Amazon's Pricing Strategy: Replicate and Increase Profits for your Store
Amazon, the world’s largest retailer with a $1 trillion market cap, has long held its reputation as a price disruptor in the retail space. So when it comes to pricing, the company knows what it’s doing.
They have used dynamic pricing strategies for years before it was mainstream—this has allowed them to maintain profitability and ensure they're ahead of the competitors.
Amazon’s pricing strategy relies on three things:
Offering low prices
Strategically updating prices to entice buyers
Making data-based decisions
How does all this come together into Amazon’s price strategy? And how can you implement a similar strategy for your store?
Tearing down Amazon’s dynamic pricing
Amazon sets product prices based on demand, purchase data, and on-platform competitors. But the strategy is simple - use real-time data and continually adjust product prices to match market demand.
In other words, if there's high demand for a product, they'll raise the price and when there’s low demand, they’ll lower it. This is made possible by Amazon's data collection methodologies that drive pricing decisions.
1. Demand-based pricing
Demand-based pricing considers the demand for a product or service to set prices.
For example, Amazon constantly adjusts its product prices to match demand and find price ranges that convert best and offer maximum profit margins.
Here’s a daily chart of Amazon’s price changes:
Seasonal pricing is also part of demand-based pricing. This strategy helps you identify the general demand patterns for your products throughout the year and make pricing decisions in advance.
You will notice Amazon offering products at large discounts during such high-demand seasons as Black Friday, Cyber Monday, Halloween, Christmas, and more to get the highest number of users to buy.
There’s an alternate form of demand-based pricing too, location-based demand pricing. Websites offering concert tickets, hotel room bookings, and cab services like Uber constantly raise or lower their prices based on the demand in specific locations.
This is a viable strategy for businesses within this market as customers have come to expect these drastic price changes.
2. Pricing based on customer data
This type of pricing considers a variety of data points—customer behavior, purchase history, and price sensitivity are a few examples.
Since Amazon’s goal is to optimize conversions, they rank sellers with the lowest prices and highest reviews, higher on the search results.
This ensures that customers get the best deals on the products they’re looking for and incentivizes other sellers to lower their prices to match.
Amazon also uses customer data to show relevant products within the customer’s average shopping price range and increase their average order values.
3. Competitive pricing
Competitive pricing takes into account the prices across competitors when setting prices. With over 85% of consumers researching their prices online, retail businesses need to match the prices to what customers expect to see.
While Amazon does not directly engage in competitive pricing, they do use competitive pricing to undercut competition when it comes to their private-label brands.
Also, because cheaper products rank higher in search, other sellers on Amazon are automatically required to use competitive pricing strategies if they wish to show up on the search.
To implement competitive pricing, you can begin tracking your competitors' price changes and adjusting the prices on your store manually.
Within a few months of tracking, you will notice clear patterns in the pricing data that can help you plan your future pricing strategy. If manual price tracking sounds difficult, try price automation on your Shopify store to save time.
The 3 steps Amazon takes to implement its pricing strategy
After the breakdown of Amazon's dynamic pricing strategy, let's take a closer look at the different ways the company uses price data to improve its conversions and profits.
1. Customer experience optimization
"The most important single thing is to focus obsessively on the customer. Our goal is to be earth’s most customer-centric company." — Jeff Bezos
Amazon doesn’t have the most beautiful website in the aesthetic sense. But it converts 15% of visitors on average and the conversion rates are around 74% for prime members.
So they’re focusing on the right things — customer experience. There are many aspects to a great customer experience including site navigation, load speeds, customer support, shopping times, and more.
One of the major factors influencing customer experience is price.
Since customers search online for prices before making a purchase, allowing sellers to offer products at higher prices can lead to a bad customer experience and lost sales.
This is why Amazon highlights sellers offering the best product prices compared to the competitors.
2. Purchase data analysis and interpretation
By analyzing customer data from over 200 million prime members and many more non-prime members, Amazon knows the buying behavior.
