Winning the Price Game (Part 2): Mastering Amazon Retail Pricing

Paul Sonneveld
I'm Paul Sonneveld, co-founder and CEO of MerchantSpring and host of this weekly podcast. Now, before we get started, just a really quick reminder, MerchantSpring is a proud sponsor at Amazon Accelerate this year, just two weeks away. If you are attending, come and visit us at our booth 29, to check out our latest features, enter our giveaway, and even chat with me about maybe being a guest speaker on this very podcast. All right. 

Now, last week, we had an incredible session and conversation with Josh Cowan, the Sales Director and Senior Account Manager at Intero Digital, where we tackled really cost price increases on Amazon. We went pretty deep and we run out of time. So what I have done is I've invited Josh back today to really go deeper into that second part of the conversation we didn't cover last week, which was Amazon retail pricing. 

Now, for those of you who didn't attend last week, here's a quick intro on Josh. Josh brings more than 18 years of experience in e-commerce technology and retail, including time as a vendor manager at Amazon and leadership roles at several Fortune 500 companies. He's also built his own ventures, giving him a unique perspective on scaling brands in today's competitive marketplace. Josh, welcome back. It is great to have you here again. And thank you for rearranging your schedule just to come back and do that second part of our conversation today.

Josh Cowan
Yeah, of course. Thanks for having me back. Appreciate it. 

Paul Sonneveld
Great. Well, today we're talking about retail pricing. For those of you expecting to talk about cost price increases, I'm sure Josh will touch on it here and there because the things are related, but there is an entire 40-minute session on just how to get Amazon to approve your cost price increase. So go to our merchantspring.io and look for our webinars on demand there. You'll find it there. 

This is a live session. So just to remind it to our audience, if you have specific questions that you want to throw at Josh or ask him, please use the comment field on LinkedIn or on YouTube. We will receive those questions, and I will put them in front of Josh either during the conversation or towards the end.  So, please go and do that. Okay.  Josh, let's jump into the topic of retail pricing when it comes to Amazon. Let's just set the stage, right? Why does Amazon retail pricing matter so much for vendors, right? You know, I'll play devil's advocate here. Like I'm just supplying the product, Amazon is paying my cost price. Like, why do I care what Amazon sells it for?

Josh Cowan
Yeah, for sure. Look, this is a huge issue. This is, you know, this is the question that drives a lot of big brands' decisions whether to sell on Amazon or not, because retail pricing is so important. So why? Number one, I would say there's two really key reasons. One, what shows up on Amazon as the retail price will impact all of a brand's other retail channels, right? Everyone's watching is kind of the point here. 

So whoever they're selling to, they're paying close attention to how things are priced on Amazon because they have to be competitive. Because Amazon owns online product search. This is where consumers go to start their shopping journey and learn about products. And so they're going to see that Amazon price, they could be standing in a retail store somewhere. And, you know, if Amazon pricing is lower than it is in that retail store where they're holding that product, well, then they're that's going to impact all of their other sales channels. So that's one key reason. 

The second one I would say is is brand value and brand perception. Right. No one wants to be associated with cheap pricing, with pricing below where their products should be, you know, where they want them. And, you know, discounting oftentimes signal signals like a lack of value and, uh, uh, no one wants to be associated with that. So everyone wants their pricing to hold, of course, in all channels in a perfect world there's one price, you know, no matter where a product sold. And so, those are the key. Those are the key reasons.

Paul Sonneveld
Yeah. And, you know, just for the obvious, right. Obviously, we're talking vendor here, where Amazon sets the price as opposed to seller where you do have much greater control over the retail pricing. So, let's just talk about the technicality. I mean, how does Amazon adjust the price? Right. I know they do this algorithmically. It's not like they've got people in basements increasing or decreasing prices. I used to work for a very large grocery and we did have people to do that. But Amazon doesn't do it like way. How does the pricing algorithm on Amazon work? And particularly, how does it impact pricing for vendors?

Josh Cowan
Yeah, great question. I think that this is a huge grey area for a lot of brands. The, you know, first and foremost, no one knows exactly how it works, right? We know the inputs, we know the elements. And even when I was internal at Amazon as a vendor manager, I, you know, I knew the inputs, but even as a VM, I didn't have the exact code or algorithm for how Amazon adjusts it. But we do know what those inputs are. So we make some assumptions. 

