Pricing Strategies on Amazon: Why Is It So Hard To Get Pricing Right? Nathan Franco, Limited Goods James Thomson, Marketplace Accelerator
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• 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
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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
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Presenters
Overview of Today’s Discussion Building an effecKve pricing strategy requires a clear understanding of two issues:
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COST PRICE
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Overview of Today’s Discussion Margin follows from managing both price and cost carefully:
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PRICE • CompeKKon-‐based • Cost-‐based • Value-‐based
MARGIN
• AcquisiKon Cost • Commissions/Fees • Indirect/Hidden Costs
• Amazon Marketplace pressures on margin
• Individual product P&L’s
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Overview of Today’s Discussion
• 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?
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COST PRICE
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Why Does Strategic Pricing MaDer So Much?
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1. Sourcing -‐ What to buy in the
future -‐ Decisions on which
vendor to use
2. Vendor NegoGaGons -‐ What terms from
suppliers you’ll accept -‐ What wholesale prices
you’ll negoKate down
3. Inventory Management -‐ How long to hold
inventory -‐ What to liquidate, and
never restock
4. Pricing Changes -‐ How to price down, vs.
how to price up -‐ When to price up, vs.
when to price down
Strategic Pricing will drive your decisions on:
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Why Does Strategic Pricing MaDer So Much?
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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
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• 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
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Auto Pricing SoPware PRICE
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• 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!
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FBA Pricing Perks PRICE
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• 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!
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FBA Pricing Perks – revisited PRICE
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• 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
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Customer Metrics PRICE
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Now What About “Cost” ?
How do many Amazon sellers unfortunately think about “Cost”?
+ Wholesale cost -‐ Inbound shipping / outbound shipping -‐ Amazon commissions -‐ FBA fees / merchant-‐fulfilled shipping
= $ PROFIT
Meanwhile,
• Overhead costs,
• Hidden costs Are consolidated at end of year, and subtracted from total profit
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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
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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 = $2.00
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And The Hidden Costs on Amazon
• 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
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Hidden Cost CalculaGons 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?
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COST
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Hidden Costs of Selling on Amazon: FBA Example 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)
$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*
*These calculaKons don’t yet include FBA storage fees, FBA return shipping fees from Amazon FC’s to the seller
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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:
3. Automated tools for comprehensive cost view across your whole Amazon business:
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FBA Calc hjp://www.FBAcalc.com Hydrasale hjp://www.hydrasale.com/pricing/ Profit Bandit hjp://sellerengine.com/profit-‐bandit/ Teikametrics hjp://www.teikametrics.com/amazon-‐ya.html
*Disclosure: James Thomson is a co-‐founder of SKUProfit
SKUProfit * hjp://skuprofit.com
© Copyright 2015, Marketplace Accelerator LLC and Limited Goods
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!
Top 5 Takeaways and Next Steps
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