Amazon’s Pricing Strategy: What You Need to Know
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When we hear about Amazon, we inevitably associate it with enormous success. It is impossible not to notice how much it has grown physically and in the digital world. But does such a gigantic retail store follow simple or complex plans? What is amazon’s pricing strategy? These are some questions that many entrepreneurs and business enthusiasts ask themselves when reflecting on Amazon.
A Success Story
Before discussing strategies, profit margin, best price, or any of its achievements for success in the marketplace, we need to look at its history.
Amazon was founded by Jeffrey Preston Bezos in 1994. Bezos, an engineer working as an analyst on Wall Street, was closely watching the still-young Internet market share. And so he decided to start his own business. The estimated value-based pricing of the company today is approximately $1.62 trillion. However, the company’s beginnings were relatively modest: an online bookstore, where hosting equipment and providing services took place in the garage of his home.
Jeffrey’s wife was present along the way. The couple needed to learn exactly what products they should sell online, such as CDs, software, books, or computer parts. The big novelty at the time was ordering online, which amazed many people. And in that time, Amazon made sure to have the product you needed and deliver it as fast as possible.
In this way, Amazon was the pioneer in E-commerce. In the very first month of operation, the company received orders from all 50 states of North America and also 45 countries around the world. And in 1997, its sales balance was approximately 148 million dollars.
Even with impressive numbers, this meant something other than profit. In fact, the opposite occurred. Amazon closed every quarter with negative numbers. However, Bezos foresaw that this would happen because he aimed for something other than profit initially but rather to invest massively in the structure of his company.
Then in 1999, Bezos took another bold step for the time being. He allowed people and third-party companies to sell used products on his platform. And his innovations didn’t stop there.
And in 2001, Jeffrey Bezos’ predictions came true. According to his statement, the company started making profits this year when he said it would take at least 5 years to start making profits.
In 2003 Amazon Web Services was launched as a hosting service for e-commerce stores. In this sense, Kindles and eBooks have revolutionized Amazon’s brand technologically. In the beginning, the company only sold physical books. A few years later, there was the spread of digital books. eBooks have become popular worldwide, and now millions of people have adopted this model of reading.
This is a small part of the story of the giant Amazon marketplace. Like many others who have also succeeded, this company started in the garage of their home, aiming to invest for the long term and continually innovate in the market. In this sense, we must analyze its pricing strategies and other actions that surprised the market.
How Does Amazon Make Its Pricing Model?
Customer base loyalty is earned through low prices and sellers using Amazon’s platform to sell their products and establish loyal customers. Basically, Amazon business offers the most competitive prices on the market. This implies that prices can vary several times during the day. This is Amazon’s dynamic pricing.
Amazon uses price drop tracking to help them calculate how to adjust and reprice their product pricing. An algorithm integrated into their system helps them recognize price changes in products or shipping. This algorithm allows Amazon to adopt a dynamic pricing strategy and price its products faster and more effectively, making its competitors unable to keep up with this fast pricing.
One of the highlights of Amazon’s principal model is the Buy Box. But how does this purchase mode work? It consists of a box at some strategic point on Amazon’s site. The leading offers and product details will be presented according to each customer’s search history on the site itself.
This way, a product is delivered to the customer of different brands and shopkeepers, available for immediate purchase. Because it has become a very effective method, many sellers strive to appear in the Buy Box, knowing that this will guarantee them more visibility and sales. And for the customer, this is also beneficial because the competitive prices are the lowest possible for the same product.
With thousands of retailers selling their products on Amazon, your stock will always be complete, and the chances of running out of stock are minimal. This becomes very convenient for the customer, who wants to buy their product and receive it as soon as possible, with no surprises of out-of-stock.
How Does Amazon Calculate Its Best Price for a Product?
There is no exact science to calculating the best product price. However, there are some facts that you should look at when setting your expenses, such as the cost of goods, shipping costs, and competition.
You should take a thorough look at the costs of your products. They may include the following items:
Your product prices should always generate some profit margin and need to be competitive. Once you have your profit margin, compare it with your competitors’ to adjust and observe if your prices are appropriate.
There Are 4 Main Strategies When We Study Amazon’s Pricing
- Penetration: this strategy consists in leaving your prices lower than your competitors to gain visibility in the market. Usually, this strategy is used with new brands or products in their launches. This technique is not profitable in the long term. Still, it can help achieve a Buy Box quickly and even build potential customer loyalty to the brand.
- Economy: the strategy of leaving your profit margin small is used by Amazon. There is a combination of low-profit margins and low advertising costs. This makes the product more affordable for their customers, usually with low or no shipping costs. This is a technique that works with everyday products like shampoos and soaps.