Number one, about 95% of the time, I would say, give or take a few percentage points, the retail matching is determined by price matches, either internal on Amazon from other third-party sellers or external offers. When I say external offers, I don't mean every offer you can find out there on the internet. Amazon will take for every category. So let's say we're talking sports and outdoors, right? They're going to look at the biggest competitors externally that sell in that category. So maybe Dick's Sporting Goods and Cabela's and Walmart, and a few large online retailers like Academy and Midway. They're not going to tell you that, but they are matching those large external retailers, right? They're not matching the small online mom and pop shops or small dealers online. 

So again, 95% of the time, it's going to be matching, right? So let's talk a little bit about the 5%. say the biggest chunk of that 5% is what Amazon calls OIH or AKA overstock. So when Amazon has bought too much, maybe it's post prime day and the promotion didn't perform as well as you had expected. And now they're sitting on more inventory than their forecast says that they can sell on the next 60 to 90 days. So they mark a certain number of units as OIH or overstock and they will drop the price down to try to generate some sales and push that volume up to where now the dynamic forecast matches the run rate to where Amazon can move through that inventory in a shorter amount of time. And so then that price should pop back up. 

So now some of the smaller, lesser reasons that Amazon might adjust price. One internally, they call like a cost plus, which is Amazon might determine that the margins too high for the category average, right? Let's say your cost is much lower than what some of your costs are. And that margin for Amazon is more than they need. Well, Amazon knows that and they don't need that much margin and they know it's way above average. So they may drop the price to something that makes more sense based on the costs that they're getting at it. Just to, again, because they just don't need the margin and they want to generate more sales. 

Some even, a couple other smaller reasons might be you don't have a list price in the system. Sometimes that's the case where it's somehow a miss where the list price is dropped off and Amazon just doesn't have a price to reference. So they're creating their own price, right? And then this, I would say this last couple of years, another issue everyone's facing is sometimes Amazon is actually raising the price above your list price and where you want it. And, you know, sometimes they do this due to them not having competitive offers externally or internally, and, uh, they want more margin on that product. And so they'll just raise the price because they think they can sell it and there's no one else that's telling them they should sell it for less. So, yeah, those are the key factors I'd say.

Paul Sonneveld
Yeah, I knew most of those, but a couple of new ones there, particularly around the, I guess, the sell-through, right? Pushing the sell through for the product is overstock. Really, really interesting. I mean, I'm sure we'll get into that a little bit more because obviously that's the scenario where your brand can really be devalued, which is sort of what you mentioned at the start of this. I just want to clarify, you know, you always hear people talk about like, Amazon is a price follower, right? 

When it comes to that 95%, um, you know, obviously, it's really important for you to know what, what are your retailer benchmarks that Amazon looks at in terms of price matching. There was always talk about kind of Amazon following, but are there any instances where Amazon leads on price? Have you ever seen that? Like, I'm just thinking about like, you know, trying to improve price perception, trying to, you know, key events like, you know, Cyber Weekend, Prime Day and the like, which has been any times where you've seen Amazon sort of act out of character or are they pretty strong on that, on the follower policy?

Josh Cowan
Yeah, good question. You know, I think Amazon's tested a lot of different things, beta, even on the seller central side, they've actually been creating little promotions that they say they're funding themselves. And, you know, I think they are testing different things out. And, the bottom line is you can't really tell Amazon what to do with pricing when on the 1P side on Vendor Central, because they will hit you back with the laws, as far as you can't dictate price, and you can't tell them where to price fixing, right? 

And so you have to be really careful with those conversations. But they are testing some things, I'd say mostly on the 1P side, it's the reasons I gave you, even for things like promotions, like Prime Day, and whatnot, they're looking for funding from vendors and from brands to adjust pricing down. But that's not to say it's not possible. They are always looking into testing new tools. And so it's possible.

Paul Sonneveld
Yeah, interesting. And your point there is very valid around. I mean, we have legislation here in Australia as well, around, you can't talk pricing with the retailer as a vendor, right? You can talk cost prices, sure, but you can't talk pricing. And I remember being on the buying team and just sort of continually having to remind suppliers, I'll just ignore what you said, can't do that. And it's the same in many other jurisdictions, right? Which sort of gets us onto the question. So, okay, we understand what's happening here. We understand how Amazon sets the price. 

