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Podcast (10k-podcast): Play in new window | Download (Duration: 32:30 — 29.8MB)
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“In the mundane act of naming a price, we translate the desires of our hearts into the public language of numbers. That turns out to be a surprisingly tricky process.” William Poundstone
So let’s talk about this. First of all, why does this even matter? More than ever, e-commerce entrepreneurs have had crazy rises in costs. Whether it’s shipping or raw material costs, they have shot up. Amazon ads costs have also gone up across the board. At least 50% year-on-year increase in Amazon ad costs.
Focussing on Amazon pricing and how it drives profits, the maths is pretty simple. Let’s come back to more mundane math that we can all grasp, but overlook, which is this:
If you have a $20 product, which has say a 20% profit margin, that means if you’re good at math, you are making $4 in profits.
Let’s say you increase the price by 10%. Let’s say also you can maintain that price and keep your other costs the same.
Well, guess what? Your profit has increased from four to $6. Yes, that isn’t a dramatic amount in absolute terms. But, it’s a 50% increase in profit for a mere 10% increase in price.
Now, can you just increase your price by 10%? Well, that’s an interesting question. Isn’t it?
In some cases, the answer is – yes, more than you might think! In those cases, this maths has got huge power. It goes straight to your gross profit line. Not only is it not abstract, but it’s not a casual matter. This drives huge amounts of profit if you get it right. That’s why it’s a subject worthy of serious consideration. And of intense action.
So one concept I want to talk about is price sensitivity. We all as sellers tend to assume that all products are very price-sensitive on Amazon. At least most people I’ve ever worked with or spoken with. Back in the day myself, I’ve done that as well.But in the 10 K collective mastermind, we’ve found a different reality on the ground.
Learning how price sensitive your products are is a critical piece of your Amazon pricing strategy. But it’s a bit more subtle than that. From the mastermind, it seems that three categories have emerged of price sensitivity on Amazon.
First of all, some products are indeed quite price sensitive. So if you raise your price and the competitors keep theirs, then you find that the sales drop off. And if you raise your price a lot, they drop off a great deal.
Sometimes it’s caused by the competitors lowering their prices. Sometimes that kicks off a price war. Of course, we’re all incredibly familiar with that. However, there are new forces coming into play now. Sometimes you and the competition might keep prices the same but still see price sensitivity. Consumers become more price-sensitive because they feel under financial pressure. That’s a very strong trend and set to continue.
For the foreseeable future in mid-2022, they will be feeling the effects of inflation. Who knows what comes next? We already have inflation. A recession may well be to come, probably with rising unemployment to follow. All of these reduce consumers’ purchasing power.
So with all that at play, that sounds like the mundane boring and rather depressing reality of the normal price sensitivity.
However, some of the more savvy members of the mastermind have discovered some products are quite price insensitive. That is to say, you can raise the price quite a significant amount before demand drops. That’s a dramatically powerful discovery! And thus a key part of Amazon pricing strategy.
So you raise your price by 10% and you maybe increase your profits anywhere, depending on your profit margin From 30% to 50 per cent or more.
One of the mastermind members that sells a lot of products has got a good business, but they have pretty thin margins on the individual products. If are looking at a product that sells for 10 pounds and you make one pound profit. Guess what? If you can increase your price by 10%, that extra pound doubles the profit.So the thinner your margins are, the more significant it is to find those products that are price elastic.
The third category is more common. Those are the products whose prices you can raise, but which will need some extra marking work to justify it. And sometimes you will need to tweak the product mix as well.
Now there are lots and lots of clever things that the price consultants out there at SKP advise. For example, you may have noticed the shrinking size of packets of some consumer products over the years. Products keep the same price but get gradually smaller or lower in quantity.
Let’s say you have a hundred-gram bar of chocolate that cost a Euro, and now it’s 90 grams but it still costs a Euro. Say 3 ounces and a dollar if you prefer American measurements.
I’m not suggesting that as an easy win. It’s one thing you can consider of course. But that means rejigging your physical products, your packaging. So I’m going to stick with this series of profit maximization videos and podcasts and content to the basics. This means you don’t have to change the actual products very much.
Now we are getting into the world of practical Amazon pricing tactics. So how do we actually exploit this theoretical ability to explore pricing to maximize profit? Well, roughly in order of ease of use here are 5 pricing tactics for Amazon sellers …
I strongly suggest using an automated system. And frankly, the only one I know of for private label sellers is Eva, which is why we keep going on about them because they’re very powerful.
And you can get discounts and deals at amazingfba.com/Eva.