- Premium: This technique is the opposite of the economy technique described above. This strategy often raises prices because one brand is the product producer. In shopping, the plan is to provide discounts for buying these products, thus generating more interest in the consumer.
- Skimming: The approach to this strategy is to be more adaptable with prices. At the start of sales, prices are higher until the competition catches up. After the match has raised the price closer to yours, you can reduce it, thus maintaining relevance in the market. This strategy is commonly used for sellers with unique products, maximizing profit in the short term before the competition catches up with their prices again. Some brands that use this technique are Microsoft and Sony, for example. Note that these companies price their games and consoles higher at launch. And after a short period, they reduce it to compete with their competitors’ prices.
Minimum and Maximum Prices
Undoubtedly, this topic is one of the most essential competitor prices strategies for pricing products on Amazon. You must establish products with prices acceptable to your customers, thus generating more trust and loyalty.
Keeping your products at a minimum value may be viable in the short term. Still, it has been sustainable for a long time. You should take into consideration the total costs of your product before attempting to establish this sales technique on Amazon, such as:
- Amazon commission and FBA fees;
- Shipping and customs;
- Bank payments and collections;
- Customer returns costs.
In this way, understanding the total cost of your product is very important. Examine that the desired profit may be different for different products. And it is necessary to emphasize the margin of discounts and promotions in the future to avoid losses that will hurt you.
It is crucial to analyze the highest price you can put on your product, so you are not accused of price manipulation. But what is price manipulation? Price manipulation occurs when a seller raises the price of his product because he thinks it is fair. This effect occurs due to high market demand. Many sellers unjustifiably increased their prices due to high demand. We can use the face mask widely used in the last pandemic.
On Amazon, sellers are required to set fair prices for their products. Your costs must be in line with Amazon’s reference pricing policy. That way, you will comply with the law and Amazon’s approach and win more customers.
Coupons and Discounts
You can offer discounts and coupons on your products on Amazon’s platform. Advertising campaigns can boost the sales success of these products by driving customer traffic and increasing sales. It would be best if you were careful to only give coupons or discounts below your profit line if you want to take them out of stock.
By comparing your prices with your competitors, you can get a good idea of how to price your costs. And have a better chance of participating in the Buy Box, increasing your profit margin. With this technique, you can match your prices to your competitors.
The Stagnation Strategy
Doing nothing is never recommended. On Amazon, you need to look for whatever technique is most appropriate for your way of looking at business or product type. Even if you are the only one selling a specific product, you need a pricing strategy to maximize your demand and sales potential. Definitely, you should not take this strategy of doing nothing into consideration.
Be Aware of Different Times of the Year
With Amazon’s sales experience, it is possible to observe when your product stocks sell most profitably over the year. If you are a beginner, the ideal time to increase your prices without driving your customers away is during the fourth quarter. This is because customers pay less attention to product price increases during vacations and try to buy the product before it is out of stock.
Prices on Amazon change very frequently. In the last quarter of 2021, prices changed about ten times or more during an hour. For best results, it is necessary to use repricing tools that use algorithmic pricing for certain times of the year, thus avoiding erroneous predictions. If you had to do this manually, you would need to hire specialized staff and spend a lot of money. However, with this repricing tool, the work is done in real-time, and you save a lot of money.
Price and quality are two main requirements for buyers when looking to buy something. One differentiator your company can bring that the competition needs to include is the value of your product. In this sense, you can charge higher values for your product if your quality is equally high. In the background are factors such as fit, convenience, and comfort.
If you are selling a product similar to your competitor’s, the only possibility to sell more is to lower the value of your product. Over time, if you keep the value of your product low, the same as your competitor’s, your potential customer will associate the lowest price with an inferior product. Which can destroy any profit margin.
Demonstrate the features that may motivate the customer to choose your product over the competitors. Be insightful, observe the problems the competitor’s products cannot solve, and try to improve your product, adding more value to the development and your customer. The more solutions your product can offer, the more acceptable will be the justification for a high price and the buyers willing to pay. Because, after all, your customers need products that provide value to their lives.
Amazon is much more than a giant retailer. The value it provides to businesses is invaluable. This company is a true revolutionary of our time. It is a must to learn about how it has achieved its success, with a visionary and intelligent vision from Jeffrey Bezos. We hope that you, our reader, will be inspired by this esteemed company to improve your knowledge and business.
Paul Martinez is the founder of EcomSidekick.com. He is an expert in the areas of finance, real estate, eCommerce, traffic and conversion.
Join him on EcomSidekick.com to learn how to improve your financial life and excel in these areas. Before starting this media site, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.