For Amazon FBA sellers and E-commerce business owners

Finding the right pricing strategy

One has to approach product pricing as something that is dynamic and needs to be re-evaluated frequently. There are many valid strategies. In this post, I’ll discuss two of them: How a slight increase in your sales price will significantly improve the profit margin, and how a lower price will boost—or at least maintain—your keyword ranking.

Jan 27, 2022
Per-Ola Röst

Co-founder and CTO of Rainforest. Passionate about innovation, team building, and entrepreneurship

1. Price increase

The lower your current margin, the easier it is to improve it with just a small price increase. 

A product sells for $15. After advertising and refunds, you have a gross profit of $3 (20%). If you elevate the price by $1 (6.66%), your profit increases by $0.85 (after the 15% Amazon commission), or 28%.

Here’s how gross profits increase with a higher price at a margin of 20% (assuming there’s no loss in sales velocity due to price increase): 

1% price increase → 4.25% gross profit increase 

5% price increase → 21.25% gross profit increase  

10% price increase → 42.5% gross profit increase 

20% price increase → 85% gross profit increase

 

Even if your sales velocity is negatively impacted by the price increase, you can generate more profit for your brand. A 25% drop in sales velocity after a 20% price increase would still lead to a 39% increase in overall profit.


When a product is expected to run out of stock, there might be a good opportunity to raise the price. Just note that as your inventory levels drop, especially below 100 units depending on normal sales velocity, Amazon can start suppressing the product in its search results.


What products are most suited for price increases?


Brand managers should explore price hikes for products in a leadership position in their respective niche. You can also consider increases for items with stable sales velocity and products that are not positioned for aggressive growth via improved keyword ranking (more on this further down). 


How to increase the price? 


Amazon’s anti-price gouging algorithm can suppress products when the price increases too fast. Therefore you should lift its price slowly, over a couple of days and not more than 10% per day. 



2. Price decrease


Even if the exact workings of the Amazon algorithm are unknown, it is a common view that more sales lead to a higher search ranking, and that the higher ranking leads to even more sales.

 

The relative conversion rate is the most important factor in the keyword ranking. When you are converting better than your competitors for any given keyword, you are in a good position to surpass them in the ranking.


It starts with a world-class product listing: images, title, bullets, A+ content. When you have a product listing that is equivalent, or preferably better than that of your competitors, you should drive as many sales as possible to surpass your competitors in ranking. 


There are different tactics to drive sales: using an email list, increasing advertising etc. Another way is simply to reduce the price. In most product categories, it’s a guarantee to increase your sales.


Keyword ranking can improve quickly as a result of increased sales velocity—for example by running a lightning deal—but it is assumed that you need to maintain that higher sales velocity for 8-21 days to score a higher ranking.


Be methodical and deliberate about lowering the price! 


It’s dangerously easy to settle on a lower price, enjoy an increase in units sold, and lose track of the profit. Before lowering the price, you need to have your keyword rank tracker set up and also have a goal in mind in terms of ranking and increased sales.

 

Example: “I am lowering the price by 20%. My goal is to move my ranking for keyword x from position 30 (bottom of the first page) to the top 6 (top of the first page). As a result, I expect to increase units sold from 40 to 55 per day.”


Conclusion: There’s no absolute truth when it comes to pricing. Different strategies can lead to the desired outcome—but you want to be flexible and adjust your game plan if necessary. Make sure you are aware of the Amazon rules and know how to turn them in your favour. It will help you push your brand to the top.


Written by

Per-Ola Röst

Co-founder and CTO of Rainforest. Passionate about innovation, team building, and entrepreneurship

Written by

Per-Ola Röst

Co-founder and CTO of Rainforest. Passionate about innovation, team building, and entrepreneurship

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