In the world of big box retail, price matching strategy has a bad rap. With large players like Wal-Mart, Target, and Best Buy using the tactic of matching the lowest price of any competitor to take market share from smaller competitors (and each other), these big companies’ margins have taken a hit industry-wide.
But for Amazon third-party (3P) sellers, all the traditional rules of sales get tossed in the trash.
That’s because of several sales factors unique to the Amazon Marketplace, including:
• The Buy Box
• A higher number of competitors -- all in one place
• The ease with which buyers can compare prices
All of the above aspects alter how Amazon sellers need to work the competitive landscape to achieve success. With that in mind, it’s time to talk about price matching strategy again, but in a whole new light.
But first, a quick crash course in finding your ideal price range per product.
The key to profitable pricing on Amazon is knowing ALL your costs and being flexible
Amazon sellers must keep an open mind to using all different types of pricing strategies to maximize profitability. It may be intuitive to price below competitors. After all, the lowest priced item in a set of identical goods will always be the most attractive offer in a typical retail setting.
Pricing lower may result in more sales, but for every penny by which a seller lowers his price, that’s a penny less in profits. It’s vital to understand that profits, not sales figures, are the most important metric for sellers to measure in terms of their success.
Even on Amazon, having a competitive price is a heavily weighted factor in deciding who wins the Buy Box. The only problem with using a strategy of always underpricing your competitors is that they’re too smart for that. They’ll see what you’re doing and then do the same thing right back to you.
In sales, this dangerous game is called a “race to the bottom,” and it rarely yields any big winners. That’s because it eats away at the profit margins of every seller involved. Smart sellers see this practice as negative for the entire seller ecosystem and avoid it at all costs.
Speaking of costs...
The real key to strategic pricing on Amazon is figuring out your costs at the SKU level. That way, you can figure out your price floors, or the minimum prices at which you can sell your items and profit. Then, by examining how your competitors price the same goods, you can deduce an optimal price ceiling, or the maximum price you believe you can sell an item for without appearing too expensive to potential buyers.
Crunching these numbers gives you the optimal price range for each SKU to be profitable.
Once you’re armed with this information, you can begin developing specific pricing strategies per SKU. You may want to price below your competition in some instances, and even price above your competition in others. There are, however, some situations on Amazon when using a price matching strategy may make the most sense for you.
Now let’s discuss those unique scenarios.
Use a price matching strategy to stay competitive with Amazon
Ask most sellers, and they’ll tell you that they’re terrified of competing with Amazon.
Because Amazon enjoys huge economies of scale and is in control of the entire Marketplace, it’s tough to gauge how to set your prices when Amazon is in direct competition. Unfortunately for 3P sellers, Amazon sells a ton of different products, so the odds of having to compete directly with the biggest dog on the Marketplace are fairly high.
So, what should 3P sellers do to win the Buy Box when Amazon is holding it down?
Match their price.
Here's why: If you beat Amazon on price, Amazon will likely undercut you right back because it enjoys more flexibility on price due to its immense buying power. Amazon pays lower prices to manufacturers because it benefits from buying in huge quantities. It also isn’t paying the same fees as you to sell on its own Marketplace.
Since you’re paying Amazon fees just for the right to sell on its Marketplace in their first place, plus any FBA and storage fees, you’re at a major disadvantage. So don’t poke the beast by beating it on price.
Instead of that, try using a price matching strategy against them. It’s known that the Buy Box rotates between sellers -- even Amazon itself. That means if you offer a product for the same price as Amazon, there’s a chance you’ll be able to snag a share of the Buy Box rotation without provoking Amazon into a price war.
For some product categories, Amazon will fight harder to retain the Buy Box, so you may find that matching its price on some products won’t make a difference. But, there are instances where price matching Amazon will result in landing you in the Buy Box -- at least for part of its rotation.
Use price matching strategy to test how competitive Amazon is on a particular listing
Sellers with Buy Box dreams who are concerned they’ll never beat Amazon on price should then try a price matching strategy against Amazon as a test. If you wind up sharing time in the Buy Box with Amazon, you’ll know that you don’t have to undercut them and sacrifice profits in the process.
