Pricing Strategies on Amazon: Why Is It So Hard To Get Pricing Right?

Transcription

1 Pricing Strategies on Amazon: Why Is It So Hard To Get Pricing Right? Nathan Franco, Limited Goods James Thomson, Marketplace Accelerator Copyright 2015, Marketplace Accelerator LLC and Limited Goods 1

2 Presenters Nathan Franco Co- Founder of Limited Goods Founded in 2002 Limited Goods is an online reseller of primarily consumer electronics products, and a successful seller on Amazon Over 40,000 ackve liskngs on Amazon Over 70,000 lifekme seller feedback on Amazon 2

3 Presenters James Thomson Former Amazon insider, 5+ years Business head of AmazonServices.com FBA Account Manager Category Manager of Sports 3P business Managing Director of Marketplace Accelerator LLC, a consultancy for Amazon sellers, vendors and nakonal brands President of PROSPER AssociaKon, an educakonal organizakon for Amazon sellers 3

4 Overview of Today s Discussion Building an effeckve pricing strategy requires a clear understanding of two issues: PRICE COST 4

5 Overview of Today s Discussion Margin follows from managing both price and cost carefully: PRICE CompeKKon- based Cost- based Value- based MARGIN Amazon Marketplace pressures on margin Individual product P&L s COST AcquisiKon Cost Commissions/Fees Indirect/Hidden Costs 5

6 Overview of Today s Discussion PRICE COST Strategic pricing on Amazon is driven by how you aim for the BuyBox: What s the role of re- pricing tools? How can you use Fulfillment by Amazon (FBA) to opkmize your pricing? How do your Seller Metrics impact your pricing decisions? How do you incorporate a view of all of your costs into your pricing strategy? Why is Cost so difficult to understand when selling on Amazon.com? 6

7 Why Does Strategic Pricing MaDer So Much? Strategic Pricing will drive your decisions on: 1. Sourcing - What to buy in the future - Decisions on which vendor to use 3. Inventory Management - How long to hold inventory - What to liquidate, and never restock 2. Vendor NegoGaGons - What terms from suppliers you ll accept - What wholesale prices you ll negokate down 4. Pricing Changes - How to price down, vs. how to price up - When to price up, vs. when to price down 7

8 Why Does Strategic Pricing MaDer So Much? But without strategic pricing: 1. You re stuck with too much slow- moving, low- margin inventory 2. You run out of capital to invest in inventory that would actually benefit your bojom line 3. You allow your suppliers to dictate too many of the terms 4. You spend your Kme working really hard to make money for yourself, only to find you made a lot of money primarily for Amazon 8

9 Auto Pricing SoPware PRICE What is it? Well Worth the Investment Gives you the ability to do 2 important things: 1. Lower pricing in an automated fashion so that you stay compekkve 2. Raise pricing when the opportunity is there Know How to Use your Auto Pricing Tools Be deliberate and thought out in your rules The goal: You want to be priced low enough that you get the BuyBox but not lower than you need to be to get the BuyBox Don t set floor price too low and ceiling price too high 9

10 FBA Pricing Perks PRICE BuyBox priority over Merchant Fulfilled sellers More sales You can win the BuyBox with an equal OR EVEN HIGHER price than the next Merchant Fulfilled seller Bejer Profit Reach the EsGmated 40+ million worldwide Amazon Prime customers FBA is sgll young, and is growing in a strong and rapid way Amazon is pushing FBA If you have the funds, go for it! 10

11 BuyBox Example PRICE 11

12 FBA Pricing Perks Example PRICE 12

13 FBA Pricing Perks revisited PRICE BuyBox priority over Merchant Fulfilled sellers More sales You can win the BuyBox with an equal OR EVEN HIGHER price than the next Merchant Fulfilled seller Bejer Profit Reach the EsGmated 40+ million worldwide Amazon Prime customers FBA is sgll young, and is growing in a strong and rapid way Amazon is pushing FBA If you have the funds, go for it! 13

14 Customer Metrics PRICE Let s talk Philosophy Amazon is looking for sellers that emulate them How this philosophy affects sellers They are giving more visibility to sellers that have bejer customer metrics (omen Kmes even when you are priced higher than compekkon with poorer seller metrics ) Gives you the ability to do 2 things: 1. have a bejer shot at the BuyBox 2. keep your price a bit higher so you can pull in a higher profit on the sale. Crucial factor when it comes to pricing strategies on Amazon 14

15 Now What About Cost? COST How do many Amazon sellers unfortunately think about Cost? + Wholesale cost - Inbound shipping / outbound shipping - Amazon commissions - FBA fees / merchant- fulfilled shipping Meanwhile, Overhead costs, Hidden costs Are consolidated at end of year, and subtracted from total profit = $ PROFIT 15