Really easy, if your product gets sold, Mass numbers or can do if you’re seeing orders coming through for multiple units, that’s the clue. That doesn’t apply to some products. In some cases, there won’t be enough profit margin to do any kind of discount. In those cases don’t use this tactic.
But for some people this tactic can be very powerful.
Lots of things you can do with that. But broadly speaking, if people will buy one unit and they might buy two units, then they’re quite like to be in the market for four units. What about 10? What about 20?
Getting the amounts right is a thing you’ll need to find out by experiment. So I suggest you bundle them at home or use the third-party warehouse or your own warehouse stuff, depending on the size of your operation.
I don’t suggest that you hard wire it in don’t get it done in the factory in China for now. That’s not the way to experiment with bundling sizing, in my view. You can do that once you know what sells and what the sales velocity is.
This is about getting a small version or a cheaper version or less quantity. If you sell a 330-millilitre bottle or whatever that is in fluid ounces, 8 fluid ounces, then sell a half-size one of perfume, dog deodorant… whatever it is you’re selling.
This is specifically about optimising your listing to gain a higher price, but for about the same conversion rate.
Let’s get into the details so you can construct your own Amazon pricing strategy from this tool-set.
There’s repricing using a repricer. Now, this is counterintuitive, which is typical for a lot of Amazon pricing strategy. Bear with me.
I’ve just explained how complex the psychology of all this stuff can be. And now we’re suddenly talking about outsourcing it to a mere machine.
Well, there are machines and machines. Rules-basedRules based systems are indeed a bit primitive for this situation. But an artificial intelligence engine can be powerful.
The best people I know for this are the guys at Eva. I believe they are the only people who really deal with private label situations.
If you head over to Eva using this link, you will see my coupon code over there, and I’m happy to get you a large discount on your first month’s subscription.
But that is really the only with the right tool that repricing that it is an easy win.
Manual repricing, repricing by hand, is probably the hardest of the repricing tactics the mastermind members use.
Both approaches to repricing, by the way, are used in the mastermind. Some people have manually repriced using a member of staff full-time. In some cases, other people have used a repricing engine like Eva and are getting strong results with it.
So that’s the first thing is using a re-pricing engine of the right kind. And that’s such a big area that I’m going to devote a whole podcast to re-pricing. It’s a powerful pricing tactic, but you need to do it the right way.
In fact, using automation the right way is a key part of Amazon pricing strategy in general.
The second tactic then that’s pretty straightforward is really very easy one. That is: tiering coupon codes.
We all know about the ability to create general-use coupon codes or one-time use code. So I’m talking about general use codes on Amazon that are out there. We are not talking about one-time codes (individual codes) so often used for product launches. Instead, I mean promo codes ones that are out there all the time on your listing. Codes that are available to the general public.
The tiered system is something most sellers don’t know about or don’t use.
But if you’ve got certain types of products that lend themselves to being bought in bulk, it can be a powerful way to drive unit sales.
The fantastic news? You can sell the products at least in multiples, then even without bothering to bundle your products into packaging. Together, you can still sell 10 units, 20 or 50 units, whatever, add a discount in one order.
And I’ve done this a lot in the past, used to sell products to choirs and orchestras. Being institutions and groups, they would happily buy products in bulk. They used to buy by the tens, the twenties, thirties, fifties, and even hundreds when I gave them a nice discount. And I just used the Amazon tiered coupon system.
But Michael, I hear you saying. If you are talking about profit maximization, why are we discussing discounts? Well, another key part of Amazon pricing strategy is to differentiate between profit per unit, profit per order and profit per month.
For starters, you don’t have to give a big discount. If you give a 10% discount for ordering 20 of a product, although your profit per unit is going to be lower, your profit per order is much, much higher.
Especially if you’re paying for traffic, it is potentially much more profitable. Because you pay per click and if one click converts, you’re selling say 20 units at a go rather than one.
So if you’re selling units, somebody for $20 each and you discount 10% say to $16 then you. Sell 20 units and you’re looking at a much higher revenue.
Now, of course, this only works if you don’t discount too hard and remove your profit margin. And you need reasonable profit margins there to start with. So you’ve got to tailor it according to your own situation. But that can drive a lot more in absolute profits, even if the percentage of profits is a bit lower per unit. And if you’ve got a lot of stock, you want to move through at the same time, that can be a powerful combination. Better profits AND better cash flow.
Now, the next pricing tactic I’m going to talk about should drive all types of profit. The absolute profit, the relative profits and the absolute profits. That tactic is bundling.
This is an obvious thing to do as well. But many people don’t do the obvious. And I’m here to tell you that the people in the mastermind who’ve done it have great success with this. It’s been done at some scale now, and in many different product areas.
