How to optimize your Amazon pricing strategy to maximize revenue and profits, from coupons and sale pricing to shopper psychology
This post is by Paulina Masson, Founder and CEO of Shopkeeper, written with Paul Maplesden.
Amazon is a very price-sensitive marketplace, so using the right pricing strategies will dramatically increase your ranking and conversions. As a successful Amazon private label seller, I’ve experimented with and analyzed dozens of different product pricing methods to optimize product sales.
In 2018, I was lucky enough to present as part of the AMZ Seller Summit where I talked through some of the most effective pricing strategies for private label vendors – whether you’re using Fulfillment by Amazon (FBA) or taking care of logistics yourself.
I’d like to share these Amazon pricing strategies with you to help you maximize your sales and optimize product pricing. You’ll learn about discounts, pricing psychology, sales pricing, changing prices, types of buyers, split testing, and more.
A general approach to Amazon pricing strategies
Before I discuss specific pricing strategies and approaches, it’s worth exploring some general principles you’ll want to apply to every strategy, and the reasons behind them.
- I’ve designed these strategies so they’re useful for both new sellers and veteran vendors. New sellers can try out a variety of strategies to see what works for them, while veterans can use these findings to refine pricing strategies that are already working.
- The cheapest price is seldom the best price – consumer psychology and unit economics both tell us that pricing a product as the cheapest isn’t optimal for your overall profits, and that’s reflected in the strategies below.
- Your search ranking is extremely important on Amazon, so you should always apply strategies cautiously so that you don’t lose rankings that you’ve already earned. That means making gradual, small, considered changes that deliver measurable results.
- Consumers are not completely logical or rational when it comes to buying decisions. Some of these strategies are based on consumer psychology, and I’ve shared the ones that work best.
- Pricing is just part of your seller success. You’ll also need to use best practices like finding the right product keywords, using beautiful, attractive photos, optimizing using software tools, and doing competitor analysis.
- Different pricing strategies may be useful for different niches or items. Test out how the pricing works to find the optimal one for each SKU.
Let’s get into it.
1. Use coupons to provide compelling discounts
Shoppers love discounts, and psychologically a promotional price or discount coupon can be more effective than simply lowering the price. There are several benefits to this pricing strategy:
- Amazon displays a small but eye-catching label next to items where a customer can apply a coupon.
- Customers often psychologically dismiss the cheapest product on a page, but you can actually price your product a little higher, and then use a coupon to bring the price back down.
- Customers will click through to their cart to check if the coupon has been applied. Once they’ve done that, they’re a step closer to completing the purchase.
- Customers often feel lucky when they see a coupon, and believe they have found a bargain, which can compel them to buy.
- Many sellers do not take advantage of coupons, so your offer will stand out from your competitors.
- Coupons increase the number of click-throughs and sessions for individual products, which can help with your Amazon search ranking.
How to use coupons in your pricing strategy
You can add coupons to your listings by going to Amazon Seller Central and clicking on “Advertising.” You have a couple of options for providing coupons, either as a percentage or as a fixed amount. I recommend simple pricing and discount structures, so I prefer offering a fixed amount off rather than a percentage. It’s easier for your customers to understand, which means they’re more likely to choose it.
Discount amounts that tend to work best are numbers that divide well into the original selling price. For example, if the price is $21, then a coupon offering a $3 discount is a good idea, as that’s one-seventh of the total price. If your prices are in round, even numbers, use round, even numbers as your discount amounts.
Once you’ve started offering discounts, check how they’re doing on a regular basis. Understand how different discount levels impact your sessions and sales. Split test different coupon amounts on your items so you can use the most effective pricing approach.
Amazon charges 60 cents for each coupon applied and used, so you’ll want to build this into your profit margin calculations. But it’s likely, surprisingly, that fewer than half of your buyers will actually apply the coupon.