Is this the end of this conversation, or actually are there things you can do, right, as a vendor, right? On one hand, we're saying, well, you're not supposed to tell Amazon what the price is or, you know, they will ignore you at their peril anyway. But, you know, we care about vendors, right? So what are the key levers that vendors actually have? What are their options in terms of influencing that retail price without having any direct control over it, obviously?

Josh Cowan
Yeah, for sure. For sure. I think, you know, it depends on if you're, if you're talking about keeping price where you want it or adjusting it down, right? The obvious ones for having control over price, where you want price to come down, is promotions, right? A number of different types of promotions that you can run on Amazon. But if you want, if you want more control over your price on Amazon, the thing you really have to do is have a really strong third-party channel and external retail relationships and external distribution strategy. 

So, and I think my point here is know who you're selling to and have strong relationships there. So, you know, I think of distributors are kind of an obvious, like an easy culprit, right? Distributors are, they work on volume, right? They're great for brands because if you can get a distributor to buy your product, you're going to sell a lot of units, right? They're going to put that in a lot of different places. The downside of that is that distributors don't care as much about your brand as you do, right? They care more about volume. And so they will get rid of the last little bit of inventory they have and sell it off at however they can, right? 

And they will liquidate and sometimes that inventory will get in the hands of small dealers, and you know, mom and pop shops, you know, particularly on e-commerce. And that will come to the Amazon third-party storefront and throw up some units at a really low price. And, again, that's, it's really hard to track and track them down. But having strong relationships and trusting the people that you're selling to, I think, is really, really key, so that that doesn't happen. 

And part of that is have a really strong Amazon selling policy. So, define for distributors and for anyone you sell to, this is who I allow to sell on Amazon. And you have to adhere to this. And if you're reselling and this product ends up on Amazon and it can be tracked back to you, well, you're gonna lose access to the brand, right? And those are hard conversations to have, but they're really necessary if you wanna keep that brand value. And I talk about this with my clients all the time, that you have to have strong relationships and you have to have a pricing policy, whether it be a map policy or whatever that may look like for you. You have to have a policy that has teeth. 

And what I mean by that is you have to be willing to stand behind it and enforce it. So, you know, they will test you. Almost everyone you sell to will test you to see if you're serious about that policy and to find out if it has teeth or not. And so even the big guys, you gotta, you know, you gotta be careful because they will run promotions because they know Amazon's the biggest dog, you know, in the game, right? They know that they have to discount if they want to take some of that volume away from Amazon.

Paul Sonneveld
Can I just ask you to clarify map? What does it mean, the map policy and the like? I know it's very common terminology used in the US, probably less so in Europe and other regions. Can you just explain a little bit what it is, how it works in the context of Amazon?

Josh Cowan
Yeah, for sure. So you've got your MSRP, your standard retail price that is kind of that top of the line, like list price. And then you've got a minimum as advertised price, which essentially is so map a minimum advertised price. And that's essentially telling everyone that you're selling to that you are okay with them dropping the price and advertising a price on their site or in-store or whatnot. That's lower than your standard retail price. Typically, it falls around 10 to 20% below that standard retail price. Essentially, you're saying that is the lowest that you can go.

And if you break that, if you break that, that, you know, map price, you know, there's big ramifications. So the whole point of having a map is to enforce that retailers don't drop below that. And really, again, it's why it's such an interesting topic in the US is because there are these price fixing rules, but at the same time, you can have a pricing policy like this, and there's kind of loopholes that allow you to have a map policy. But again, it's only as strong as you're willing to enforce it.

Paul Sonneveld
Yeah, so it becomes part of your kind of commercial terms in terms of the distribution or sale arrangements with others. But clearly in the U.S., I mean, it's interesting because in a lot of geographies, certainly in Australia here, like having a map policy is still not allowed, right? The retailer literally can do it. The only thing you can do at some point is just withhold supply because you don't like the behaviour. But you can't sort of, you know, openly say you shall not advertise below this price. 