Just because it’s obvious doesn’t mean everyone’s doing it. And if your competitors are doing it and you are not, then you’re handing the competition a stick to beat you with. So use it yourself instead. And if your competition isn’t using bundling properly, then it’s there for the taking for you!
Lastly, many sellers use bundling as part of their Amazon pricing strategy but they don’t realise how far they can go with it.
So bundling is very simple but you shouldn’t overlook its power. The difference between that and the tiered coupon codes approach that I’ve just suggested is simple. You put all the products into packaging together.
So you could have individual units of something selling and you can create a two-pack, a three-pack, or five-pack of the same kinds of things. If you sell a bundle of varied things, you can bundle the things together in bigger or smaller bundles as well. For example, you sell a shoe cleaning kit with a brush, black shoe polish and a shoe polishing cloth. In which case, you can experiment with adding brown polish, spare shoe laces, or a little shoe bag, for example.
It’s not rocket science to do this. If you send the stock to Amazon from your home or from a third-party warehouse, it’s pretty straightforward to do. If it goes direct from say China or from your factory somewhere else, you are going to need to get your factory to do it.
So my advice is very simple: start your bundling experiments with very small numbers. So if you have normally individual units and you’ve got them in a third-party warehouse somewhere, you’re in good shape. Get them to bundle together two of the units into one package.
Yes, you may need to use some temporary packaging until you’ve got things scaled. I wouldn’t suggest scaling and committing to new packaging until you have data showing that it’s going to work well. And at that point, you can go away and get bigger packaging made etcetera.
Anything could become complex if you work that way! But I would start with the simplest possible version.
If you literally just take two cardboard basically cubes of product two units in each package, for example, you could wrap the two together. Just make sure that you’ve obeyed Amazon’s instructions about packaging. Again, it’s not complex. And it’s really worth doing.
One important thing about the psychology of pricing is simple. A lot of people aren’t very good at doing the maths! So if everyone else is bundling, say two units, four units, eight units, then why don’t you bundle nine or 12? It’s harder for people to do the maths.
A majority of people won’t be doing the maths that vigorously. It depends on how price sensitive your market is and different categories will vary on that front. The key thing is to avoid direct comparisons. Avoid being apples compared with apples!
The next pricing tactic is pricing related. That is: loss leaders of small bundles or small sizes, depending on the type of product you’ve got.
Again, this demands a more sophisticated approach to Amazon pricing strategy than merely maximising profit on every unit sold. But done right, this can be a great way to grow profits AND grow your market share. Aka stealing sales from your competitors!
One of our mastermind members has been very successful with this. He’s pushed into it by one of his competitors. He and his business partner responded by producing a small version of their product. They hoped it would be a loss leader.
Specifically, they hoped consumers would click on the listing when they saw it because it was cheap. Therefore, it would sell a lot and thus it would rank high in search results.
They set their listing up as a parent and child relationship. So consumers who clicked on the small variation would see their other variations. Those variations have a bigger size and an even bigger size of the products – and thus higher price points. And then, my member hoped, consumers would buy the higher-priced items. Thus driving profits.
I’m delighted to say that has all happened according to plan! But even better, they’ve discovered that they’re actually making a profit – albeit a small one – on the small size as well, because it’s selling so easily. So going in with a loss leader has proven to be a very successful pricing tactic.
The product I mentioned is very much a luxury product but it still works. In price-sensitive times, consumers still want a little bit of luxury. They just don’t feel they can justify what they used to spend. This tactic can help them and you.
Say they used to spend $25 on a luxury product. Maybe they need to spend 15 now. And if you engineer it correctly, then you can probably make a profit on the front end. But even if you don’t, you should make a profit from the parent listing as a whole (that is to say the group of variations).
The key to profiting is to have the more expensive products priced correctly. On the one hand, they need to be profitable for you. On the other, you need to price them against the small size to look like better value.
Say your small version of the product is $15. If you offer a 10 pack, then it’s proportionately a lot less per item at $99, for example.
This is great news for the coming downturn or recession.
You can probably still inhabit the affordable luxury position using this pricing tactic. That’s great because it’s much more profitable positioning than bargain or value for money . Just be smart about thinking about sizing and amounts of products. And remember to experiment before you order 10,000 units!
The last thing that the mastermind members are doing is conversion rate optimization.
I’m going to talk about branding and CRO separately again, but I’m going to mention it in the context of pricing.
If you have a hundred visitors to a listing, if your conversion rate is 10%, then you’ll get 10 sales out of a hundred visits. And if it’s 20%, you’ll get 20 sales out of a hundred visits. And that implies the pricing stays the same and the number of sales goes up.
