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Follow These Three Steps to DetermineYour Amazon Product Pricing Sweet Spot

Grace came to mefor some advice.

She wasextremely excited about her recent decision to launch a new product on Amazon.It was her first one.

She’d taken hertime and looked through several Amazon categories. She had done some researchthrough Google Trends and other marketing reports. And she had finally naileddown the niche she was going to conquer - kitchen cleaners.

It had a load ofpotential and appeared to have enough room to expand her product line as well.Her product idea had all the makings for a great product launch.

But now, it wasbecoming real. She was actually on the edge of pulling the trigger on orderingand having the product shipped to Amazon FBA. She just wanted to get one morepiece of the puzzle in place.

She was tryingto determine her pricing.

She had heardsuccess stories from both sides of the spectrum. Some sellers were selling morebecause they priced low. Other sellers claimed their secret was to price high.But she wasn’t sure she should cut and paste their solutions onto her ownproduct. The amount of information was confusing.

So she asked methe question, “What are the basics of finding the right price for my product?”

Now there arepeople who have written entire books on pricing, so it’s not an easy question.But I could tell Grace wanted a simple answer.

So I gave herwhat I’d give anyone who’s just starting out in their first Amazon business -my three step process to determine your pricing sweet spot.

That’s whatevery brand is attempting to find which is why so many are constantly testingtheir product pricing by raising it 5% or lowering it 10% or ending it in .97instead of .99. Every brand is trying to find the “sweet spot” right in themiddle of “too high” and “too low”. Amazon sellers are no different.

So whether you’re just launching product #1 or one year into product #3, you’llwant to think through the following steps to evaluate your pricing. These threesimple points will always bring you back to center on where your pricing sweetspot actually should be.

STEP ONE: STUDY YOUR COMPETITION

As Grace isgetting ready to determine her pricing, she has to look at the pricing of hercompetitors. This will help her determine the range of price legitimacy herproduct has in the market.

Price legitimacyrefers to the price range acceptable for the product. For example, if youdecided to sell your own brand of minute rice, you’d find that the generallegitimacy range is between $1.19 and $3.50. If you decided to sell your brandfor $16 p/box, you’d have a problem (unless your rice grantedimmortality).

So Graceresearched her top five competitors and logged their own pricing for an 8 ouncebottle of degreaser. Their prices were:

So by looking atthe major players in her category, Grace can determine that a general range forher pricing should be between $2.75 and $4.50. It doesn’t mean she can’t go higher or lower in pricing, but it meansshe better have a good reason for doing so.

All Grace has sofar is a legitimate pricing range, but now what does she do? Does she try toprice in the higher or lower range of her competitors?

In order to makean informed decision, Grace needs to complete step two and three. But before wemove on, let me point out a warning associated with step one.

It might betempting to think about pricing lower than your competitors. Perhaps Gracelooks at her competitor’s pricing and decides she’ll price her cleaner at $2.She could run an advertisement which lined up her product with their productsand ask customers to “compare and save”. Wouldn’t customers be swayed by lowerpricing?

Not necessarily.Actually, studies have found that pricing your product lower can have twonegative influences on your product.

First, pricingyour product lower can give it a lower perceived value. You can imagine thiseasily with important items. If you are shopping for a cough medicine forcongestion issues, would you buy a brand that is $5 below the cost of everyother brand? Probably not. When a brand without name recognition tries to enterthe market at a lower cost, people are naturally suspicious.

Secondly, studies have alsoshown that when brands ask customers to compare prices, the results arenegative. For some reason, customers assume they are being somehow falselymanipulated. However, when customers are allowed to make comparisons on theirown without any prior suggestions, customers will typically choose the bettervalue.

Of course,pricing higher than your competitors may also be a temptation. However, ahigher price can only be possible if you have a strong differentiation thatjustifies the price. Without a strong customer base, you will need to persuadepotential buyers to see a reason to pay more.

STEP TWO: STUDY YOUR COGS (Cost of GoodsSold)

Now that youhave an idea of the price range available to you, it’s time to see if you canmake a profit  by sourcing your own private label product. You’ll need tobegin contacting suppliers in your niche and getting estimates on the productyou’re interested in. Only then can you begin making decisions about youractual price.

The Cost ofGoods Sold refers to the manufacturing cost of your product. So for example, ifyou were sourcing hair brushes, you’d want to know how much each hair brushwould cost including both materials and labor. Usually, the manufacturer willgive you this information during the estimate.

So if Grace wereto get estimates on her own formulaa of kitchen cleaner, she’d want to know herCOGS p/bottle. Let’s suppose the manufacturer's she contacted gave her thefollowing estimates:

If Grace decidesto go with the lowest estimate ($0.46) and sold her own brand for $7, she couldestimate that she would make about $6.54 per bottle. That’s remarkable! But isthat accurate?

Not necessarily.

Even thoughGrace has her COGS, she’ll need to think through other expenses and overheadnot directly related to the supplier. This might include the cost of design andproduction of labels for the bottles, the cost of Amazon’s fees per product,and possibly the cost of advertising or giveaways associated with that product.Once those fees are factored in, Grace will determine if her $7 price tag isfeasible or not.

