Three ways to optimize for Amazon's pricing strategy

By Arie Shpanya

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Amazon has become synonymous with great deals.

Retailers using the marketplace have spoken out about drastic undercutting from Amazon as a retailer, especially because they reprice with such high frequency (changing the price of the bible 100 times in five years).

But what's Amazon’s actual strategy when it comes to pricing?

Judging by the news that has surfaced over the years, one would speculate that Amazon's strategy is to frequently lower prices until they beat competitors--for all products. As a consumer, you probably go to Amazon because you think they have the lowest prices, but is that really the case?

Wiser collected exclusive Amazon pricing data and compared it across the competitive landscape using a tool called Market Price Index. The study offered insight into Amazon's overall pricing strategy, and revealed that Amazon performs well-calculated pricing changes.

Here are three things we learned from our analysis of Amazon's pricing strategy. 

1. Take a categorical perspective

Amazon applies different pricing strategies across different categories. While products might be more expensive in one category, they'll be more competitive in another.

Applying the same strategy to your entire suite of products isn't useful when it comes to price optimization. Instead, measure price elasticity between product groups to learn which ones are more susceptible to demand fluctuations with price changes. You can use this knowledge to make more targeted price changes in the future.

2. Focus on what you do well

Most people go to Amazon for the most popular categories, like electronics and toys & games. In our study, we discovered that Amazon's most competitive prices are in those high-traffic categories, and their most expensive prices fall into their less favorable categories, such as automotive parts.

In these less favorable categories, the retail behemoth was getting out-priced by niche retailers like Pep Boys. Why? Because Amazon doesn't have nearly as many eyes on those products as they do on electronics.

The same goes for your store. Your best selling items (given they have the proper elasticity) should be the most competitive.

And when it comes down to your less popular products, treat them as upsells for the doorbusters to earn back some margins. 

Cheaper prices exist in the most popular categories.

3. Keep the closest eye on your biggest competitors

Amazon is more competitive against some of the most notable retailers in the industry, on average 12% cheaper than Target and 16% cheaper than Toys R Us.

These are direct competitors for Amazon and had some of the highest rate of product overlap with Amazon, especially in Amazon's most popular categories.

There are thousands of retailers selling online today, but your biggest threats are the ones that are in your vertical. Keeping tabs on them is going to keep your pricing strategy much more focused and efficient.

Instead of pricing across the entire market, price against your biggest competitors.

Remember how we said Amazon is known as a low-cost leader? Interestingly enough, we found that Amazon is actually on average 13% more expensive than other retailers across all of its categories. 

Even though Amazon has built a powerful price perception, it doesn't necessarily adhere to it in every case. 

The biggest takeaway from Amazon's exclusive data is that branding is an incredible tool. When you narrow down and keep your pricing strategy more focused, you can streamline the price optimization process.