Their collective purchase history is estimated to be 1 exabyte (one billion gigabytes), and this data grows extremely fast. Amazon analyzes this data to show you products that they know are relevant to your search.
So next time you see suggestions from Amazon, like the one above, you know they’re Amazon’s sophisticated algorithms at work trying to show you relevant suggestions.
3. Research-backed price changes
Amazon is very strategic about updating prices for its private-label products. They use the price data gathered from all the sellers offering similar products and find the ones that convert best.
Amazon has an advantage here. It can oversee the sales and profitability data for everyone using its platform.
Also during sales, when customers expect to see big discounts on the prices, you may see products listed at massive discounts. While the discounts are real, they’re usually exaggerated to entice customers.
A quick look at the price histories on Keepa can tell you if a product has a real discount or not.
The prices are not just adjusted dynamically based on the season but also minutely changed throughout the day to ensure profitability at every sale based on the price sensitivity of users for different products.
3 steps to replicate Amazon's pricing strategy for your DTC store
The strategies are enticing to try on your ecommerce store. But you don’t have the huge customer datasets or the processing power for scalable analysis. So here are 3 ways you can use Amazon’s learnings to optimize your pricing strategy.
1. Making the customer experience a priority
The first thing you need to do is make customer experience (CX) a priority. While the scope of CX is not limited to pricing, getting the prices right is the first and major step toward keeping your customers on the site.
Once you have at least managed to profitably match your prices to your competitors, you can begin implementing the rest of the customer experience elements in your store.
To reduce the number of questions in your customers’ minds, you also need to ensure they’re all answered right on your product pages.
This includes offering comparisons with similar products, adding FAQs at the end of each product description, and more.
Even after you have implemented everything right, some customers need a final push to convert.
This can be handled with a scarcity trigger like Amazon uses on every product page as shown in the above screenshot.
All of these and many other elements collectively account for an amazing customer experience that builds trust and turns one-time buyers into repeat customers.
2. Using more data
Pricing based on competitors is an excellent strategy to get the ball rolling. In the long term, you would have to keep playing catch up while the competitors capture market share.
So, it’s important to own the data to make pricing decisions. One of the fastest ways is to conduct price tests for your store.
If you are a Shopify brand, you can use Dexter to run price tests and collect statistically significant data for accurate pricing insights without added effort.
Dexter’s simple 3-step setup wizard walks you through selecting a product, setting the price increase or decrease, and the traffic split to test the price. Once done, Dexter begins collecting data without changing the URL or SEO, adding unnecessary products to your store, or requiring manual code changes.
You can continue to send traffic to your existing product pages and a part of your visitors will see a different price.
3. Being strategic about price changes
It’s extremely important to regularly adjust prices to the market conditions, economy, inflation, and customer demand. But you also need to be strategic about the same.
Amazon knows that customers don't like sudden price changes, so they tend to make gradual price changes over time. Here’s a graph of price changes for one of their products.
It makes sense to use a similar pricing strategy for your products. It can take a visitor up to 90 days to become your customer. So your pricing strategy needs to consider a long-term approach where you gradually raise the prices every 60-90 days based on your price testing data.
Also, you can experiment with seasonal pricing which may help you gain higher sales volumes and maximize profits during peak demand periods.
Power your store with Amazon’s pricing strategies
Amazon's pricing strategy is a key part of its success. The company offers low prices, is strategic about price changes, and uses data to inform its pricing decisions.
While Amazon has achieved this feat through the sheer volume of data they collect, you can achieve similar results without the upfront investment in data, too.
Beginning with an excel sheet to monitor competitors' prices, you can move to gather customer data through price tests. This will give you the insights required to plan out a price strategy that suits your brand and marketing style instead of playing catchup with competitors.
And if you have a Shopify store, Dexter is the perfect tool to start your price tests. If you need any help with setting up your price tests, you can talk to one of our price-testing experts through the live-chat option within the app. Alternatively, you can drop us an email at help@thedexterapp.com.