by using a proprietary algorithm that automatically lowers your prices after competitors lower theirs. This is a useful automation solution, but such tools lack agility and functionality outside the realm of Amazon.

The Amazon marketplace provides its own calculator for sellers: this tool gives pricing suggestions after taking into account product cost, shipping expenses and Amazon fees. It calculates the most profitable price based on those variables and also allows you to test different price points for your product. This is an efficient tool, but it does not automate repricing.

Winning the Buy Box is the ultimate goal of all sellers on the marketplace. This is a hard task, and product price is not the only factor taken into consideration. Here are some things you can try to increase your chances to win the Buy Box:

1. Reduce delivery timelines as much as you can; keep them under 14 days.
2. Work on improving product reviews and gain ratings by encouraging customers to review your goods.
3. Make sure you sell quality products. That will help you reduce returns and replacements.
4. Optimize content on product pages: provide correct keywords, ample description, characteristics and images. It will minimize return rates.
5. Products sold as a part of the Fulfillment by Amazon (FBA) program stand more chances of getting into the Buy Box. This is explained by the fact that Amazon can deliver products quickly, and easily organize all other processes, such as returns.

Among other factors influencing the chances of getting to the Buy Box are refund rates, order defect rate (ODR), seller response time, and stock availability.

The competition on Amazon is fierce, so you should be very flexible and agile when setting up your prices. There is no magic bullet for everyone – each Amazon pricing strategy fits different types of sellers. Note that many successful retailers use automated pricing solutions to stay ahead of competitors and adapt to Amazon’s dynamic pricing algorithms.

If you want to be a leader in the pricing race, consider automating your pricing efforts. With the help of Priceva’s solutions – repricing tools and dynamic pricing – you can track an infinite number of competitors’ goods and receive data-based pricing recommendations. Plus, this software can automatically update prices in your store as regularly as needed.

The Amazon automatic pricing tool is useful for stores that sell a large number of products and have many competitors. It can adjust rates according to other sellers’ changes or according to rule parameters. It is a useful tool, but it lacks a couple of features. First, you cannot raise prices more often (there are update limits), which prevents you from maximizing your profits in the long run. Second, repricing rules cannot be customized.

To enforce a MAP policy on Amazon, you need an automated tracking solution that will enable you to get real-time information about prices. You can use dedicated Amazon repricers or implement more complex and functional software, such as Priceva’s repricing tool.

Once you reveal MAP violators, you can send them a Cease & Desist Letter or prohibit selling below MAP in the contract. Also, the Amazon Brand Registry lets you restrict the number of Amazon sellers that are allowed to sell your brand.

Go to the Seller Central account and click on Automate Pricing under Pricing from the top tool bar of your Seller Central account. Click on Action and select Pause or Delete. You can stop repricing for a certain SKU by clicking on Stop Repricing in the Take Action menu.