Amazon does not offer discount coupons in every country, although it’s likely they will eventually introduce them in most regions. Keep an eye on where coupons are available, and introduce them as soon as you can. If discount coupons aren’t yet available in your area, you can use Promotions. It’s not quite as effective as coupons, although it will still give you a competitive advantage.
You can also find Promotions in Seller Central under “Advertising.”
2. Try sales pricing, but don’t expect too much
You might have thought about showing sale prices on your products. Amazon may choose to show sale prices on your items as a “strike through” of the manufacturer’s suggested price, with your cheaper price next to it:
- This can help consumers feel like they’re getting a bargain, especially if the regular price is much higher.
- Amazon does not always show the original price, although there are ways to influence this.
- Typically, Amazon only shows both prices if:
- The item is a best seller.
- The item has a high sales rank.
- The sales price makes the item a very good deal.
How to use sales prices in your pricing strategy
You can enter the original and sales prices for each of your products. The original price is typically listed as the Manufacturer’s Suggested Retail Price (MSRP) or a Recommended Retail Price (RRP). Amazon compares this price against the price you’re selling at, when deciding whether to display both prices.
If your product is already selling well, then it’s possible Amazon may show the original strike-through price. If not, then you will need to offer a substantial discount of 50 percent or more to get it to show.
Although sale pricing is a reasonable Amazon pricing strategy, it does have some limitations. Showing both prices against your items is often temporary, due to Amazon’s algorithm. However, having both prices in place can boost your sessions and conversions, which will increase your search ranking and can be very useful over the long term.
3. Increase prices on items that are just below the Amazon free shipping amount
Amazon Prime members get free shipping on a majority of items, but if a customer isn’t a member of Prime, then the free shipping threshold really matters. In the U.S., someone has to spend $25 or more on products to get free shipping.
If they spend less than that, they could have shipping charges of around $5 to $6. This means it’s actually more expensive to buy an item for $23 and pay $5 shipping, for a total of $28, than an item priced at $26. At that price, they won’t pay for shipping at all, and will have “saved” $2.
How to use the free shipping minimum spend in your pricing strategy
Here’s how to help your customers when it comes to shipping:
- Find out what the free shipping threshold is on the Amazon marketplace where you are selling. I’ve listed most of those thresholds in the image above.
- Learn the average shipping cost Amazon charges non-Prime customers spending less than the minimum.
- Examine each of your items and if the selling price is below the free shipping threshold, but adding on the shipping fee takes it over, increase the price so it’s above the threshold.
- Amazon will then list the item with “free shipping” next to it, which can boost your conversion rates.
- Track how your items perform before and after the change, and make adjustments.
4. Use consumer psychology when working out the pennies
You might wonder why customers will often choose an item priced at $29.99 over an item priced at $30. There’s plenty of consumer psychology around this, but essentially our brains only really consider the first digit when comparing, so $29.99 looks like a “2” while $30.00 looks like “3”. It’s not rational, but it’s what we need to work with.
How to use a penny pricing strategy for Amazon products
I’ve studied consumer psychology and how that plays into pricing strategies, and conducted experiments at multiple price points. Here’s what I’ve learned:
- If you price your items ending in .99, it’s likely they will be perceived as “cheap” or a bargain, due to customer expectations and years of price conditioning. If those are the customers you’re aiming for, that’s great. Otherwise, consider a different amount.
- If you want to promote a more luxury or premium item, the psychology suggests using even numbers for penny pricing, for example pricing something at $29.98.
- For very high-end items, consider a round number with no cents, like $42.00.
- Avoid other amounts as they can be confusing to the customer. I don’t recommend using values like 0.29, 0.35, 0.42 etc.
- As always, test how a small change affects your sessions, conversions, and sales and tweak accordingly.
5. You can drop product prices quickly, but only raise them slowly
Amazon allows you to reduce prices at whatever speed you want, but if you try and raise prices too quickly, you’re likely to get punished by the algorithm. That’s not surprising – Amazon has built a reputation as an inexpensive marketplace, so they’re incentivizing you to not raise prices.
