Pricing is not easy, whatever some people say. It’s one of the most important decisions you will make in your FBA business, but it’s also a really difficult one.
It’s particularly difficult because you have to strike a balance. Most goods are what economists call price elastic, so that if you reduce the price, you will sell more units, and if you put the price up, you will sell fewer units. Customers want to pay as little as they can.
If you just wanted the maximum sales, you could price your product at a dollar. But you wouldn’t even cover Amazon fees, let alone your product costs. If you wanted maximum profit margin you could price it at $100, but if your competitors price the same product around $20, you will be lucky to make any sales at all.
So you have two different ways of looking at the pricing decision.
1. Add up all your costs, and then apply a mark-up to the product so that you are selling at a profit. (Ah, but what should the mark-up be? That’s the difficult bit!)
2. Look at what your competitors are selling similar products for and aim to equal or beat their value proposition. If your product has extra features, for instance, you might say “We’ll sell for 10 percent more” rather than matching the price.
Ideally, you’ll find that if you calculate your potential price using both these approaches, you will have a bit of wiggle room in the middle. So for instance, if your total product costs and Amazon fees add up to $10, and you want 100% profit, you will aim to sell for $20. If competitors are selling between $19 and $25, that gives you a reasonable zone of discretion. But if they’re all selling for $18, you have a problem.
You need to do your market research before you order your product, but things change, so you’ll need to do it afresh once your product is in stock. The wider the range of price that you could sell at, the more choices you have. Remember the range, because if you want to tweak the price later on, it’s your reference point.
Make sure you know which way the market is heading. If prices are going up, that gives you a lot of choice in pitching your price a little higher. If you’re in an area like computers where prices tend to trend downwards, you may have less discretion.
You also shouldn’t just do your price comparison on Amazon – you need to look at what things cost in the mall, too.
What do you do if you want to price your product to undercut competing products just for a few weeks to get started, but then raise the price? If you’re clever, you don’t come in at the low price. You come in at a higher price but you use a special discount offer or coupon code. That gives customers the feeling not just that they’re getting a bargain, but that the real value of your product is the higher price rather than discounted one.
You’ll need to tweak your prices from time to time. Monitor your competitors’ prices regularly and be prepared to respond.
Be prepared to test a price rise from time to time. If it doesn’t stick, and you see sales slackening, you can reverse it. If it does stick, of course, you’re making more profit for every unit you sell – so you could test another rise. Watch out though, because if your price goes up too much, Amazon may move you down the sales rankings. Our guess, 20% is okay, more than that in a short period and you may be taking a risk.
In bricks and mortar retail, pricing is often something that’s done once, when a product is introduced. But on Amazon, you can move your prices whenever you like, so you are much more free to try things out. Make sure you take advantage of that freedom!
