Will Tjernlund, Greg Mercer and Bernie Thompson talk about private label pricing, from costs and competitors to products and positioning
There is a common misconception about private labeling on Amazon that simply taking a generic product and slapping a logo on it is a recipe for success. In most cases, there are other factors that play a key part.
One of these is price. Unlike wholesale or reselling models, where a manufacturer will often provide you with a retail price, and there are usually many competitors selling the same product, there are no such guidelines with private labeling – the price is totally down to you.
This can be daunting, as not only do you have to analyze market pricing, and decide on your initial place within it, but you also need a strategy for altering your price to react to market changes and your competitors.
To shed some light on this topic, I spoke to three private label experts – Will Tjernlund, Greg Mercer and Bernie Thompson – to get their advice on how to price private label products.
Finding the market price for your product
So let’s start from the beginning, you’ve sourced your product and you’re now trying to calculate your initial price. Did you know, that you may have already made a mistake?
Our experts were unanimous in the belief that you should have, at the very least, a rough idea of your costs and the price you need to sell your product for to generate a fair return, before you have bought your stock. Otherwise, you run the serious risk of buying multiple units of a product that you can’t sell for a good enough return to make it worth selling it.
The first step you need to take, regardless of whether you have your stock or not, is to find the market price for that product. This usually isn’t too difficult, as there are very few products that aren’t already being offered in some guise on Amazon. So, searching your primary keyword, for instance “medicine ball”, will return a good set of similar products.
From this you should be able to see clearly what the price range is like for similar products already being offered on Amazon. It is then about making an honest appraisal of your product, and its features, and judging whether it is more aligned to the lower or higher end of the market. It is also worth using software to analyze the search results more scientifically, and find out what price the best selling products are being offered at.
Sometimes though, the range of prices can be too large to base any real decisions on. You may have one competitor offering the product at $20 and another at $200, which makes it almost impossible to know where the market really is.
In this situation, Will Tjernlund turns to another marketplace for assistance – eBay.
When stuck for a way to find the market price for pairs of bamboo sunglasses, Will decided to test the market using eBay auctions. He created a series of different listings for all the different sunglasses he had in stock, each with a different picture. Each auction was set for seven days, with no reserve, and a minimum bid of $0.99. Will then used this data to generate a market price for Amazon:
After a week we figured out which pictures commanded the highest price which is very valuable information and I also realized that people were bidding anywhere from $17 to $24, which is pretty much a market price after listing the product 10 different times.
From this data, we knew that if people are willing to pay that much on eBay, where prices tend to be lower, we can sell the sunglasses for $24.99 Prime on Amazon, and so that’s how we came up with the price.
Will Tjernlund, Founder, Goat Consulting
Factoring in costs
A crucial part of calculating your initial price is factoring in any costs you will incur. Unfortunately, this is the aspect of pricing where private labelers most commonly go wrong, often because there are costs that they simply forget to include. Some of the elements that are commonly forgotten are:
Amazon fees differ by country
If you are selling on Amazon marketplaces overseas and have your stock in fulfillment centers, make sure that you take into account the different fees that each country charges. You then need to adjust the price of the item accordingly, to make sure that selling in this market is profitable. You don’t want to expand to an overseas Amazon marketplace, price the product as you do on Amazon.com, and then find out further down the line that you’ve been selling at a loss.
A very similar scenario happened to a friend of Bernie Thompson’s and meant they wasted two years selling on Amazon.ca at a loss.
I had a friend who launched in Canada and sales just took off, he was going gangbusters! But it turned out that there were very different cost structures for commission and FBA between the U.S. and Canada – with Canada being much more expensive.
Unfortunately, this friend had just carried over the U.S. costings into their Canadian pricing and they realized that they had absolutely hit it out of the park for almost two years but they’d been losing money the whole time.
Bernie Thompson, CEO, Efficient Era
The cost of pay-per-click advertising on Amazon can often catch sellers by surprise. They source their product, list it on Amazon, go to run PPC ads and find out that their primary keyword, which they expected to bid a dollar on, is more like $6.00 per click. They are then left to decide whether to increase the price of the product and risk pricing themselves out of the market, use a sponsored ad campaign and make a loss, or try and sell the stock organically, none of which are ideal.
