E-commerce analysts are predicting that Amazon.com will make over $120 billion in revenue this year. Of that, between $40 billion and $50 billion will be going straight into the hands of third-party merchants – the online retailers that sell on Amazon’s massive international marketplace.
Since there is no limit placed by Amazon on the number of third-party merchants, or the amount of products they sell, the same product is often sold by multiple merchants, each competing with each other and sometimes with Amazon itself. To address this situation, Amazon has created a very clever system to determine which of the many merchants competing to sell the same item will actually make the sale, and it’s called the “Amazon buy box.”
Essentially, the Amazon buy box acts as a personal researcher, analysing each product to determine which merchant will give the customer the best possible overall experience and value for his money. It takes into consideration things like positive and negative reviews, how soon merchants promise to ship an item, and how often they’ve kept that promise. It looks at how often deliveries come late or damaged, and many other metrics. Finally, it determines how much value each merchant is offering at their given sales price.
To Amazon shoppers, this guarantees the best possible shopping experience. But for online merchants, this means so much more. It means that if their reviews are good, their customer satisfaction is high, and they’re working hard to offer their customers a near-perfect experience, they can sell their item on Amazon at a higher price than their direct competitors and still make the sale. Over the years, we’ve seen top merchants winning that coveted buy box position, and making massive volumes of sales at prices up to 20 percent higher than other merchants selling the same identical item.
When we take a closer look into the buy box, there’s one more feature that is worth mentioning. Amazon has long abandoned the idea of giving the buy box to a single merchant for very popular products. Instead, the buy box is shared between several merchants, with their “share” of the buy box determined, as we mentioned, by the merchant’s performance history. For example, if there are ten perfectly comparable merchants all competing for the same product buy box, they might each get 10 percent. This means that each merchant will have their offering shown in the buy box for 10 percent percent of each day. Alternatively, a relatively high-performing merchant could have 70 percent of the buy box, an average merchant could have 25 percent, and a lower-performing merchant 5 percent, all within the same day.
To the skilled retailer, this opens up a world of possibilities. By adjusting their prices, not only can they control the profit margin they make on each item but also their share of the buy box, and thus the volume of the sales that they make. Knowing that a certain item would be difficult to restock, a savvy merchant could raise his prices, happily making fewer sales with a much higher margin. Alternatively, if their seller rating is high enough, they could take a much larger chunk of the market share for a popular and easily restocked item, still maintaining a healthy profit margin on a massive amount of sales.
To that end, many retailers selling on Amazon use a technology called a re-pricer. Essentially, a re-pricer is able to change prices frequently, to best take advantage of these opportunities. There are currently three re-pricing methods used by Amazon sellers to find this pricing sweet spot: manual, rule-based and algorithmic. Here’s how they work:
Manual Repricing: The simplest re-pricing method involves manually updating prices for every item. This gives the highest level of control and visibility to the seller, but also requires the most amount of work, which can be very restrictive for sellers with many products or those who do not have the time to spend manually re-pricing their entire inventory.
Using manual re-pricing can often be a full-time job, with larger sellers hiring teams of people to constantly monitor each product. For that reason, this method is only really used by sellers who sell a very small amount of high-value items, or products with no competition on Amazon.
Rule-Based Repricing: Currently the most popular re-ricing technique, rule-based re-pricing looks at the competitors’ prices for each product, and then adjusts the seller’s price based on a set of predefined rules. For example, rules can be set to match the lowest price on the market, beat the lowest price by a certain dollar amount, or be in the lowest 20 percent of all prices.
Rule-based re-pricing is quicker and easier than manual re-pricing. It also has the ability to instantly react to competitive price changes as they happen, often in near real time. However, this method suffers some major drawbacks. First of all, the rules themselves can often take a long time to set up, and also become conflicting, thus requiring constant supervision to ensure they deliver the best possible performance in a variety of marketplace situations.
Even more problematic, rule-based re-pricers only take into account competitors’ prices and ignore all other seller metrics. They are therefore forced to disregard the buy box share and profit margin, and cannot try to position for the maximum potential profit.
Algorithmic Re-pricing: The latest re-pricing technique available to sellers uses computer algorithms to determine the best possible price based on all known market conditions. This is similar to the technique used by traders to decide what price to set when selling shares on the international stock market.
Unlike rule-based re-pricing, algorithmic re-pricing is able to monitor every variable used to determine the buy box itself, and sets a price that will give the optimal balance of buy box share and profit margin for each individual product.
Algorithmic re-pricing has been proven to deliver the highest rate of return to sellers with the least amount of effort, as the process is usually entirely automated. However, this is also one of the more expensive re-pricing methods available, and can therefore be prohibitive for smaller merchants or merchants with very low profit margins per product.
Shmuli Goldberg is marketing director of Feedvisor, a fully algorithmic re-pricing and business intelligence platform that helps marketplace sellers maximize profitability.