You know, although there are other rules around advertising below cost and those sorts of things, it's sort of a different topic. But in terms of, you know, how does this, you know, what is Amazon's view on MAP? Right. So I understand that. And obviously, you have a lot of leverage in maybe other retailers and distributors. But Amazon is a big customer from a vendor point of view. So what happens in reality and practice here most of the time when it comes to map and Amazon adhering to the map you've set?

Josh Cowan
So the very broad answer to this is that they do not recognise map, right? Amazon, if you say, Hey, you're breaking map. I mean, this is one of the biggest, I would say, flaws that the brands have, or it's just not something you want to lead with when having that conversation with a VM at Amazon. Don't lead with, Hey, you're breaking map. It's there's so many other ways to have that conversation and have it be a positive one with positive results. And the reason for that is that legal at Amazon, they refuse to essentially fix prices when someone leads with the conversation about how Amazon's breaking map. 

So I think it's just one of those things where you have to have the conversation the right way. The reality is, I have brands that I work with that have conversations with their vendor managers about map. And Amazon does have tools to hold price where, you know, brands want it, but it has to be for the right reasons. You've got to already have a net PPM that's above category average. It has to be something that is like completely out of your country. You know, there's a lot of different elements. It depends on the vendor manager and who you're talking to, how lenient they will be here and what they're willing to do for you. And that's where the relationship aspect of it, I think, comes in with Amazon and having that conversation the right way, because they do have tools to help you there. 

But in general, speaking broadly, Amazon does not recognise map, and it's better to lead the conversation with, hey, we noticed that prices come down, can you give us any insight into, you know, who might be driving that down? Or you could leave with, Hey, is this an overstock issue? Are you guys seeing that you have too much inventory on this? Or is it potentially a price-matching issue? Right? Questions like that you will have you will make a lot more progress with than you're breaking map.

Paul Sonneveld
Yeah, no, I think that that's actually goes directly into in the next question I was going to ask you, which is, you know, think about like where we are now. We're about to start AVN, the next rounds of AVN, right? Probably kicking off for a lot of people in about a month or two months' time. You know, there will be conversations around, Hey, your net PPM is eroded. It's not where it needs to be. You know, some of those negotiation tactics, some of them might be because your price has been eroded, right? 

Maybe you're selling, you know, the retail price, something was $20. It's been eroded to, I don't know, $16, right? Clearly, no vendor puts their hand up and says, Hey, let's erode the price out of my products, right? Unless maybe you're not getting the sell-through. So, as a vendor, you already started mentioning this, so some of this answer might be the same, but how do I systematically work through with Amazon what's driving their price erosion? And then what are some considerations, maybe to stop that hemorrhaging of that price coming down?

Josh Cowan
Yeah, yeah, it's tough. I think, again, this goes back to inventory is a really big one. You know, I would say one mistake that brands make that cause price erosion is they're too confident with buy-to-run buys, those vendor-initiated orders where they ask Amazon to take a bunch of inventory on a set of new products that they've launched. The problem with that is, you know, 90 days comes around and Amazon hasn't sold through it all. And now they're either sending it back to you or they're, they're discounting it. 

So I would say be willing to grow products slowly. And don't be over-aggressive with your plans with Amazon. But, you know, generally speaking, you know, you can avoid the price erosion, you know, with managing those external factors with external retailers, and ensure that everyone's kind of playing by your, your, you know, your pricing rules. Those are the key things, I think it's really it comes down to the relationships externally, and, you know, managing your distribution, strategy and don't be willing to sell to, five, 10 different distributors just to try to get the volume. And don't sell to every dealer under the sun, like know who you're selling to, um, and work on those relationships and ensure,

You know, here's the thing. I think it's really key to tell everyone else what your Amazon strategy is and why pricing is so important, right? Because Amazon people don't understand this. The large majority of searches that start on Amazon they actually end in a purchase elsewhere, right? So if you think about it, Amazon is kind of a gateway to improving your sales and other channels. And so with that understanding of other retailers and dealers understood, like by having a really strong Amazon presence and pricing there, you're going to help your own sales externally. They would look at it completely differently, right? But they just see Amazon as the biggest competitor, the biggest dog in the room, right? And so they don't want to play by the rules, they're just going after the sale, but they don't understand the bigger picture of, hey, make sure that Amazon looks good so that, you know, a rising tide floats all boats is kind of what I like to say, and it starts on Amazon.