When you’re launching, PPC ads are crucial. You need them to help drive traffic to your listings, and increase sales, which in turn will improve your search ranking. It’s very hard to launch successfully without using ads, so it’s a good idea to do your research in advance. Go into AMS and set up a dummy campaign, to see how much you’d have to bid to be in first place.
Even though the bids on your primary keywords could change by the time you list your product, you will be able to see whether your PPC spend is prohibitive, and will prevent you from making a profit.
If one of your products has a country-specific variation, you need to keep in mind that the unit cost is going to vary, and that with the tight margins for online selling, failure to adjust prices can prove costly.
This is a common occurrence in the electronics market, where a product that is sold in different countries, and so has variations with different plugs, are all sold under one SKU. The product has the same UPC code globally, and the seller just sends different variations to fulfillment centers overseas or, if they fulfill their own orders, puts the correct plug in the box before it’s shipped.
Bernie Thompson is also in the electronics market, but has separate UPCs not only because there is less chance of the wrong plug ending up in the wrong country, but also because there are different costs involved. A major one is that the UK is a much smaller market than the U.S., so the price of sourcing 5000 U.S. plugs is going to be lower per unit than sourcing 250 UK plugs.
By keeping the variations completely separate they can be costed out and priced appropriately, unlike having a global UPC where you might be losing money in the UK because you’re charging US prices despite having higher costs in sourcing the different plug.
Setting your initial price
Once you’ve found the market price for your product, and made sure you’ve factored in all the costs, it’s time to set your initial price.
When you’re going through this process, it is a good idea to generate multiple price points. Will Tjernlund, and his brother Andrew, created a three-step profitability calculator in Excel that helped them decide on an initial price for their product. It would also generate a liquidation price, where they could sell their stock at clearance prices but still make a slight profit, and a ceiling price, which they could charge if their product became one of the leaders in the category.
When you’re trying to find your initial price, there are a number of strategies that you could choose to adopt. Firstly, you could look to match the market price and differentiate your product in other ways. This could be by offering additional features, so if you’re matching the price for sunglasses, yours might include a nice case, a cloth and some cleaning spray. Alternatively, you may choose a philanthropical path, and donate a percentage of every pair sold to an eye care charity.
Differentiating your product is really important in this strategy, because if you just offer your product at market price and try to compete with established private label products, you’ll have little success. Customers are far more likely to buy the established products with more reviews, higher search ranking and ultimately, a better reputation.
Another strategy is to set your price above the current market price. This can be a risky move though and you need to have a solid reason for why your product can command a higher price than similar products that are already on the market. This also needs to be made clear to your customers.
The last, and most popular strategy is to set your initial price below the market price, even if this means making a short-term loss on your product. The idea is that the lower price should lead to a large number of sales, which will boost your product in Amazon’s search rankings. Then, over time you should be able to start raising your price (we explore why and how to do this in the next section).
A final aspect of pricing that private label sellers agonize is the psychology effect – in other words, does a product at $14.95 sell more than ones priced at $14.99 or $15? The answer, according to research that Greg Mercer conducted using millions of data points, is a surprising no.
When should you alter your price?
When, and why, you should alter your price greatly depends on the pricing strategy that you are choosing to deploy. So if we take the strategy of entering the market at a loss, you ideally need to be matching the sales rate of competing private label products before you bring your price up.
To find the sales rate of competitors, Bernie Thompson uses the “999 trick”. This is where you find your competitor’s product and add 999 units to your cart. Amazon will then tell you how many of those units you can actually buy, so you know your competitor’s stock level. If you do this over the course of a week, you can see how many items are leaving Amazon’s stock and are therefore being sold. Doing it over a prolonged period also helps account for other factors that might mess with the data.
By finding out the sales rate of either the category or keyword leading product, you know the level that you need to be selling at in order to appear on the first page of Amazon search results. Bernie Thomson has also found that after you’ve matched this run rate for a two week period, you can start to bump up your pricing, because Amazon customers seem less sensitive to pricing if the product has a strong search ranking:
Marketplaces have got these interesting elasticity behaviors that maybe aren’t the way you learned in economics class. So once you’re up in search position you have a lot of ability to bring the price back to norms and not lose sales. Basically people are trusting Amazon search and they’re not going deeper to find that the other product is still at the low price.