If you try to raise prices too quickly, you’ll lose the Buy Box which is of course a big driver of sales. This means when you want to raise prices on your popular products, you’ll want to do so gradually. This will reduce the impact on your ranking and help avoid the loss of the Buy Box, which would drastically impact your conversions.
How to increase prices slowly
I’ve experimented with how fast you can raise prices, and this is what I’ve discovered:
- Identify the products where you want to raise prices.
- Only increase your prices by around 10 to 15 percent of the previous price, each time. For example, $14.99 > $16.99 > $18.99 > $20.99.
- Once you’ve increased the price, leave it around three or four days before your raise it again.
- When you list a new product, list it for slightly more than your target sales price, that way you can reduce the price without any penalties.
6. Understand your break-even point when setting a price for profit
It seems obvious that you should always price every product so you make a profit, but in practice it’s not that straightforward. That’s because there are many different factors you need to work into your per-item costs so you can set a realistic profit margin.
As well as calculating your base costs, you’ll want to set enough of a profit margin above that cost so you can generate more income, pay yourself a salary, grow your business, and buy more stock.
How to use the break-even price in your strategy
Working out your costs per item can be complicated, so it’s important to have a methodical approach:
- For each item, you need to calculate the total cost of sourcing it, manufacturing, shipping, fees, and other aspects of getting the item from the supplier all the way to Amazon, and then on to the customer.
- Costs you should take into account include shipping from the manufacturer, import tariffs and customs fees, Amazon fees including referrals, fulfillment, monthly and long-term storage, coupons, PPC, sales taxes, and refunds.
- You’ll also want to take into account your fixed office costs and apply that across all the items you sell, so you’ll want to figure in utilities, rent, and any money you pay yourself.
Once you know all these costs, that’s your break-even price – the lower limit that you can’t drop under if you want to cover the cost of getting, selling, and fulfilling the item.
You will also want to apply a profit margin to this break-even price. Many sellers choose to add a profit margin of around 40 percent, so if the product has a break even price of $25, with a profit margin that would be $35.
Remember, too, that it’s easier to make a profit on higher-priced items. You need to sell fewer of them to make good money.
7. Understand the different types of Amazon customers and price accordingly
When you’re listing your products, you’ll need to decide if you’re going to follow a cheap/bargain pricing strategy, or a luxury/exclusive pricing strategy. Why those two categories? Because each appeals to a specific type of buyer.
How price for different Amazon customer types
There are two main types of customers, methodical and spontaneous:
- Methodical buyers do lots of research, look for the best deals, compare prices, and take lots of areas into consideration before purchasing. Typically, they are looking for bargain items that are good value for money. Estimates show around 60 percent of buying is methodical.
- Spontaneous buyers don’t do much research, get bored looking for deals, don’t do much price comparison, and buy quickly. Typically, they may spend more on items, especially if a product is of a higher quality. Estimates show around 40 percent of buying is spontaneous.
- These two types of buyers are at opposite ends of the customer spectrum, and most of us fall somewhere between the two based on what we’re buying, how much it costs, how much time we have, and several other factors.
This means you can make money with either a bargain or a luxury pricing strategy, depending on the customers you’re targeting.
- Consider adding “extras” to a basic item to move it into the “luxury” side of pricing, and sell both versions.
- You can’t be on both sides of the pricing/quality fence with the same item. Don’t try to be cheap and good!
Another important point about pricing – you’ll need to think beyond what you think is a reasonable price for the item, based on your own financial situation and perceptions of value.
Your customers will have different priorities and may well be willing to spend more on a product than you would, so don’t be afraid to experiment with charging more. Vary your pricing and run a split test to see how different price points impact conversions and sales.
