As an Amazon retailer, what should my target profit margins be? Should I be aiming for keystone retail margins on Amazon? Should I be setting prices to make the same profit margin on all of my products?
As any successful retailer in any market knows, performance is all about profit
margins – How much are you taking home after the customers have paid you for the goods? This bottom line question must be addressed to execute a successful merchandising strategy on Amazon. In this article, I will explain how Amazon retailers should recognize the shift of commodity trading at the core of their business and need to be focused on dynamic pricing to be successful.
In the world of e-commerce, where retailers have the potential of addressing very large demand from potentially millions of Amazon’s customers with low cost, optimally adjusting prices to match demand can have a tremendous return for even smaller retailers. In fact, in a commoditized market where customers focus on price and speed and cost of delivery, size truly doesn’t matter – Amazon enables any retailer to compete for the same customers as the likes of Best Buy, Toys-R-Us, or Macy’s.
As more vendors seize the online opportunity on Amazon, competition increases and as the basic laws of economics dictates, prices tend to decline. Unlike a traditional brick-and-mortar retail scenario, consumer demand is not limited by foot traffic and product pricing is not rigid. E-commerce retailers need to set prices fluidly often several times a day to be competitive on a national or global scale. It’s purer supply and demand economics – competition and efficient supply means many products are commoditized, a retailer who has the lowest price for a hot product on a marketplace shopping site such as Amazon may capture hundreds of sales for a single item. Pricing optimally can mean thousands of even millions of dollars a year from a single product.
The Amazon opportunity and its economics are revolutionizing retail. With only the cost of commission paid only when a customer purchases, any retailer can offer virtually any product to the world’s largest customer base. With extremely low barriers to entry, Amazon’s simple formula works, the Amazon ecosystem provides the customers and transaction platform whilst the retailer provides the commodity.
So, now you’re marketing your products on Amazon to millions of potential customers only to find you’re competing against a dozen people doing the exact same thing with the same products. Should you lower your prices?
With any rational customer naturally purchasing from the lowest priced merchant – the question relating to pricing is ‘How Low Should I Go?’
When selling on Amazon solving the puzzle of dynamic pricing and variable profit margins really matter. If I try and sell everything at a 50% Gross Margin, I might be missing a hundreds of sales as another retailer is will to go down to 40%. Should I go down to 40% too, or perhaps 20% of even 10%. After all, 10% Gross Margin from a $100 product selling 50 units a day is a far better for the bottom line than a $10 product selling at 50% Gross Margin selling 1 unit per day.
A savvy Amazon trader would recognize this opportunity and adapt rapidly. At Teikametrics we help clients with this process, we call this ‘Floor Analysis’. By analyzing the lowest Gross Margin thresholds, a.k.a. ‘the floor’s for each product, a vendor can balance volume versus margin. This is the key exercise required with the configuration of a successful Amazon Repricing strategy.
The end result is many variable margin sales which are aggregated to create one combined bottom line profit average across the catalog. This is a portfolio approach similar to an active trader of public stocks and shares. Individual stocks are traded at different velocities but performance is measured based on overall portfolio returns.
As technology evolves and marketplaces like Amazon become more competitive it’s the adaptive and dynamic retailers that will survive – a new approach to pricing is necessary and those who fail to recognize this will be left behind as the nimble and intelligent companies embrace the opportunity.
About Alasdair McLean-Foreman
As the Chief Executive Officer, Alasdair is responsible for Teikametrics’ overall business strategy and day-to-day operations. Alasdair founded an e-commerce company in his dorm-room which grew into a multi-million dollar company selling high-end sporting goods. He also founded the weight loss and fitness company Traineo and has built and provided e-commerce solutions to large organizations including Newscorp, The Times of London, L’Oreal, and The New York Marathon.
Alasdair earned a Bachelor of Arts in Economics at Harvard University where he was captain of the Track and Field Team and a member of the Great Britain and England national track teams.