Bernie Thompson, CEO, Efficient Era
And, even when your reach the market price, this shouldn’t stop you from trying new prices, to test the price sensitivity of Amazon marketplace customers. Greg Mercer thinks that many Amazon sellers find their initial price and stick with it, even though they could potentially be seeing a greater return from their product. He believes that sellers should regularly be trying out new pricing, by running properly constructed testing over a fair period of time:
Often I’ll see people with a $20 product increase it to $22 and say, ‘Well you know yesterday I was at eight sales but today I only had six’, and change their price back. But they don’t know that the drop was definitely because it was too expensive.
So, I recommend a proper A/B test where you’re rotating your price every 24 hours and then looking at it over the course of two weeks. This way you can see if your sales really changed over that time.
Greg Mercer, Founder, Jungle Scout
Ultimately, there is no blanket rule for altering your price. A large part of it is knowing your market, keeping an eye on what your competitors are doing, and being aware of any new sellers entering the market. Things to watch out for include your competitors increasing the cost-per-click of PPC advertising, liquidating their stock or even running out of stock during busy times of year, such as Christmas season.
Positioning yourself against your competitors
When it comes to positioning yourself against your competitors, knowing your market is one of the key weapons in your arsenal. It’s very much a case of picking your battles, and to do that you need to know which of your competitors to take seriously, which ones don’t pose a threat, and which ones you simply can’t compete head-to-head with. Will Tjernlund learned his market, and who his competition were, simply by spending time on Amazon and was able to use this knowledge to approach competition on a case-by-case basis.
I just naturally look at my listings throughout the day, and I’ll be able to notice a new seller with 200 reviews on the first page, selling for $4.99, because I know almost every company on here.
So, when I sell a product I know who everyone is on the first page and I can say: ‘Okay these are the cheap guys shipping straight from China. These other guys do a really good job with their branding’. And so I don’t try to compete with them because they are going to kick my butt.
Will Tjernlund, Founder, Goat Consulting
If you are called into a direct battle by the actions of your competitors, or even in just the standard day-to-day competition for sales, you need to know what you are competing on. Your two primary options on Amazon are price and quality, and Greg Mercer finds that competing on the latter is usually a better option:
I pretty much always go for the higher-end stuff that commands the higher price. You have to have pretty lean systems in place if you’re really just trying to compete on price. It just seems to me that it’s a lot easier just to go for the higher-end of market and just be competing on quality. The less price-sensitive customers are also probably going to have a lower return rate as well, because you know they’re not so worried about saving a dollar.
Greg Mercer, Founder, Jungle Scout
Choosing quality can be an even stronger option for a product where the competing private label products all have four star reviews or below, as Greg has found that a quality product with five-star reviews can sell at 20-30% more than low-rated competition.
A final aspect to remember is that competition doesn’t just include other Amazon sellers, there is also competition between marketplaces, as they are all trying to maintain the perception that they are the ones with the lowest prices. In fact, Amazon monitor your prices on other marketplaces, and if you offer a lower price elsewhere, they may take action against you (only in the U.S. – this “price parity” policy is not legal in the UK and EU). Because of this, Bernie Thompson believes keeping a consistent price across all platforms can be a safer way to proceed.
Marketplaces are trying to use as much leverage against you as possible to make sure you’re not offering a lower price to anyone else. You’ve got these kind of wars between ecommerce platforms that mean, very often, the only way to avoid trouble is to have a pricing strategy of trying to maintain the same price across all your different online channels.
Bernie Thompson, CEO, Efficient Era
You can see that there are several different strategies for pricing private label products, but at the heart of every single strategy is research. Knowing your product, knowing your costs and knowing your market are all crucial, if you are to find your optimum price.
Conducting this research as early as possible can also give a big advantage, as it decreases the risk of stocking a product that you then realize has to be sold way above the actual market price just to break even.
Finally, it’s interesting to consider what our experts have said about price sensitivity and how traditional economic principles don’t necessarily hold true on Amazon. While this is an important factor for new private label sellers to work into their pricing, it is also important for established private label sellers, who may actually be able to charge more for their products.
What has your own research told you about private label pricing? I’d love to hear what you think in the comments below.