Amazon Pricing Strategy: Behind the Scenes (2023)

A quick summary of what drives Amazon customers to transact...

Imagine a physical market full of n stores selling all sorts of things. What do you think the general pricing model would look like?

A simple answer would be that low selling items would be listed at discounts, while top products would have their prices constantly raised because customers don't need an incentive to buy those products.

Now, if we were to take this fully online marketplace and consolidate it into a platform that has over 310 million global customers with algorithms designed to raise or lower prices in a matter of minutes based on prevailing market conditions, we could say we started scratching the surface of Amazon's pricing strategies.

These days, it's very convenient for customers to search for products, compare current retail prices in brick-and-mortar stores, find out that it's a little cheaper online, and buy it from aggregators like Amazon. For the curious among us, it would be interesting to understand how Amazon consistently prices its products so competitively, and to learn about the various pricing strategies and tools at play.

Understanding Amazon's "Buy It Now" Box

The checkout box is a button that takes listing viewers directly to the checkout page. This is a feature that has historically resulted in excellent conversion rates.It is estimated that over 80% of all US Amazon sales come from the Buy It Now box.

Buy Now offers immense value to sellers, and they naturally want the Buy Now button to appear on all of their listings to drive more traffic, sales, and growth.

Given the power of the Buy It Now feature, Amazon often curates its availability. An excellent example of this would beRemove 6000+ sellersof the global market in 2020 for violating its fair pricing guidelines with price increase products related to the COVID-19 pandemic.

However, from time to time, you will come across product listings without a Buy Now button. At this point, it seems rather ironic that Amazon is holding back merchant sales and growth. The explanation for this can be understood from the following quote.

Sellers set their own product prices on our store. If a product is offered by a seller on an uncompetitive basis, we reserve the right not to offer that offer. Customers can still find all offers on the offer lists page.

An Amazon spokesperson during an interview with Inc.

For example, if a supplier is listing a PlayStation 5 console on Amazon for over $800 even though it has a retail price of $499.99, you can be sure that such offer will not have a Buy It Now option because Amazon wants show it off to other vendors offering the same product at different prices.

(Video) How Amazon's Super-Complex Shipping System Works

As you can see in the above snippet, due to a predominant gray market markup for this particular product, multiple sellers are priced to list, with the cheapest and highest ranked seller at the top of the list.

Other factors that determine Buy Now button eligibility for sellers are as follows:

1. The seller must aprofessional sellerAmazon account

2. The product must not be a used item.

3. Best selling AHR, account health rating. The following factors improve AHR

3.1. Low ODR, order defect rating

3.2. low CR, cancel rating

3.3. Low LSR, late delivery rate

3.4. High VTR for self-fulfilling (non-Amazon-fulfilling) orders, valid tracking fee

3.5. High OTDR for self-fulfilling orders (not fulfilled by Amazon), on-time delivery rate

4. Product Pricing

5. Shipping costs

6. Customer feedback

7. Optimized inventory management

price adjustmentAmazon Seller Strategy

Sellers often undercut the competition, both on Amazon and elsewhere, in insignificant amounts ranging from $0.01 to $10. The reason for this throttling is quite simple; These listings would appear higher in market-based searches.

This tactic is called repricing and can be done both manually and automatically using various seller-facing tools such as RepriceIt, Bqool, Aura, Informed.co, Seller Snap, Xsellco. Most of these tools use machine learning to identify constraints where they price offers.

For example, if Christmas is just around the corner and a seller wants to clear out their stock of high-quality artificial Christmas trees, the above tools will do the following.

1. At the same time, look at historical price trends for similar products
2. Identify the best performing product
3. Identify the best performing seller
4. Forecast GMV based on historical exchange rates at different price points
5. Forecast net sales after Amazon commissions and fees at various price points
6. Recommend/implement (if authorized by the seller) optimal prices based on predefined constraints

Once this cycle is complete, data from this year's Christmas celebrations will be saved for future reference, giving sellers and their tools even better knowledge of how much to price their products.

Amazon Basics: Provides an Opportunity to Adopt a Competitive Pricing Strategy

For those familiar with the Amazon marketplace, Amazon fundamentals need no introduction. It's a group of Amazon products that range from simple charging cables to premium travel bags.

Amazon Basics is just the most visible example of a private label. Given the company's knack for acquiring multiple companies in a short amount of time, Amazon owns, in whole or in part, many other brands.

Now we come to the competitive pricing part. Wikipedia would tell you that it is a pricing strategy that uses the undercutting method on a larger scale.a dominant companyintentionally lowering the price of a product or service in an industry. This is relevant because Amazon has full access to this data when a seller sells their products on Amazon.

Amazon would then study the possibility of developing the best-selling products in-house. Because of this, Amazon Basics products are, above all, easy to make and comply with, while being essential. While predatory pricing is illegal, vendors have accused e-commerce giants like Amazon and Flipkart of adopting this pricing strategy in the past.

For sellers, this is a problem.

To grow, they need to list on Amazon. If they grow too big, Amazon will notice and, if possible, will market the products as proprietary at a lower price.

Diploma

Amazon is often criticized for being a companyworth so much but makes minimal profits. That's because they've evolved from a simple online bookstore in the 90's to a super equivalent of an app whose services are used by almost everyone on a day-to-day basis. Amazon is considered the world's most valuable brand and one of the most influential forces for economic and cultural change.

The company is valued at over $1.7 trillion, and the pandemic has only accelerated those numbers.

However, its net profit trends are one-hundredth of those valuation numbers. It should come as no surprise that a company that constantly undercuts the competition and prioritizes delayed gratification over short-term financial gain makes such meager profits. Honestly, in absolute terms, it's not even that small.

To give you some perspective, in fiscal 2020, Reliance Industries' valuation-to-earnings ratio was approximately 20, while Amazon's was 77.

Based on trends, Amazon's pricing strategy would continue to follow the same principle.

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