But with an improved conversion rate and a more powerful brand you can focus on defending your price instead.
Let’s say you currently have 10 people out of every hundred visitors buy your product at $20. That’s a 10% conversion rate. Yes, you can work on your listing to have say 15 out of 100 visitors convert at a $20 price.
But you can also choose to have 10 people out of a hundred convert, but at a $23 price. The latter explodes your profit per order and especially per unit. That is fantastic news for your gross margin.
So conversion rate optimization should become an obsession. It’s always a nice to have. Now it’s an absolutely essential to have in the straitened times we live in.
We’ll be more specific when it comes to the branding-specific episode in this series. For now, there are 3 simple things that I see people doing well. And in some cases, 3 mistakes sellers are making that are killing their profits.
Benefits are the outcomes. You need to tell people what they’re going to get from using your product. It’s particularly true in the US and similar in the UK. It’s not how you should sell to Germans. They like features. They’re very technically minded, – it’s a different world out there!
But if you’re selling to English-speaking markets, focus on clear benefits, not features. Not “We have 4.5-millimetre thick polypropylene plastic”. But “This is almost unbreakable compared to other iPhone cases.”
You’ve answered the “So what?” question.
The other question that consumers have is “Why should I buy your product, not Joe blogs over here?”. And you really need to answer that question. The answer is differentiation.
Your product may be engineered to be different from the competitor’s products. I hope it is! But we all know re-designing products is a long and expensive process. It can take months. That’s especially true if you getting products from China or India. We’ve all been there!
So let’s say your product itself isn’t very well engineered to be different. Well, you can still structure your listing to maximise differentiation.
You need to articulate more clearly than your competitors how your product is different to their products. That’s about articulating in the fullest sentence, not just using words.
And that brings me to the last point. Yes, images have immense conversion power in e-commerce. But before you worry about the images, you need to clarify your benefits and your differentiation points.
Only then should you try and write those into sales copy. It needs to be coherent language that is punchy and direct and exciting. And which reflects your brand’s values and style.
And only after you’ve done the copywriting in my experience, is it the time to go and hire photographers or graphic designers.
The reason for this is simple: the brief. You’ve got to explain to your visual experts in clear words what you want. Yes, you can use images as examples, but that’s not enough. Skipping a clear brief will get sub-par results.
So a brief which I’ll be talking about soon with the professionals actually, but the brief is critical. It’s hard enough to communicate with a photographer or graphic designer exactly what you want from them. If you’re not super clear in your mind exactly what you’re trying to communicate, it’s almost impossible.
What are the benefits of the selling points? What outcomes that people get from using this? Yes you have to link them to features. Benefits can’t be just abstract. But most sellers I work with go on about features far too much. So link benefits to features and you’re halfway there.
I was speaking to a very fine visual marketer, Daisy Sepulveda today. She runs a model agency and they do fantastic product photography for Amazon.
We are actually going to discuss how to write a good brief soon. So stay tuned for that, because that is a missing piece. But an essential prelude to a brief is you being very clear on your message.
So these are all very practical pricing tactics. I’m trying to keep my feet on the ground and report back from what’s happening on the ground rather than abstract stuff.
That said, if you are interested in pricing strategy, then I’m going to recommend a couple of books.
The first book is by William Poundstone: Priceless, The Hidden Psychology Of Value(Amazon UK link)
If you like business strategy books, I think you’ll find that fascinating.
The other book is Pricing Power by Jason Miles of Omnirocket, formerly winning on Shopify. (Amazon UK link) And of course Jason is the co-host of The E-Commerce Leader podcast alongside me. We are going through Pricing Power principle by principle on that podcast.
So I’m not going to recreate that here, but just stay listening out for those.
Out of Jason’s 12 principles, I’m going to mention two or three that strike me.
I hope that you now realise the truth of this! If you don’t have a real Amazon pricing strategy, you’re at the least leaving a LOT of money on the table. Worst case, you’re risking your business. I hope this post has woken you to the power of pricing and the possibility of really being much more active with, and much more mindful about your pricing, then I’ve done you a favour. In which case, go get a copy of Jason’s book available on Amazon.
By the way, he’s an eCommerce operator par excellence, and very practical.
So, if you want a very practical do like this, don’t do this, then Jason’s book is the most practical one. I think the Poundstone is fascinating, but it’s more abstract.
It’s particularly tempting when you feel like the sky is falling in to run around like Chicken Little and start lowering prices. I see sellers doing this even though their cost prices are going up. It’s understandable. The sellers sense probably correctly, that the consumers are becoming more price sensitive.
