Pricing plays a crucial role in determining Amazon sellers’ success on the highly competitive marketplace. According to our Amazon statistics, at least 30% of online shoppers list price as the most important factor in product selection. What’s more, about 75% of consumers check prices on Amazon before buying something.
It’s not quite as straightforward as adding your markup and calling it a day. There are several effective Amazon pricing strategies that sellers can implement to optimize sales and profitability. Here’s a closer look at over 10 proven dynamic and competitive pricing models.
What Is the Amazon Pricing Model?
Amazon adapts a dynamic pricing strategy that constantly adjusts prices based on market demand, competition, and other factors. Amazon’s goal is to give shoppers the lowest price possible so that they will keep using the platform.
While this benefits buyers, it can be challenging for sellers who must remain competitive while maintaining profitability.
The Amazon pricing model uses sophisticated algorithms to analyze customer behavior, market trends, and competitor pricing to determine the optimal price for a given product. These algorithms consider supply and demand, inventory levels, seasonality, and customer purchasing patterns to set prices that maximize sales and profits.
As a result, it’s normal to see product prices constantly change, sometimes multiple times a day.
Another prominent feature of the Amazon pricing model is the coveted Buy Box. This feature is awarded to sellers who meet several Amazon criteria, including good reputation, shipping efficiency, and competitive pricing. With the Buy Box, shoppers can instantly purchase an item they want, resulting in higher sales for the merchant and convenient shopping for the customer.
And speaking of convenience, another factor in Amazon’s pricing model is the availability of thousands of merchants practically selling the same thing. This provides convenience to shoppers in knowing items will never run out of stock, and prices will constantly remain competitive. It is also the primary reason why Amazon retains a large customer base.
The Amazon pricing model is designed to ensure that the company offers its products at the best possible price to customers while maintaining profitability.
How Do You Price Items on Amazon?
“Pricing shouldn't remain static. I regularly adjust based on real data. For example, I may temporarily price products at cost to generate reviews and sales velocity. This can increase organic visibility. Once sufficient reviews are obtained, I’ll raise the price to increase profitability. I also monitor best-seller rankings daily and adjust prices up or down accordingly. My goal is to find the optimal price that keeps my product competitively positioned for sustained sales.”
Shawn Stack, founder and CEO at Hallmark Timmins.
Pricing your products on Amazon requires continuous involvement. You’ll need to conduct pricing experiments by testing different prices for the same product to determine which generates the most sales and profit.
For example, while a small decrease in price will reduce your profit margin, it can boost your daily sales. It’s all about finding that sweet spot.
In addition analyzing the sales data of these price experiments, also extend your research to:
- Market trends
- Customer demand
- Competitors
You should then apply dynamic pricing and adjust your prices in real time to match the market conditions that your research has uncovered. It’s too much to tackle manually so it’s best to use a dynamic pricing tool.
Amazon Pricing Strategies
While there are many pricing models available, three of the most commonly used are cost-based pricing, value-based pricing, and dynamic pricing.
Here’s a detailed overview of each of these three pricing strategies, along with other examples of pricing models, and how to use them effectively to optimize your pricing strategy on Amazon.
1. Cost-Based Pricing
Cost-based pricing involves calculating the cost of producing a product and adding a markup to determine the selling price. This pricing method ensures that all expenses are covered and a profit is generated. To utilize this method effectively, sellers need to analyze their product costs, calculate a reasonable markup, and price their products accordingly.
2. Value-Based Pricing
Value-based pricing means setting a price based on the perceived value of the product to the customer. It allows you to align prices closely with what buyers are willing to pay.
To implement this pricing method, sellers need to understand their product's value proposition, customer segmentation, and competitive landscape. This method can be highly effective in maximizing profits and increasing customer loyalty.
To make it work, sellers will need to focus on gathering customer feedback. This will help you to understand what your customers value most about your product which you’ll need when highlighting product differentiation.
The easiest place to start is with your own reviews. Are customers consistently mentioning unique features or benefits they appreciate?
Then, optimize your product listing accordingly and focus on these favorite features to differentiate your product from similar ones. To do this, Shawn Stack from Hallmark Timmins suggests that you use informative bullet points and write a comprehensive product description.
“For bullets, focus on features, benefits, specs, uses, and anything that differentiates you. Make sure to include keywords throughout in a natural way. Tell a story about the problem your product solves. Use formatting like bold and italics to highlight benefits.”
