How do I prevent my prices from racing to the bottom on Amazon (or any other marketplace?)
Photo by Kenny Eliason on Unsplash
Amazon Pricing
As consumers we all know that Amazon generally seeks to offer the lowest price available on products. They do this by comparing their price to other online sellers. Sometimes those products are compared to one major competitor, for more competitive products they can watch several competitors. When I sold as a third-party seller (3P) on Amazon we had a pricing algorithm where we could set a minimum margin that we were willing to accept and the algorithm would lower the price on Amazon until it hit our minimum, then it would reset the price. We watched all day as Amazon's algorithm would adjust to our price and when we reset at a higher level, Amazon would too. Fun trick, if you want to see what the price history is on a product, visit https://camelcamelcamel.com. You can track any Amazon product and even set up alerts for when a product hits a certain price.
If you ask Amazon about a particular price their standard line is “we don’t set prices we follow the market price”, effectively saying it isn’t us, it is someone else that is lowering prices. Prior to the pandemic there were only a very few times where I saw that Amazon was the price mover and only when they had expensive inventory that wasn’t moving. Most of the time Amazon was in fact matching another online price in the market. Post pandemic Amazon has become more aggressive about offering promotions to clear out inventory. This is completely within their right as a retailer, but for a brand the question often is: “If I sell on Amazon how do I ensure that it isn’t just a race to the bottom in terms of pricing?”
So how do you influence pricing on Amazon? The simple answer is that if you are a first party seller (1P), meaning you sell your products to Amazon and they sell it to the consumer, you don’t control pricing in Amazon. The Robinson-Patman Act 1936 and other antitrust laws require that each company establish prices and other competitive terms independently, without agreeing with competitors. I sometimes hear that if I became the seller on Amazon (Third Party Selling - 3P) then I could control my price. That is true, you would control the price on Amazon for the product that you are selling, but how many other 3P sellers are selling your product online? They set their own price! This doesn’t mean that all is lost. There are ways to support your brand and ensure a level playing field for everyone involved.
Influencing pricing in the market comes down to three key principles:
- Distribution strategy — Who else sells your product on Amazon?
- Brand strength — How strong is your brand? What kind of competition do you have on Amazon? Does your product demand a price premium? Is that evident to the consumer?
- Pricing Policies & enforcement — Do you have a MAP policy? Unilateral Price Policy? Are you enforcing it? Are you willing to enforce it?
Distribution Strategy
The first question to ask yourself is who else sells your product? Are they allowed to sell it online? What restrictions or requirements do you have for people that sell your product online? Most brands were represented on Amazon before the brand established an official relationship because enterprising 3P sellers were able to acquire product and list it.
Are you willing to limit the number of online sellers to gain more control over your brand online? The key is to have sellers that will represent your brand in the way you would want it to be represented. You can enforce this with an Authorized Internet Reseller agreement which stipulates the requirements sellers must meet for selling your products online. Things like content requirements, return policies, warranty representation, can all be included in an Authorized Internet Reseller agreement. Of course, an agreement is only good if you are willing to enforce it. You will have to make some decisions about how important it is to protect your brand and if you are willing to stop selling to resellers who don’t abide by your policy.
Brand Strategy
The next question to ask is how strong is your brand? Can you demand a price premium in the open marketplace? How many competitors do you have selling similar products? Here is an interesting example when I searched for a combination lock:
- Master Lock is $8.38, has more reviews 4858, and a higher rating (4.5 stars)
- Amazon Basics is $9.59 for two locks but has fewer reviews 3306 and a slightly lower rating (4 stars) $4.78 per lock for the Amazon Basics version is $3.60 cheaper than the Master Lock
In this case you may only need one lock in which case the Master Lock is a better deal because you don’t have to buy two, it has the name brand, and better ratings. How do your products stand up to your competitors? If you haven’t controlled your distribution strategy (see above) it won’t matter if there are other 3P sellers selling the same product for less.
Pricing Policies
If your brand is strong enough, and you are willing to control your distribution strategy, then you might want to look at establishing a pricing policy. There are two kinds of policies: MAP and UPP. MAP stands for minimum advertised price. Where a manufacturer unilaterally decides what price, a product can be advertised for, they set forth what steps the manufacturer will take against MAP violators, and they apply MAP equally to all retailers and enforced equally against all retailers. (pattern article citation). Unilateral price policy (UPP) is a “one way policy” as there is no agreement between the sellers and manufacturer. The policy is announced unilaterally and unilaterally enforced. Deciding which is best for you requires the input of legal counsel to ensure you set it up properly. Regardless of the policy you choose you will need to track pricing in the market and understand who is and who isn’t violating. You will also need to decide how you will enforce this even if it turns out that your best customers are violating the policy. It’s easy to take action against smaller players but this needs to be unilateral. Neither policy stops “unauthorized sellers”. Instead, you must plug the holes in your distribution strategy so they can’t get the product. If that doesn’t work, you can bring legal action against them.
Conclusion
The real question to ask yourself when implementing a plan like this, are you willing to enforce your plan and what could that mean? Are you willing to clean up your distribution network? I know of one company that limited online sales to just 5 or 10 online sellers. How many would you have to shut off from selling online? Is that necessary? Do you have the courage to enforce the policy with your biggest sellers? Remember you have to unilaterally enforce the policy! If you have the brand strength, the right distribution strategy, and a good pricing policy and plan, you can have influence to help maintain your brand integrity and pricing in the market.
Disclaimer
The above is based on my 10+ years working and selling to Amazon. If you are serious about this topic, you should seek legal counsel on how best to set up these policies. I have worked with a couple different legal firms and am happy to make an introduction. The opinions above are my own and are not meant to be legal advice.