Last week I talked about Amazon’s new fees that went into effect this Monday. Now that you better understand the fees you will pay when you sell on Amazon, I want to talk about pricing: the good, the bad and the ugly.
If you’ve been selling for even just a little while, you’ve probably seen some weird pricing on Amazon and wondered “can that be right?” The answer is “probably not.”
People aren’t really selling blockbuster paperbacks for $500 and they’re not making any money if they are selling them for $1.50. These out-of-whack prices are usually aberrations produced by large-scale sellers who use laborers and repricing software with their products. For example, they might charge $500 for every book that goes up to Amazon and then rely on the repricing software to drop it down to the middle of the pack. These sellers often reprice daily so they know that $500 won’t be up there long.
What about the guys who are losing money on every sale by selling a book for $1.50? That could be a repricing software error where they don’t put a “floor” on their repricing and the software keeps racing to the bottom. It could also be an error of a new seller who doesn’t understand how the fees work and who thinks the $1.50 is what they get to take home in their pocket.
I’m going to list here some of my own pricing guidelines but I want to say up front that all of these depend on circumstances and it is important to think through your pricing carefully. There are exceptions to most rules and circumstances can change things. For example, I recently repriced some items to rock bottom prices. Why? I knew I’d never sell them at a reasonable price and making some money was better than paying Amazon 15 cents to dispose of them. They were, essentially, a lost cause.
- Double your money – What I mean by this is that when Amazon’s fees and my out-of-pocket costs have been removed, I’ve basically doubled my investment. I’m happy to turn $1 into $2 all day long. It adds up. Naturally, if you can do better than that – even better! When I buy the item is when I make this calculation. I consider if I can sell that item for enough to double my money. This also gives me enough wiggle room if I need to cut prices later such that I’ll still make a good margin. For example, if I spend $30 on a toy, I’d like to clear $60 after fees and expenses. I might price it around $90. If I have to drop my price later and only clear $45, I’ve still made 50% on my money. Normally, to double my money, I need to price at three times purchase price. This is not true for expensive items. I can sometimes double my money and charge less than 3X. This is why it is so important to understand Amazon’s fees. Another reason why “double your money” is one of my rules is that I know there will be losses, refunds, times when I have to drop my prices and times when I have to dispose of them. All of these cut into my overall profits. If I don’t have enough margins built into my prices across the board, I’ll lose money and go out of business. Margin is critical to success in this business.
- Match similar conditions – If you have a “collectible very good” board game to sell, look at the prices of the other “collectible very good” games, not “collectible acceptable” or “collectible good.” You can charge more for a better condition item. Occasionally it makes competitive sense to match a poorer condition. If someone else has a “good” book for $9.99 and you think he is priced too high, you can charge $9.99 for your “very good” book and will likely sell yours before he sells his. Now if $9.99 is too low for a “very good,” then you should charge higher. No sense leaving money on the table. Your better quality product is naturally more desirable.
- Match or be higher priced than other similar condition FBA sellers – If there is a “good” book for $7.95 and you have a good book, too, you should match or slightly raise their price. Why? Because this way you don’t trigger the repricing software “race to the bottom” phenomenon and you both can get a good price on that book. I might price my “good” book for $7.99, for example.
- Never price above Amazon – I see this all the time and it puzzles me. If Amazon is selling a toy for $24.99, no one should be selling it for more than that. My book (see picture on right) is a good example of this puzzling pricing behavior. Given a choice, most consumers prefer to buy directly from Amazon, not a third-party. In fact, I try to price a couple of dollars lower than that. Around Christmas you will see many sellers with much higher prices than Amazon. They are hoping that Amazon will sell out and then they can get the better margin. This can work on very hot toys (electronics, whatever), but it is risky. I prefer to keep my risks as small as possible so I don’t willingly price above Amazon. I have found sometimes that Amazon will reduce its prices and now I am suddenly higher than Amazon which is very annoying but a fact of life if you sell on Amazon.
- Don’t price lower than $4 – For books, you will make about 60 cents if you sell it for $4. Assuming you paid something for that item to begin with, plus the cost to ship it to Amazon, you aren’t even breaking even. Those guys selling books for $3.75? They’re losing money with each one they sell. It would be cheaper to pay Amazon to destroy the book (15 cents). I sell books for $7 and up. If you see something lower in my portfolio, it’s a loser that I’m dumping.