A compelling narrative can make a product feel more valuable, helping to justify its price tag.
For example, do you use only eco-friendly production values? A survey Deloitte conducted has found that sustainability is one of younger consumers’ main values. In fact, they’re willing to pay 10% more if the product is sustainable. So, if your target audience is Gen Z and millennials you can justify a premium pricing by highlighting how your product promotes sustainability.
3. Dynamic Pricing
Dynamic pricing is a model that requires adjusting prices based on market conditions, competition, and other factors. Dynamic pricing allows sellers to respond to changes in the market and remain competitive. To effectively apply this model, sellers need to use dynamic pricing algorithms, track competitor prices, and adjust their prices accordingly.
4. Competitive Pricing
Competitive pricing involves setting your product prices based on what similar products are selling for on Amazon. The goal is to attract customers by offering prices that are competitive yet profitable. This approach not only helps in gaining visibility but also maximizes sales potential by aligning with consumer expectations.
To do this, you’ll need to use the Competitive Price Threshold (CPT). Amazon defines this as when the price is based on competitive prices from other retailers. In fact, if your price is more than the CPT, your offer won’t qualify for the Buy Box (now called Featured Offers).
You’ll need to monitor your competitors’ prices regularly with the help of technology. For example, with Amazon repricing software, you can set a minimum and maximum price per product, helping you to mirror your competitors’ rates.
If you’re a new Amazon seller, Shawn Stack recommends you do the following:
“Once you’ve determined a competitive yet profitable price, start a little lower to gain your first reviews and jumpstart sales. You can then raise to match the competition as your product rankings and reviews improve.”
5. Penetration Pricing
Penetration pricing is a marketing strategy where a seller sets a low initial price for a new product to attract customers and gain market share. The idea is to entice buyers with an irresistible offer, encouraging them to try your product over competitors. Over time, as the product gains popularity and customer loyalty, the seller gradually increases the price.
The strategy is especially useful for new Amazon sellers or crowded product categories. It can help you to boost sales quickly and increase visibility to set a foundation on which you can build customer loyalty.
Like with cost-based pricing, you’ll need careful financial planning. You want to avoid setting prices that will result in significant losses and ensure that your business can withstand the initial low prices without jeopardizing financial stability.
Customers might associate a low price with low quality. So, to avoid the low price counting against you, specifically highlight the quality and value.
6. Algorithmic Repricing
Algorithmic repricing is an automated pricing strategy that uses sophisticated algorithms to adjust the prices of your products based on various factors, such as competitor pricing, market demand, and your sales goals. It’s beneficial to sellers as it ensures prices are always optimized in real-time.
Tools like Intelligence Node and other Amazon repricing software solutions offer more advanced features than the marketplace’s own built-in tool. As this pricing strategy can’t be approached manually, it’s best to use one of these third-party tools.
7. Psychological Pricing
Psychological pricing is similar to value-based pricing in the sense that it uses customers’ perceptions to base prices. The following are three main methods that Amazon sellers can check out:
Price anchoring
When using price anchoring, Amazon sellers will include a reference point (or "anchor") for customers which they can use to evaluate the value of a product. This reference point could be a higher original price or a comparison with similar products. It creates the impression that customers are getting a better deal which can fuel impulse purchases.
Charm pricing
Charm pricing is the everyday pricing practice of listing a product at, for example, $99.99 or $99.95 instead of $100. Even though there’s virtually no difference in these two prices, customers perceive that they’re getting a better deal.
Tiered pricing
Depending on the type of product, you can also offer multiple price levels for essentially the same product. For example, a kettle in fire engine red with a matt finish might be priced higher than one in standard white.
Aside from incentivizing customers to spend more, it also helps you to appeal to a broader audience. Including an entry-level, basic version allows you to attract sales from price-sensitive shoppers too.
8. Premium Pricing
For products that offer truly unique features to competitors or are offered as a more premium option to a specific niche, Elias Rima, founder at 1LEAP, recommends using premium pricing. He explains:
“Contrary to what a lot of people would say, I believe that pricing your products slightly ABOVE the competition will help to avoid the whole bidding war, racing to the lowest price scenario. Choosing to price above the competition MAY yield better results depending on the type of product you are selling and its uniqueness.”
You can also use your brand reputation to justify charging higher prices. It’s about positioning your brand and its product range as a high-value offering and creating the perception of exclusivity.