So now Grace reworksher chart to look more like this:

Notice howGrace’s initial COGS was important but didn’t give the best picture of herprofit margin. Now, with all fees included, her total cost per bottle is $5.40,making her total profit only $1.60. Grace can now make adjustments to herpricing to increase her profit margin. At this point, it seems Grace’s $7 pricepoint isn’t enough to hit an ideal profit margin.

Of course, thisprofit margin might be helped by buying a larger quantity and reducing the costper bottle from the supplier. Then, if Grace can increase her sales to a largenumber, she may be making enough to maintain a sustaining business on Amazon.

Always, always,always determine your COGS and profit margin before setting your price.

STEP THREE: STUDY YOUR CUSTOMER

One importantfactor often overlooked by Amazon sellers is their typical customer base. Ofcourse, when you’re just starting out, you won’t know who your customer base isyet, but you can probably imagine the kind of people you want to purchase yourproduct.

The problem isthat new sellers often begin pouring over competitors numbers and their ownprofit margin numbers and completely forget to ask the question, “But willcustomers pay that much for the product?”

Remember, you’llprobably need to avoid the two extreme ends of pricing. You don’t want peoplecoming to you simply looking for a great bargain. That won’t result in along-term sales strategy. It’s okay if customers see your product as a goodvalue, but you don’t necessarily want to be known as the flea market of Amazon.

But it might bedifficult as well to enter the Amazon market with a high-end price as well. Asmentioned before, a new product better have a very valuable and cleardifferentiation from it’s competitors if it’s going to enter Amazon wearing anexpensive price tag. It’s also important to consider whether customers come toAmazon to purchase high-end products. Depending on your product niche, this maynot be the most likely scenario.

Back to Grace.Grace envisions her own product being purchased primarily by moms in thekitchen and not by commercial kitchen workers. She knows that moms are oftenlooking for deals and not necessarily for high-priced product. Besides this,the residential kitchen cleaner niche isn’t necessarily a high-end category.

So Graceprobably can’t decide to charge $10 per bottle unless her cleaner had adistinct advantage over her competitors. She needs to not only ask how much canI make from a kitchen cleaner product but also how much will moms pay for akitchen cleaner?

Starting out,you’ll need to consider the same two factors: Are customers in your nichewilling to pay your price, and are customers looking for your product willingto pay your price? Don’t be afraid to test different price points in order toanswer those questions with real data.

Additional Pricing Methods

Price Anchoring

Price anchoringrefers to placing your price alongside another higher price point making thecustomer feel that your price is a deal. You see this all the time while youshop though you may not be familiar with the term.

Whenever you watchan infomercial, the spokesperson will always begin with a question: “What wouldyou expect to pay for a product like this? $100? $200?” Those prices are mentalsuggestions. It’s like saying, “We should really charge you $200 for thisproduct.”

But then theannouncer says, “But the actual price for the product is only $59.99.” Andcompared to $200, $59.99 sounds like a steal. The announcer may even use theactual price as another anchor. “But if you call in the next 30 minutes, youcan get the product for only $29.99.” Truth be told, the product may only beworth $12.99, but by anchoring the price to higher prices first, $29.99 is agreat deal.

On Amazon, priceanchoring will usually take place by setting the price higher than your actualsale price in the backend of your Amazon product listing.

But whenever youadvertise your price, try to anchor it next to a higher price.

The Power of 9

There is evidence thatprices ending in the number 9 usually outperform prices with alternate endings.There is enough studies verifying the power of the 9 ending that these pricesare called “charm prices”, so Grace may want to set her price at $6.99 or$7.49.

However, DerekHalpern over at Social Triggers argues that thereare no studies proving that the 9 magic works with online sales. It’ll be up toyou to decide whether you want to try it or not.

Offering a Middle Option

Though this maynot apply to those starting with their first product on Amazon, offering amiddle option may come in handy as you continue to expand your business.

Studies have shown that brands who offertwo product choices can increase the sales of the higher priced product bycreating a middle option. Let me explain by way of an illustration related toGrace.

Let’s say thatGrace eventually expands her product choices and offers not only a 16 oz.bottle for $7 but also sells an 8 oz. bottle for $3.75. If the studies arecorrect, Grace could introduce a middle option, a 10 oz. bottle for $6.50, andcustomers would gravitate toward the higher priced 16 oz. bottle.

Original Product Selection

Inserting a Middle Option

Now, of course,very few customers would ever purchase the 10 oz. bottle because it’s wayoverpriced, but placing it there suggests that the 16 oz. bottle is a greatdeal. In the end, it’s a more subtle form of price anchoring.

Conclusion

By taking intoconsideration your competition, your cost of goods sold, and your customerbase, you’ll be making a much more informed decision about setting the price ofyour Amazon product.

But once you’vefactored each of these in, don’t hesitate to experiment with different pricing.Perhaps Grace could set her price point at $7 for two or three weeks, thenchange the price to $6.99 for another three weeks. She may find that the pennydifference makes customers feel slightly better about their purchase andincreases sales.

In theend, you get to make the ultimate decision about your pricepoint. So do it wisely with plenty of consideration for these three areas.