- Don’t be the lowest – There often are low-ball sellers on valuable items or the lowest price might be for a poorer condition than mine. I don’t want to match or beat them. I want to be in the middle of the pack. I try to think what someone might reasonably pay for my item. The lowest seller often doesn’t understand the value of the book or their fees. For example, I would never sell a textbook for $7 or less. Anyone who does that is losing money on each one because they are so darned big and heavy; the fees are higher than a regular hardback.
- Assume sales before yours gets to the warehouse – When I’m pricing, I usually ignore the lowest price and don’t think about it in my considerations. I assume that it will have sold by the time my item gets to the warehouse. Since it generally takes four days to a week for a box to arrive and get processed by Amazon, it is quite possible that the lowest-priced item is sold. So if there is one low-ball seller, I don’t worry about it. If there are a lot, I move on. Once in a great while – when the margin supports the effort and costs – I’ve bought the low-ball seller’s item and then turned around and re-sold it at my price.
- Consider how fast the item is selling – There are some items that are selling so fast, you can almost ignore the other sellers and price what you think it is worth. Books like The Kite Runner or the Harry Potter books, for example, were under 1,000 in rank for a long time so while there were often $4 or lower sellers, I sold mine between $6.99-$8.99. I knew those low-ballers would be out of there pretty quickly and I could get my price. It was a quick way to make a few bucks. Most books I sell are much higher ranked, however. If I have a 1,500,000+ ranked text book that Amazon is selling for $130.00 and there are a lot of $4 sellers (or lower), I don’t buy the book even though it is worth more than $4 because it will take such a long time for the low-ballers to sell out.
- Look at the merchant sellers – Have you ever seen this situation? The FBA sellers are all selling a used book for $10+, but merchant sellers are selling that same book NEW for $4.99 and used for $4 (includes shipping costs). This is where some common sense needs to kick in. If I’m a buyer and I want a book, do I want to pay $5 for it New or $10 for it used? Might I be willing to wait a few extra days to save $5? I might. This means that there will be fewer overall potential buyers for my higher priced item. While FBA sellers get a premium on what they sell because of the free two-day shipping, keep in mind that a huge difference may cause a buyer to turn to the merchant sellers. This is where judgment and some experimentation come into play. You may decide, for example, to try $10 but if it doesn’t sell after a certain amount of time, you might want to consider lowering your price.
- Charge more if you are the only FBA – I love when there are no other FBA sellers because I can charge a premium and I don’t have competition except from Amazon. Sometimes, I’m the ONLY FBA option because Amazon is not selling that item. I especially love that. How much of a premium do I add? That’s another “it depends” answer. Usually I’ll look at the merchant sellers and pick a price in the middle or high end of the pack. If they are all low, then I’ll come in $2-$4 more if it seems reasonable to me. With some used textbooks, I’ll look to be around 50% of the new cost. For example if “new” is $120 and there are no FBA sellers, I might price it between $49.99 and $59.99, even if the used merchant sellers are selling around $20. This is a case where you will need to experiment a bit. Since I generally don’t pay more than $2 for textbooks, I have a lot of wiggle room.
- Remember the season – Textbooks sell mostly in January and August with a slight bump in June. Toys sell the most from October-December. BBQ supplies sell stronger May-August. Calendars need to sell by January or you are out of luck because Amazon drops its prices 50% or more on them in January. During peak seasons, you can often command a better price than during off-season. Textbooks that are over 1 million in rank in March can quickly drop down to low rankings in June and August. I send in textbooks, all year round, but knowing they will often sit there for six months or longer, I price them higher to cover the storage fees and the extra weight.
As a bonus point, I’ll add “It’s not about you.” Pricing is NOT about what YOU would pay for an item. It is about what a buyer will pay for an item. Many people price their goods too low on Amazon because they think – wrongly – that no one will actually pay them $10 or whatever for this item. They are burdened by the fact that they know what they paid for it ($2) so they think that is what it is worth.
Nothing could be further from reality. The fact is you have no idea the value someone will place on being able to order from Amazon in the middle of the night and having it delivered in two days (or overnight). How much is a taxi in the rain worth?
When you are pricing, use the merchant and other FBA sellers as well as Amazon as your guides, and your common sense, but be willing to push the envelope a bit, too. Experiment with your prices a bit. You can always change them if something isn’t selling and wouldn’t it be great to get a higher price than you expected?
After a while, you’ll have a good sense of what things are worth and the range of prices that sell. You’ll have your own guidelines for pricing that are making you money – and that’s the bottom line. If your strategy isn’t making you money, change it.
This is a lot to think about, but I assure you pricing becomes automatic really quickly.
Is there anything about pricing I didn’t cover here? Please ask me in the comments!