9. Skimming Pricing
Skimming pricing takes the opposite approach to penetration pricing. Instead of starting with a low price and gradually increasing it, you start with a high price and gradually lower it.
The goal is first to target early adopters who are willing to pay a higher price before broadening your target audience. As such, for this Amazon pricing strategy to work, your product must be new or innovative.
Early adopters are more willing to pay extra in order to be among the first to own a cutting-edge product. This way, you maximize profits in the initial stages of your product launch, helping to offset initial research and development as well as marketing costs.
It’s similar to the premium pricing strategy. However, as the product’s novelty dwindles and similar products start to appear on the market, you’ll gradually start to lower the price.
10. Economy Pricing
For a simpler approach to Amazon pricing, you can implement economy pricing. Using this strategy, you’ll offer products at lower prices than your competitors to attract price-sensitive buyers.
It’s particularly well-suited for selling high-volume products and products with minimal differentiation like basic electronics or generic household items. The idea is to generate higher sales volumes so that you can offset the lower profit margins.
To maintain profitability despite the low margins, you can use strategies like product listing optimization and ads. Your products might be generic, but they still need detailed descriptions, relevant keywords, and high-quality photos to let them stand out. Even with lower prices, Amazon customers want to feel confident about the product, making it essential that you still highlight product benefits and unique selling points when writing your description.
11. Promotional Pricing
All businesses can benefit from using promotions and discounts from time to time. It creates urgency to boost sales while at the same time making your product attractive to new customers who might otherwise have scrolled past.
Amazon Sellers can, for example, use:
Lightning deals
With lightning deals, you’ll offer a limited number of discounts on an item for only a short period. One of the main benefits of using this promotional tool is that these deals get featured on Amazon’s Today’s Deals page. In addition to the significant exposure, it’s also extremely effective at creating a sense of urgency.
Coupon campaigns
Coupons are a versatile promotional tool that allows sellers to offer discounts on their products. It offers great flexibility as you can set the discount and duration. Customers can apply these coupons at checkout, providing an attractive incentive to purchase.
Like lightning deals, it can also generate impressive exposure as they are featured on the coupons page.
12. Bundle Pricing
With bundle pricing, you’ll be selling multiple, complementary products together as a single unit at a discounted price. This strategy increases the perceived value attracting the attention of cost-conscious consumers.
It can also improve customer satisfaction. Not only will different needs be met in one purchase, but the products often enhance the user experience.
For sellers, bundling also offers an opportunity to “get rid” of slow-moving items. If you have a product that you’re struggling to sell, you can bundle it with a complimentary bestseller.
This might require testing some different combinations. Experiment with different product combos to see which bundles resonate more with your target audience.
In addition to your target audience’s needs, you can also use seasonal trends to guide you. For example, if there’s an upcoming holiday like Halloween, bundling different types of candy together can be a sweet deal.
Factors That Affect Amazon Pricing Strategies
Several factors can affect Amazon's pricing strategies, which you should consider before committing to a pricing model.
Competition
Selling on Amazon is highly competitive, and even if you offer a unique product, there’s a huge chance you have a close competitor. Pricing strategies must take into account the prices of competitors.
You may price your products higher or lower than competitors, depending on factors like product quality, market demand, and production costs.
Market Demand
Amazon may adjust its pricing based on the level of demand for its products. If demand is high, the company may raise prices to increase profits, while if demand is low, it may lower prices to stimulate sales.
Understanding Amazon’s dynamic pricing strategy will ensure you stay on top of market demands and aren’t left out when prices change. You can also use Amazon repricing tools to ensure your products remain competitive.
Production Costs
The cost of producing a product is a crucial factor in pricing decisions. You should not sacrifice profits for the sake of competitiveness. Always factor in production costs when you set your prices and make sure you cover them before deciding on a pricing strategy.
Marketing and Advertising
If you are in a highly competitive niche, you want your listings to always appear at the top. You can do this by advertising your products so Amazon places them at the top. Factor in the cost of advertising when considering your pricing strategy.
If you have to price a product very low and still incur extra advertising costs, then you need to rethink your pricing strategy. In contrast, most high-priced items invest in sponsored listings and then incorporate a portion of those ad costs into their overall price.
Also, consider hiring Amazon marketing and advertising services to help you get over this step.
Consumer Behavior
By accessing Amazon’s wealth of data analytics and dynamic pricing tools, you can adjust prices in real time based on factors like customer location, browsing history, and purchase history. For example, you can show a lower price to a repeat visitor who previously abandoned their cart.