Understandable – but in my view, wrong.
Are they more price-sensitive in your particular category? It really depends on your category. But you still do not want to start a price war if you don’t have a lower cost structure than your competitors.
And you don’t. Because there is a Chinese factory out there that is certain to be cheaper than you.
From experience, that is correct. You are going to keep testing and keep adjusting. That’s particularly true when everything is changing a lot, particularly consumer demand.
And that brings me back to the importance of testing things. So once again, I’m going to mention Eva, which is a repricing tool.
Two reasons why I think Eva’s really different to the other repricing software out there.
Firstly There’s plenty of repricing software for resellers. It tends to be rules-based. That means if it stops working the system, isn’t going to automatically adjust. That in turn means you’ve got to do a lot of manual labour in monitoring it. Or you just let it run – and lose money!
In contrast, Eva has an artificial intelligence engine. That means that their repricing learns from experience. That’s quite profoundly different from rules-based.
The second thing is kind of simple but complex at same time.
The simple thing is other repricing engines are just obsessed with price and maximizing profit. But of course, in reality, the biggest way to run out of profit is to run out of stock. Because when your inventory is gone in a product, your revenue obviously falls to absolute zero. And it stays at zero for as long as you’re out of stock.
Plus, we all know that also Amazon can reduce your rankings for the right keywords, etcetera when you go out of stock. Depending on the competitiveness of your category, that can really hit future sales too.
So going out of stock clearly has very bad consequences.
Why then would you want to price for profit abstractly separate from whether you have stock? Well, you wouldn’t. Stock control needs to be integrated with your Amazon pricing strategy to really drive profits.But of course, most repricers work in a sort of vacuum in that way. Whereas Eva has a stock control and replenishment engine that integrates with the repricing engine.
Now, I think that’s super smart. And even if you don’t use software manually, you’re going to have to think about that as well. We will be talking about stock control for that very reason in a separate post.
For all these reasons, I really do recommend that you check out Eva. If you go for the offer with them, then I’m offering a powerful bonus. If you are UK-based or based in Europe, and hit the mastermind criteria for the 10 K collective, I’m offering then you get a month of free mastermind. To be eligible, you need to be doing at least 40,000 Pounds or about 50,000 Euros per month in private label sales on Amazon.
So you can check that out at amazingfba.com/eva. And, if you want to get the bonuses, you’ll just need to send me an email at firstname.lastname@example.org and tell me that you’ve subscribed to Eva.
The other two things I’ve got to offer in relation to pricing is this: first of all, we’ve got a little guide about pricing. I’ve co-created it with Eva because they are repricing experts. It’s not super sophisticated, but it should give you several thoughts about pricing on Amazon. That’s at www.amazingfba.com/repricer.
You’ll get a little guide on that and a few emails in a little series. Something you should consider getting, if you want free help for me on that. Given how central Amazon pricing strategy is to maximising profits, I think the better informed you are, the safer your business is going to be!
Last but not least, if you’re not sure where you should be focusing to maximize profit, then I can really help you. I’ve been working it for quite a few months now on a profit assessment. The purpose is simple. It’s to diagnose where you have options and possibilities to increase your profit.
It is there to find your biggest profit killer, the thing that’s losing you the most money. Plus how to flip that on its head and make it a profits/ growth option.
So if you want to find that out, go to www.amazonprofitquiz.com.I hope that helps and I want to give you the tools to do the job. So the assessment tool, Amazon profit quiz.com. I think you’ll find it really useful.
If you find that it’s flawed or you think that the results are wrong, just email me your findings at michael@amazing fba.com. And I’m happy to tweak the system with your assistance to make it the best it can be. That said, we have already road-tested it and it seems to be working well for sellers. It should take you all of 60 seconds to take. Check it out here.
Amazon pricing strategy is so important and Repricing is the hidden gem in this area. So that’s why I’m devoting the next post in this series to repricing. And then the overall series is about profit maximization, including stock control.
Then we’re going to talk about stock control, why it matters and how to achieve it manually. We will also talk about how you might want to look into using systems to do that.
After that, we’ve got profit measurements to give you clarity about the numbers that you need to make informed decisions.
Later we have Reimbursements; then Amazon ads and how to cut waste from that- very big cost to a lot of us at the moment. After that, Branding, as I’ve mentioned today, already and conversion rate optimization are next. Last but not least, we’ll discuss business model clarity as well.All of which is to serve one aim: maximise your profits. Or to protect your profits in the coming storms.
If you want to be kept in the loop, the best thing is to join the Amazon Insiders email list here.
Happy hunting and good profits!