16 Overhead Cost CalculaGon Pick your Kmeframe e.g., past 6 months, past 12 months Add up all of your costs that aren t product acquisikon costs and selling fees, including: Warehouse/storage/3PL costs, uklikes, insurance, book- keeping, payroll & benefits, business travel, corporate business tax, product samples, web development, etc. Pinpoint which costs apply to all channels vs. only to Amazon (e.g., FBA Inventory placement, Amazon Lending fees, Amazon sales tax colleckon fees) IdenKfy what porkon of all units you sold were on Amazon marketplace Divide total Amazon overhead costs into number of units sold on Amazon à That will give you overhead cost / Amazon unit sold COST Example: Overhead costs specific just to Amazon =$20k Other Overhead costs applied to your overall business = $175k Total units sold = 100k PorKon of total units sold on Amazon = 80% Total Amazon overhead = (80% * $175k) + $20k = $160k Overhead per Amazon unit sold = $160k / 80k units = $

17 And The Hidden Costs on Amazon COST Refund commission fee FBA refund shipping: from customer to fulfillment center (for certain categories) FBA disposal fees, or fees for return shipping from fulfillment center to seller The seller s internal processing/handling fees Write- down, write- off costs Opportunity costs of stock- outs 17

18 Hidden Cost CalculaGons COST 1. Go to Seller Central à Reports à Payments à All Statements View, to find these costs: Refund commission fees: RefundCommission FBA refund shipping: FBACustomerReturnPerOrderFee + FBACustomerReturnPerUnitFee + FBACustomerReturnWeightBasedFee FBA disposal fees, or fees for return shipping RemovalComplete 2. For write- down costs, track what porkon of returned items you are able to sell again as new 3. Do you have internal handling fees for returned items? 18

19 Hidden Costs of Selling on Amazon: FBA Example COST You sell an item on Amazon at 15% commission Amer all inigal costs, you have an apparent $10.00 profit on that item. BUT: 1. Your total overhead last year averaged $2/unit sold 2. This SKU has a 25% return rate, where you recover only 60% of the expected new selling price, due to customers returning products rarely in new condikon, or in its original packaging. So return- related costs are 25% x (1-60%) x $50 wholesale cost/unit = $5/ unit. 3. On all returns, Amazon keeps 20% of the original commission as a return fee. So add 25% x 20% x $12.50 = $0.63/unit. 4. So for a product you have refunded once and then sell, your apparent profit of $10.00 has fallen by $7.63 ($2 + $5 + $0.63) to $2.37, a drop of >75% of your believed profit on this item. And, if that product is a somlines item, you ll have to add the cost of paying the customer s return shipping to FBA to the fulfillment center (e.g., $2.50) *These calculakons don t yet include FBA storage fees, FBA return shipping fees from Amazon FC s to the seller $80.00 price on Amazon - $50.00 wholesale cost - $ 5.00 inbound/outbound shipping - $ 2.50 FBA fee (eskmated) - $12.50 Amazon referral fee (15%) $10.00 Margin - $ 2.00 overhead allocakon - $ 5.00 return- related costs, with 60% recovery rate on returned items - $ 0.63 average FBA returns fee $2.37 Margin* 19

20 So What Tools Help Us With Strategic Pricing? 1. Combining mulkple reports in Seller Central - Reports à Payments à All Statements View - - Reports à Fulfillmentà All Orders Reports à Fulfillmentà Returns 2. Automated tools for the certain types of cost from your business: FBA Calc hjp:// Hydrasale hjp:// Profit Bandit hjp://sellerengine.com/profit- bandit/ Teikametrics hjp:// ya.html 3. Automated tools for comprehensive cost view across your whole Amazon business: SKUProfit * hjp://skuprofit.com *Disclosure: James Thomson is a co- founder of SKUProfit Copyright 2015, Marketplace Accelerator LLC and Limited Goods 20

21 Top 5 Takeaways and Next Steps 1. Solid customer metrics play an under- rated key role in Amazon pricing strategies. 2. Figure out your overhead allocakon to apply to each SKU you carry. 3. Re- examine whether each SKU you currently carry is, in fact, profitable from a total- costs perspeckve. Modify your approach to sourcing new products so as to keep total- cost profitability clearly in mind. 4. Consider the benefits of Auto Pricing somware, and the selling benefits of FBA. 5. Focus on growing your profits faster than your sales revenue. This is about making YOU money, not Amazon. PrioriKze profits over sales! 21