Let’s continue our journey into the world of pricing strategy. Today’s post is going to be a bit of an economics lessons as we dive deeper into the world of pricing methodology. As eCommerce sellers we need to understand all the different pricing options because one size doesn’t fit all when it comes to your inventory. With every product in your inventory you need to have a goal in mind. We all know that goals can be a bit of an ambiguous term so let’s be more specific about what we should be thinking about.
Pricing objectives give direction to your entire pricing process. Determining your objectives are the first step to pricing your product. Until you understand these objectives you won’t have the information you need to implement the pricing method to help you achieve your goals. So what are some of the different pricing objectives that you can choose from? Let’s look at few examples:
- Maximize Profit
- Maximize Revenue
- Optimize Sell Through
- Maintain Status Quo
- Liquidate Stock
- Capture Market Share
Sometimes you’ll have more than one objective. Other times you’ll find that your objective has changed. Regardless of what your the objective might be take some time to figure out exactly what it is. At first this might seem difficult or unnecessary but with time and practice it will become second nature and the value of this exercise will become clear.
The Takeaway: Make sure to understand what you’re trying to do before you try to figure out how to get there.
After you’ve determined your pricing objective(s) you need to set the right price level to achieve that objective. You determine the appropriate pricing level by applying one or more of different pricing methods. Today’s blog will be focused on reviewing three different pricing methods:
i. Cost-Plus Pricing
Cost-plus pricing refers to a pricing methodology where your price level is determined based on the total cost of an item plus a pre-designated markup. It’s important to remember that when engaging in cost-plus pricing you’ll need to determine the total cost for an item which includes shipping, prep fees. AZ fees etc. This is one of the simplest methods you can use to price your products. To determine your price point using the methodology you ‘d increase your total cost by a fixed percentage to determine the price point. For example let’s say we have an item that costs us a total of $100/product and we’d like to generate a 50% return on this item. In such a case the final price for this product would be $150. If you’ve ever used a repricer you’ll notice that most of them have some feature which allows you set prices based on a cost-plus methodology.
The Takeaway: Use cost-plus pricing to determine the floor price (lowest price) that you are willing to sell an item for at any given point in time. Using this method you will can guarantee a certain return as long as your item sells at the predetermined price point.
ii. Demand-Based Pricing
Demand-based pricing refers to a pricing methodology where price is determined based on demand for a particular item. When product demand is high you’ll notice that items have lower sales ranks on Amazon. If demand remains high and outpaces supply levels you’ll notice that prices tend to rise as sellers aim to maximize profits. On the other hand when demand is low you’ll notice that items have higher sales ranks of Amazon. If demand remains low and seller have excess supply you’ll notice that prices tend to fall as sellers look to attract more customers. To successfully engage in demand-based pricing you need to have a solid grasp of sales rank and competition. Remember as we covered in the our last post Understanding the Buy Box the vast majority of Amazon sales are generated through the Buy Box so when determining pricing levels don’t look at all prices but specifically those of offers competing for the Buy Box.
The Takeaway: Use demand-based pricing to determine the current price target for an item. Initial pricing should be based on the current Buy Box. A detailed understanding of sales rank history and competitor supply levels will help you project whether the Buy Box price will remain stable or adjust up/down over time.
iii. Competition-Based Pricing
Competition-based pricing refers to a pricing methodology where a business considers the price points of competitors’ products to set the price of their products. The business can decide to charge higher, lower, or equal products based on the price of its competitors. Higher prices are garnered when a premium product is being offered whereas lower prices are realized when a value product is being offered. I find this methodology becomes the most useful when you are looking to price a product that is similar to another product. Or when you are bundling different types of products together.
The Takeaway: Use competition-based pricing when you have a product that is similar to other products on the market. Remember consumers consider many different things before deciding to make a purchase. Competitively pricing your products relative to competitors helps create value in the eyes of the consumer.
Next time we will dive deeper and discuss how to create dynamic pricing strategies which take into account multiple pricing objectives and pricing methodologies. If you like this blog post and want to see more content like this make sure you check out the FBA Simplifiers Facebook Group