Product Pricing Strategy on Amazon

Pricing is critical to the success of any product and brand.

Go too low, and you're leaving money on the table, hindering your profitability, and slamming a cheap image onto your brand, but making a bunch of buyers ecstatic if your product doesn't suck.

Go too high, and you're killing your conversion rates, slowing down your growth, and limiting your obtainable market share, but executing on your dream of building an aspirational brand - after having bought a few Luluelemon's shares and yoga pants, and reading Shoe Dog.

But on marketplaces like Amazon, pricing is an even trickier art, where your product's success is dictated by algorithms and a virtually-infinite digital shelf you're competing in.

Start with your fully-blended break-even price

Before diving any deeper on advanced pricing strategies on Amazon, the very first step is computing your fully-blended break-even price.

Now while this sounds meh and utterly obivous, the number of brands that have a partial understanding of their costs when selling on Amazon is astounding.

Turns out many brand operators are just bad at handling numbers, get lost navigating Amazon's maze of reports, are lazy to do the work, or love to think they're profitable when they're bleeding out money on each sale.

A true fully-blended break-even price is a selling price where you break-even on all your costs pertaining to selling on Amazon. All your costs.

This price should hence include:

• your gross product cost, or how much it costs you to manufacture or purchase one unit of your product from your supplier
• your duties cost
• your warehousing cost, or how much it costs you to store your inventory in your warehouse or third-party logistics partner
• your shipment processing and storage fees, or how much it costs you to get the product from your warehouse or supplier to Amazon's fulfillment centers, and have Amazon process it, dispatch it, and store it over time
• your marketing cost, or how much it costs you to advertise your product using notably Amazon Ads to generate a single sale, as well as the amount Amazon charges you in referral fees for it
• your fulfillment cost, or how much it costs you to have Amazon fulfill an order using FBA
• your damages and returns cost, or how much as a reserve it costs you to handle damages and returns from customers on a pro-rated basis
• your taxes cost
• your handling cost, or how much it costs you in software and direct labor that is attributable to making a sale on Amazon

The above costs, when combined, would truly represent your real unit Cost of Good Sold (COGS) on a fully-blended basis when selling on Amazon. Such break-even price should be your very first step towards establishing your target selling price on Amazon.

Analyze your competitive environment through search

Amazon is first and foremost a search engine where the search bar is said to be generating over 70% of sales, significantly higher than discovery-based browsing.

One fascinating component to Amazon relative to other search engines like Google is how its algorithms works, and how pricing plays a key role in it. Price your product too high and out-of-market, and you'll bury it in the depths of pages 3 and below.

When selling on Amazon, your number one goal should be generating organic traffic and hence organic sales. After all, you're already paying so many darn fees, you don't want to plough too much extra money into ads.

To generate organic traffic, you have to rank at the top spots on page 1. While the #1 spot may secure a 25% to 45% click-through-rate (CTR) on non-branded search terms, the #10 spot can already push you down to as low as 2% to 5%, while the bottom of page 1 would yield less than 1%. Yeah, that drops quickly.

That is why you want to dissect page 1 and page 2 search results on your target non-branded search terms to have a better grasp of pricing dynamics in the competitive landscape, and better understand pricing distribution and how it correlates with specific organic ranks.

Set minimal viable price and optimal price targets

As you conduct the previous research and analysis exercise, you should be able to come up with pricing ranges that are compatible with specific keywords, and with specific organic position ranges.

Combine this data with your previously-computed fully-blended break-even price and check if it's even viable to be selling on Amazon, or if you should just stick to your Shopify-powered owned-operated store that fully relies on Zuck's benevolence and your ad dollars.

Indeed, you may require having a selling price that would be just too high for the marketplace and hence uncompetitive, likely requiring you to spend significant investments in advertising to establish a presence on Amazon.

If Amazon pricing dynamics are compatible with your product and positioning, you can now move to using cost-plus pricing or markups to come up with potential selling prices.

A minimally-viable selling price would be one that is probably at least 20% higher than your fully-blended beak-even price, meaning it would yield a 16% contribution margin (20/(100+20)).

A good selling price would be one that is likely 40% to 50% higher than your fully-blended break-even price, granting a 28% to 33% contribution margin.

A great selling price would be one that is likely 60% to 100% higher than your fully-blended break-even price, generating a 37% to 50% contribution margin.

Take repeat purchase behavior into account

Time to get more nerdy and dive deeper into numbers.

Looking at pricing from the viewpoint of a single purchase per customer is entirely different from when you take into consideration repeat purchase behavior.

Your typical mattress purchase would be made every 8 years or so on average, while your ineffective weight loss supplement will likely be purchased every spring season. This means the profit you should be ok with per order may vastly differ depending on the repeat purchase profile of your product.

For a high-repeat product, you can stomach lower contribution margins, while for a low-repeat or no-repeat product, virtually all the lifetime profits you may expect from a customer come from their first purchase, forcing you to have to maximize your contribution margin on that very first sale.

The quickest way to analyze your repeat purchase performance is through Amazon's Repeat Purchase Behavior report, or by analyzing the orders in your owned-operated online store.

Your goal is to compute the average number of orders per customer per timeframe, such as during the first 3 to 12 months after their very first purchase, then the subsequent 3 to 12 months periods.

If you want to take the calculations deeper, you will go as far as doing this on a cohort-basis, meaning for specific groups of customers segmented by purchase month or quarter, by age, or by territory.

Ultimately, you would ideally compute your Customer Lifetime Value (CLTV or LTV) and how it compares relative to your Customer Acquisition Cost (CAC) via the LTV:CAC ratio, where a 3x ratio and higher should be your target.

Iterate with incremental pricing changes

Pricing isn't a set-it-and-forget-it kind of thing, especially upon just launching a new product.

You should be conducting sensitivty and correlation analysis, running small time-bound tests where you change your price in increments of up to 5% to 7% - any steeper change might make you lose the Buy Box.

The key metrics you should be monitoring in terms of impact as you make your pricing A/B tests are organic keywords ranks, organic share of voice, conversion rates, ACoS, and TACoS.

These tests should run for as long as necessary until you generate a statistically-significant amount of data, which may boil down to at least 20 orders, and ideally up to 50.

As you gather the results, patterns will emerge as to the optimal price that maximizes margins, sales velocity, organic performance, and TACoS taken as a whole.

Leverage Surjed services

Got a margin and profitability challenge? You want an outside look at your pricing and recommendations? Surjed can help with a one-time consulting project or recurring work.