One final tip: $40 is a good upper threshold for lower-priced items, as products of $40 or less can be seen more as impulse buys
8. Compete on pricing, but don’t try to be the cheapest
You need to understand how your competitors are pricing their products so you can come up with a good counter-strategy. Regularly review your competitors for the quality and pricing of their items to see how they compare to your offerings.
How to take advantage of competitor pricing
There are several good ways to price against products from other vendors:
- Don’t underprice everyone else in your category as you’ll eat into your profit margins. Your products will also look cheap, low quality, and less attractive, and you’ll have to sell more to make money.
- Don’t overprice either, as that will put people off. Essentially, you don’t want your products to be outliers on price – either too high or too low.
- There’s one exception to this – if you provide a unique product that no one else is listing, you can price it higher due to this exclusivity.
- When setting prices, look at the pricing history of competitor products, using a tool like Jungle Scout. Don’t price against the price you see today, but explore how prices have changed over time.
- Look at reviews of competitor’s products so you can see how people felt about buying them at a specific price point. For example, they may say the product is expensive but worth the money, or that it’s cheap and they’re disappointed with the quality.
- Think about using repricer tools to set rules for increasing or decreasing prices based on competitor activities.
9. Offer products to Amazon business buyers
If you sell the right types of products, it’s likely that other businesses will want to purchase from you.
How to price for Amazon business buyers
It’s easy to set yourself up as a merchant providing products to businesses. You just need to go to Amazon Seller Central and register as a business seller.
Then, you can provide special prices for businesses, including quantity discounts when they buy multiple products. If a buyer logs in with a business account, they will see your products when searching and browsing.
10. Carry out split testing to refine your pricing strategy
The Amazon pricing strategies I’ve covered above are all excellent starting points, but if you really want to optimize a selling strategy, you’ll need to dig into the data. The easiest way to understand the effectiveness of your strategy is through “Split” or “A/B” testing.
In this type of testing, you analyze the existing data for a particular product before you put a pricing strategy into place. This is known as your “baseline”. Then you introduce a new strategy and measure the results. You compare the two periods of time and see what difference the strategy makes. Of course, it’s never that simple!
How to use split testing to optimize your pricing strategies
- Split testing compares two periods of time, and you can use it to analyze all sorts of things about your strategy – price changes, discount coupons, free shipping amounts, price increases and reductions, and more.
- Split testing does have drawbacks, as there may well be other factors besides your strategy that impacts sales. For example:
- Seasonal trends can impact demand – you’ll sell more sunscreen in the summer.
- Specific holidays, for example Valentine’s Day, Christmas, or Halloween.
- Marketing like PPC advertising or promoting products via other means.
- Ideally, you will want to isolate these external factors as much as possible, so you get a true, fair, and statistically significant comparison.
I recommend running tests for two weeks, during the same season, and avoiding holidays. Amazon typically takes around three days to respond to changes, so a two week testing period allows your strategy to get implemented.
This means you’ll test for two weeks to get a baseline, make a change, then test again to understand the impact. Only change one thing about your strategy between tests, otherwise it won’t be possible to know what’s having an impact.
A word of caution – if a test shows that a strategy change results in conversion rates going down, your sessions and ranking may decrease as well. Keep an eye on this so you’re not suffering fewer sales just for the sake of data collection.
What will your pricing strategy be?
I hope you’ve found this collection of Amazon pricing strategies to be useful. I’ve tried out all of these myself, and know that they work in the right circumstances.
My advice is to try one strategy at a time, making minor tweaks, and keeping a close eye on the data so you understand how things are changing. Record your results, so you can look back on what worked, and what didn’t.
Over time, you’ll be able to optimize your pricing strategies to work together, and become a more successful Amazon seller. Good luck!
This post was by Paulina Masson, Founder and CEO of Shopkeeper, written with Paul Maplesden.
Shopkeeper is a profit dashboard for Amazon sellers, tracking sales, calculating profit and forecasting inventory levels.