Determining the right price for your item on Amazon can be tough and there are a number of things to consider. This article walks through two methods that you can use for finding the elusive pricing sweet spot where customers will pay it and you’ll still be profitable. Pricing is all about trial and error, so we recommend using both of them together and seeing what works best for you and your business.
Method 1 – “Bottom-Up”
When you look at your Amazon pricing from a “bottom-up” perspective, you’ll take all of your costs into account, determine the margin you want to make, and set a price that way.
1. Start With Your Raw Materials
Keep track of what materials you use to make your items, how much of the material you use per item, and what the cost was.
|eSale Expert Tip: You may be able to reduce your material costs by buying materials in bulk if you have the volume to support it, or by substituting a different kind of material!|
2. Bring In Your Overhead Costs
List out all of your business expenses that are not directly related to an item, such as rent or utilities for a studio, the cost of certain equipment that you use, or general marketing expenses. Add these up and then divide the number of items you produce to get a sense of the overhead cost per each item.
|eSale Expert Tip: You may be able to reduce your overhead cost per item by increasing the number of items that you can produce or by using cheaper equipment or space!|
3. Account For Your Labor Cost
It takes time to make, process, and ship your items out to customers. Think about each of your production steps from start to finish and note how long it takes you to fully process one sale. Next determine how much you should be “paying yourself” for your effort. How much would you pay someone else to do it? Does that change because it’s you as the business owner completing the tasks? If you’re the only one running your business, even if you’re having fun and it doesn’t seem like work, that doesn’t mean you shouldn’t give yourself a fair wage.
|eSale Expert Tip: You may be able to reduce your labor cost per item by making certain steps in your process more efficient or by adjusting your own wage!|
4. Choose a Profit Margin
Now that you know all of your costs, you can determine the price to set. Are you okay with just breaking even since you’re paying yourself, or are you looking for more of a profit? Are you going to stay selling direct to customers who may pay a higher margin, or are you thinking about going the wholesale route where they’ll require a lower margin to you? Make sure to consider both where you are now and where you want to be in the future.
Method 2 – “Top-Down”
When you look at your Amazon pricing from a “top-down” perspective, you’ll take other factors into account aside from your costs to determine the price you want to set, then use that information to adjust your costs if necessary.
1. Understand Your Target Customer
Is your customer someone who has a lot of money to spend on things they want, or someone who tries to save for things they need? Do they appreciate the value of handmade items and are willing to pay more for them, or do they mostly look for low-priced items? Are your items good as gifts for which someone may pay a little more, or are your items mostly used by the purchaser? Make sure to fully define your customer and understand their pricing preferences.
|eSale Expert Tip: You may be able to gain some insight into your customers by asking around to friends or people you know who fit your target!|
2. Research Other Sellers
Even if you items are one-of-a-kind, there may be other Amazon sellers who sell similar items. Take a look around the Amazon site for items similar to yours and see what their prices are. Take this information with a grain of salt though – other sellers may have different costs, goals, or value for their products, so you don’t always need to beat or match them (this is especially true if your competitors are larger sellers).
When you use both of these methods, you may actually come up with completely different prices, which can be a good thing! That can indicate that your costs or business model may be mis-aligned with your target market, which gives you an opportunity to adjust something before it’s too late. At the end of the day, your Amazon prices should both represent the value of your products while still giving you the profit you desire. This is your business – don’t take anything for granted!