Pricing seems like a simple concept- sell it at a price higher than you paid for. Simple, right? Well... not really.
Having the wrong pricing strategy, can cost you thousands of dollars whereas having the right pricing strategy can make you thousands. In fact, according to a recent study, just a 1% price improvement could result in a 11% increase in profit. That's why it's important for every seller to get their pricing right for maximum profit.
In this article we're going to go through just about every aspect of pricing. So buckle-up buckaroos, there's a lot of information in this one.
The first step you need to do is calculate your product cost. You should do this for every single product in your inventory, even item (children) variations as even slight differences can add up quickly. To calculate your cost accurately, you need to assess all of the following:
- Raw materials: Any materials used in the manufacturing of your product, such as metal, wood, plastic, cloth, etc.
- Labor: Use of a supplier’s workforce and time to create your product
- Assembly: The actual work performed to bring all the components of your product together, including labor and machine costs
- Storage: Housing your inventory for order fulfillment; these costs include your own if you fulfill your orders (Fulfilled by Merchant), or use Amazon’s services (Fulfilled by Amazon)
- Shipping: Moving your products from the factory to your inventory storage facility, whether it is your home/office or an Amazon fulfillment center anywhere in the world
- Customer Return Fees: You need to factor in customer returns. When starting out, expect at least 2% returns (this is a high number, but you want to be conservative). Also note, Amazon takes 20% of the original commission as a return fee
- Marketing: Your content and ad campaigns (online and offline) to advertise your product to customers in addition to content writers, marketers, graphic artists, etc.
- Returns: Lost profits due to customers returning your product plus Amazon keeping 20% of the original commission as a return fee
- Taxes: The fee that governments charge per transaction, including state and local sales tax
- Miscellaneous: Additional overhead costs of doing business such as accounting fees, insurance, repairs, etc.
- FBA fees (If Applicable): Monthly subscription to FBA services, including fees for inventory storage, per-item, and referrals
Once you've gone through each item and figured your product cost, you need to add them all up and divide by the number of products you will produce in a given time period to get your average cost per item.
Afterwards, you need to get your gross profit margin target or GPMT. This value represents the profit percentage you want to generate per item you sell.
To get GPMT:
To save you time, you can download our Pricing Calculator Spreadsheet here. When playing around with your price, keep in mind that most retailers aim for at least 30-50% profit. Anything lower and your profit can be eaten up by unexpected costs, which happen quite often.
When doing this, you want to figure out and be able to recite from memory the following:
- Lowest price where you're still profitable
- Break-even price - this is a running price based on remaining inventory
- Max Price - the highest price you can sell your product for (when starting out, you can get this price from your highest priced competitor). As a
- Floor Price - the lowest price you're willing to go
- Upper Floor Price - The price you need to get on the first page (who has the first spot now and what are they priced at?)
Once you know these numbers, you'll be able to create confident pricing strategies, i.e., you'll know what is within your products price range and what is not.
When pricing your product(s), you need to always be thinking about your target audience and how they'll respond to the various prices. To do this it's best to create a customer profile of your target audience and attach characteristics to these profiles so that you can easily identify their behavior to price changes. The more granular you can get your customer profile, the better, but for brevity, we're going t only focus on 3 different customer profiles:
- Money does not appear to be an issue
- Tends to prefer convenience above all else
- Customer service is important for these shoppers
- Bargain Shopper
- Looking for the best deal
- Jumps on a good deal
- Fear Of Missing Out (FOMO) gets the best of these shoppers
- Prefer quality of quantity
- Will wait for the right product
- Critical buyers (more likely to leave negative reviews)
You should always consider the habits, tendencies and predictability of your customers as you price your products. We've created a more mathematical approach to identifying your customer profile. It's good to update this model periodically so that you can get a good feel for your customer base.
Some of your competition may have already figured out the perfect range and price point for pricing the product profitably on Amazon. However, many others may have crazy pricing strategies that don't match the target audience or the perceived value of their products. It's important to take note of both the outliers (crazies) and the baseline in order to figure out your product pricing.
When looking at your competitors product, see what customers are saying about it. Take note of the negative reviews, are there complaints that you know your product won't have? Be honest and ask yourself, is the perceived value of my product greater or lower than this competitor? It's important to understand the perceived value of your product in order to price competitively. Knowing this will allow you to narrow down your target audience.
For example, if your product clearly offers more value than a competitor, pricing your product higher gives the impression that it’s better than other products in your category. However, be sure to include your game-changing features and benefits in your product description to highlight your product’s strengths over the competition.
However, if your product has the same perceived value as your competitors, pricing your product a bit lower may attract the bargain shoppers to your product. WARNING! Be wary of this tactic as underpricing a competitor can quickly turn into a price war and a race to the bottom.
Pricing Tips and Tricks
Dealing with price fluctuations
If you're in a competitive market, then you'll need to constantly be keeping an eye on your competitor's pricing. One of the easiest ways to do this is to use repricing tool. A good repricing tool will keep an eye on your competitors, as well as your own product and adjust pricing based on rules you've created. A repricing tool is a must-have if you're in a competitive market that has frequent price fluctuations.
Keep your prices stable (as much as you can)
As we've mentioned before in previous articles, there's a lot to gain from changing your prices often, but you don't want to change them too often and by too much. Big swings in prices can turn-off your customer-base and ultimately have a negative effect on your bottom-line.
Some exceptions to this rule are:
- Quick boost to your sales rank
When you're starting out, it can often pay to decrease the price of your products to encourage sales quickly.
- Cross-selling products
Offering discounts to your products on bundled sales can increase your sales and bottom-line.
- Holiday Deals
Black Friday, Cyber Monday and other sales holidays are a good time to lower your prices
- Stock Clearance
In case you have overstock or just need to clear out some inventory.
Alright, if you read all of this and have a firm grasp on the concepts, then you should be in a good place to price your products. As always, if you have any questions, ask us in the comments below!