If you don’t win the Buy Box by price matching Amazon, then it’s time to tweak your pricing strategy. You can start by pricing a little bit lower than Amazon -- say 2% less -- and testing to see if you win the Buy Box then. If that doesn’t work, try slowly increasing the amount by which you undercut Amazon until you win the Buy Box, making sure that you stay above your pre-calculated price floor for each SKU.
If you win the Buy Box using this tactic, you’ll have price matching strategy to thank as your starting point. But if you don't win the Buy Box and feel your margins are becoming too tiny, then re-evaluate if you even want to keep selling that item.
Price matching strategy also works against other 3P sellers who seem unbeatable on price. Hey, if you can’t beat them, join them! By mirroring your toughest competitors’ prices, you’ll gain the same visibility as them. Plus, you'll guarantee at least a share of the Buy Box, pending your other Amazon metrics are equally competitive.
And, if you want to avoid competing with Amazon on price altogether, you can do that too. Just use an automated repricing tool that allows sellers to exclude Amazon from competition completely.
Match Competitor Prices to Drive Sales of Slow-Moving Products
Sometimes you’ll source products that you think will be big hits, only to find that they wind up collecting dust. When you’re stuck with lemons in your inventory for months longer than expected, you don’t just lose out on revenue -- you may also get hit with storage fees from Amazon.
To avoid FBA inventory storage fees, you may want to set up a price matching strategy with your lowest-priced competitors in order to drive sales while minimally impacting margins.
Make sure you’re aware of Amazon’s FBA long-term storage fees and inventory cleanup dates (February 15th and August 15th) and keep track of how long each of your products has been in storage so you know which ones need to be moved fast, lest you get hit with bottom-line-brutalizing fees. Also, note that Amazon updates its fees regularly, and it will be making its next change on October 1st, 2016.
Use a Price Matching Strategy to Move Inventory with a Shorter Sales Window
For Amazon sellers who rely on sales of meltable products, there's a potential pitfall for profits every May through September. That’s because Amazon’s rules for date- and temperature-sensitive products state that:
“Any unsold meltable inventory still present after April 30 in our fulfillment centers will not be available for sale. Hence, such inventory may be determined to be unfulfillable and disposed of.”
On top of that, Amazon considers any meltable products sent to FBA between May 1st and September 30th unfulfillable. What's worse, Amazon will likely dispose of these products entirely, so don't ever make that mistake.
Sellers who find themselves in a position of holding meltable products (or items with sell-by or best-by dates) in FBA storage close to the April 30th cutoff date may want to use a price matching strategy to liquidate this part of their inventory to avoid losses.
Even if your lowest priced competitors are below your price floor, matching them might still make sense in this situation. That's because the alternative is a total loss on your meltable inventory.
Price match your competitors to keep everyone's margins higher
That's the philosophy that some Amazon sellers use when it comes to pricing against their competition.
Rob Anderson of "Dollar Moves" is one savvy seller who's used a price matching strategy to his advantage. According to Rob, price matching has resulted in more Buy Box wins and gross sales.
Rob encourages sellers to adopt a price matching strategy as a form of seller solidarity. If fewer sellers are trying to undercut each other, more sellers can share the Buy Box at higher prices. And, of course, if everyone is charging higher prices for the same items, everyone profits more.
The more sellers who embrace this idea, the better everyone's bottom lines will be.
Price matching strategy: The bottom line
Price matching may not be something you rely on every day. But when it comes to your Amazon dominance, it’s a strategy you surely want to have ready for special situations.
Use it to test how competitive Amazon is willing to get for the Buy Box.
Use it to get slow-movers out of your inventory.
And, if you deal with chocolates or other temperature-sensitive products, price-match your lowest competitors to avoid Amazon deeming those products “unfulfillable,” rendering a total loss.
You may even want to price match regularly to keep the selling environment better (read: higher profits) for everyone overall.
Soon, we’ll discuss situations when you’ll want to price above your competitors. After that, we’ll delve into scenarios where pricing below competition makes sense.
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