Regulatory Factors and Other Fees
When setting prices on Amazon, you must consider regulatory factors like taxes, tariffs, and other government regulations. If you’re shipping internationally, remember that shipping costs may be high depending on the country, and there could be additional importation fees.
Amazon automatically calculates and adds these factors to your listing, which can result in a higher price than intended.
How to Win the Featured Offer on Amazon
Formerly called the Buy Box, Featured Offers can boost product visibility tremendously and increase sales. In short, with this feature, Amazon will combine multiple product offers on a single product detail page to ease product comparison. Featured Offers also have “Buy Now” or “Add to Cart” buttons that can boost conversions.
Here’s how to increase your chances of getting featured:
- Use competitive pricing: Keep your prices competitive. Amazon explains that Featured Offers typically match the lowest price alternative. Consider using repricing tools to adjust prices based on market conditions and competitor prices.
- Maintain high inventory levels: Keep products in stock. If you run out of stock, you can be excluded from being considered a Featured Offer. If you anticipate an increase in sales, order extra stock.
- Use Fulfillment by Amazon (FBA): According to Amazon’s website, sellers who offer fast or free shipping are more likely to land a Featured Offer. As such, it’s a good idea to opt for Amazon FBA to benefit from Amazon’s fulfillment services. This way, you’ll be able to deliver products within two days or even sooner. Plus, you’ll be able to offer free, fast shipping to Prime members.
- Offer Prime shipping: If you’re not using FBA, consider Seller Fulfilled Prime. This way, you’ll provide Prime shipping benefits while maintaining control over fulfillment.
- Optimize product listings: Ensure your product listings are accurate, complete, and appealing to customers to increase conversion rates. This will help to boost your sales volume for a product so that you can become eligible for Featured Offer placement.
Conclusion
Selling on Amazon can be highly lucrative, but only if sellers know how to price their products correctly and remain competitive. With numerous sellers offering similar items and Amazon releasing its own products, finding the right price point for shoppers can be challenging.
To succeed on Amazon, understanding the competitive landscape and utilizing pricing tools and strategies is essential. Choosing the right model also depends on factors like product costs, value proposition, and market conditions. By considering these factors and automating as much of the process, your price won’t cost you sales.
Frequently Asked Questions
What type of pricing strategy does Amazon use?
Amazon uses a dynamic pricing strategy. It uses factors like competitors’ prices, market trends, and demand and supply to change its prices regularly. Its goal is to keep the prices as low as possible.
How does Amazon use price skimming?
When Amazon sellers use price skimming, they’ll initially list their new and innovative products at higher prices. They will then lower the price over time to make the product more appealing to price-sensitive shoppers. The goal is to attract early adopters.
What signals indicate that it’s time to raise the price of an Amazon product?
The following could be a sign that you need to increase the price of your Amazon product:
- It’s consistently in high demand
- The supplier increased their price
- Operational costs or shipping fees increased
- Competitors are increasing their prices
- The product improved
- Your product consistently receives good feedback
- There’s limited supply
- Your brand is perceived as more established
How does a lower initial price impact product ranking and visibility on Amazon?
Setting an initial lower price can have a positive impact on your ranking and visibility on Amazon. This is because the algorithm uses factors like the speed at which your product sells (sales velocity) and conversion rate. A lower pierce can attract more buyers and be the incentive that price-sensitive buyers need to convert.
How do I balance pricing with advertising spend (PPC) on Amazon?
Here are some practical steps to help you balance your pricing with your Amazon ad spend:
- Examine how competitors price similar products and consider what your target audience expects to pay
- Identify what you want to achieve with your ads e.g. drive brand awareness, increase sales
- Calculate what cost per acquisition (CPA) will align with your profit margin
- Distribute your ad budget across various ad types
- Use performance data to adjust your pricing and ad spend
How do I set my prices to become the Featured Offer?
Amazon suggests that you price your product at or below the lowest priced alternative to become the Featured Offer. You can use the Pricing Opportunities tab found on the Pricing Health page to see which products are currently ineligible and adjust your pricing. Also, if you charge a shipping fee, consider offering free shipping instead.
Is it better to match a competitor's price or offer more value (e.g., more units) at a similar price?
Both a competition-based pricing strategy and value-based pricing strategy can work. If you’re in a very saturated market, consider matching competitors’ pricing. If your goal is to build customer loyalty, see if you can offer more value.
