Tuesday, March 20, 2012

Amazon Pricing - How to Swim With Sharks Without Being Eaten Alive

I'll be writing a series of posts on this topic, since it is a widely discussed subject on message boards, online selling groups, and from my clients and readers. Here is the first installment.

If you are an eBay seller new to Amazon, or thinking about selling on Amazon, the most crucial point to learn is how to price items for Amazon. eBay and Amazon are very different in this respect. The bottom line is this:


Newer Amazon sellers are often frustrated with competitors who undercut prices. You are wasting your time if you are going to let the competition frustrate you this way. Competition is a part of life, get used to it. You absolutely cannot control what other sellers do, you can only control what you do. Energy spent worrying about this is wasted energy - you are much better off spending your time and energy finding items to sell or working on your online business, rather than worrying about what other sellers are doing. Worry is nothing but wasted time and energy.Lately, I see so many people geting frustrated over this issue - it is like watching a dog chase its tail - spinning at breakneck speed and wasting valuable time and energy on a problem, not a solution.

I receive many emails each week with questions related to understanding why another seller would drop his prices below a certain point, or at all. Perhaps a product has been selling well for you, and a competitor comes in with a significantly lower price, and you simply cannot understand why that seller would do such a thing! Why would someone charge $10 less for an item when yours has been selling consistently at the higher price? The answer: You are never going to know - don't drive yourself crazy obsessing about it. Rather than spending time trying to figure out why, or becoming angry or upset, accept that competition is part of this business and you have to learn to deal with it. Part 2 of this series will focus on creating strategies where competition is minimal or doesn't exist at all.

Here are a few scenarios that I have personally seen with clients or readers that contribute to the highly frustrating "undercutting game" on both Amazon and eBay.

1. Ignorance. Another seller has no way of knowing that your widget has been selling at $39.95. They may think, "Oh, that is ridiculous, no one is going to pay that." Because Amazon does not provide data on historical sales, they can't see that you have indeed been selling the widget for $39.95 on a regular basis. You can't win here. There is no way to show the competitor that the widget will sell at $39.95. They can't get out of their own head and believe that you would be selling the widget at your price! You certainly can't contact him and tell him - that would violate collusion (price fixing) laws. You just have to wait for him to run out of stock so that you will get the sales occasionally, or eventually stop selling the item and move on.

2. The competitor's desired margin. Perhaps your competitor is happy making a $5 profit on an item, yet your price reflects an $8 profit. Even if you both bought the item at the same price, and the competitor is happy with a smaller margin, you can't win this one.

3. Competitor does not understand the Buy Box. This is a concept foreign to eBay sellers and buyers. Learn more about the Buy Box here - and if you are selling on Amazon, "learn it, know it, live it!"

4. Competitor does not understand the Amazon Prime Customer or Super Saver Shipper customers. Learn more about Prime Customers here. The best way to understand the Prime Customer is to become one. Walk a mile in your customers' shoes to understand their world. This strategy often backfires when a competitor prices at $24.50, $24.99 - when you can price at $25 and get the Super Saver Shipper sale.

5. Product may be approaching its expiration date and competitor is trying to liquidate. I've been in this situation myself. I may have bought too many of an item when it was very profitable to sell, the market became flooded with too many sellers offering that product, prices dropped, my product did not sell at the same velocity as it did at the original higher price, the expiration date approached, I had to cut my price to liquidate and sell out before the product expired and was no longer sellable. Be careful with quantities of products with expiration dates! Slow and steady wins the race.

6. Competitor's purchase price of inventory. I hear this one almost daily, "How can my competitor be making a profit at this price when I know this item only costs $X?" Never, never, assume anything about the competition. Once you get into this business, you will be shocked to know how much you really don't know. How do you know your competitor is not a wholesaler getting his products at 1/3 of YOUR cost? Many large companies and businesses use Amazon and eBay for customer harvesting - they sell products at break even or a loss to get the customer so that they can then direct the customer to their website for future purchases. (Ever bought anything off Amazon that comes in a package with a website address on it?) You cannot assume your competitors are even on eBay or Amazon to make a profit. They may be there for other reasons. I have coached these types of clients. They are more than happy to sell a product at a $10 loss to gain a customer who will spend hundreds or even thousands of dollars with them over the life of their relationship. Never, never assume your competitors (or customers) are like you. Your competitors may be looking at the power of eBay and Amazon to connect them with future customers, not at the profit on each individual sale. Another issue here is the flood of extreme couponers who have discovered that they can sell part of their stockpiles online. These folks have basements, garages, or maybe storage units full of products that they may have received free so they don't really care about margins - they just need cash. Extreme couponers also have the knowledge, experience, networks, and skills to get huge amounts of products for free and they are applying this knowledge to sourcing for products to sell online. Your competitors may be in this game for reasons very different from yours.

7. (The most dangerous situation of all!) Competitor does not keep records and does not even know if he is making a profit. I have coached so many people who don't do this - and when I make them sit down and look at the numbers, record their inventory purchases, sales, fees, and expenses, they are shocked that they are working for less than minimum wage. They feel like because they are busy and receiving deposits (from AZ or from eBay to PayPal), or that they have big payouts hitting their accounts, that they are making money. When we start breaking down what they are actually doing, they can then see they are like a mouse on a wheel - working so hard every day and not really getting anywhere. These folks would never consider working for minimum wage - yet that's exactly what they are doing as their own boss! You are competing against these people - sellers who don't know or care if they are making a profit. This situation makes it extremely difficult to succeed in this business if online selling is your sole source of income. (If you are not keeping accurate records, now is the time to start. Check out this easy eBay and Amazon tracking spreadsheet here. )

8. Your guess is as good as mine! I'm saying this tongue in cheek here because human behavior is a mystery - you will never know all the reasons why a person behaves in a certain way. I've talked to all kinds of people about issues affecting their online business and you would be amazed at what drives a seller to lower her prices. Just keep in mind that you can't control what others do, only what you do. The next part of this series will focus on selling strategies for stepping away from the "herd mentality" of online selling - how to find success working outside of the box and being unique.

(If you found this article helpful, feel free to post the link on your discussion groups, forums, Facebook, Twitter. Knowledge is power!)


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