Paul Sonneveld
Yeah, that is so true, particularly with your point around you know, when I'm in a physical store, I might be a Dick's Sporting Goods. So I'm about to buy this piece of sports equipment. Everyone wants to know that the head didn't pay an excessive premium, right? Obviously, they're happy to pay a bit more for convenience and the fact that I have it today, but, um, you know, most people will whip out their phone and just do that quick search. Right. 

And let's see, just to make sure, um, interesting enough as a side note, I used to use this argument for many brands on Australia who, who, When Amazon was small, they wanted to ignore Amazon, but I'm like, well, you should be on here because at least people will be checking out your page when they're physically shopping in store. But yeah, certainly definitely worth consideration too. I just want to go to the last point around that 5% you mentioned. I know 95% is all about price matching, and you spoke a lot about how do you manage your distribution arrangements? How do you keep tab on the key retailers that Amazon really cares about and trying to influence them the right way? 

But then there was this 5% about overstock, right? I'm assuming that you don't want to get sort of be passive about it and get Amazon just to go, ah, sell through is way under where it needs to be. We're just going to, you know, slash and burn, right? We need to get rid of this inventory. We need to clear up space in our warehouse and the like, right? Which is what, you know, typical retailer behaviour. How can you be proactive about that as a vendor, and what other levers can you pull really to avoid that, slash the price to get rid of inventory?

Josh Cowan
Yeah. A key one is don't trust Amazon's forecast, right? So understand that you have actually a lot of control. And when Amazon cuts a purchase order for a thousand units, shouldn't just say, man, accept, accept, you know, we want the sale. No, because you got to understand the downstream impact of that. So I'd say controlling it on the front end by understanding how much inventory does Amazon actually need. Like, does the volume of this product and the trajectory and the searchability of it on Amazon actually warrants the purchase order that Amazon's putting through, right? Amazon obviously thinks so, but that doesn't mean they're right. They're wrong all the time. They're wrong about how well a promotion is going to do when you've got an upcoming deal, right? 

And so I would say, be really careful about the purchase orders that you're accepting when Amazon's cutting them just again, you know, you do not have to accept all of that. Sure, maybe your confirmation rate will go down a little bit and your metrics will be not exactly where you want them, but what's more important, the brand perception with price or your metrics on Amazon with your confirmation rate, right? And so, I'd say that's really key. I would say, yeah, I mean, that's really on the front end, that's where you can really manage it well. And then if Amazon does have too much inventory, consider before they hit that point, if you know, man, the run rate has not caught up to where we expected it to be at this point. I can see. It's that Amazon's over inventory and that discount might be coming. Get ahead of that and run a promo on it. Right. Run a promo. So it's under your control, run a coupon on it or a 15% off or a 20% off or whatever if Amazon accepts that promo and lets you run it, then you've gotten ahead of them and took more control.

Paul Sonneveld
Yeah, staying in control and trying to proactively manage that sell-through, as opposed to having it done to you, right? Yeah, absolutely. Great. Just to wrap up, final question for me here. If you had to sort of take out your crystal ball, right? And think about, like, what do you think is going to happen to retail pricing in the next few years? Or at least Amazon's approach and philosophy? Is there anything that you point to and say, I wouldn't be surprised if they start doing this or that? What are you thinking about as Amazon evolves their retail pricing game?

Josh Cowan
Yeah, that's a great question. No, I don't know if anything will change in terms of how Amazon prices, unless a new competitor comes into the market that is, you know, a serious threat to Amazon, that might be the only way that they really look at their whole pricing strategy differently. And so, unfortunately, my crystal ball doesn't, you know, tell me whether that's going to happen or not. But I do want to make one other point that will hopefully help everyone in terms of costs and pricing overall and just this whole topic we talked about the last couple weeks, and something that we didn't cover, but so important. 

When you initially price a product for Amazon, and when you create a cost and create a new product on Amazon, be very careful about how you price it. Okay, so create a price that you can live with for a good while. Because if you create a cost on there and then assign a list, a list price that you have very little room to stay in Amazon's good graces in terms of PPM, if it were to come down at all. You're going to be in trouble. And then if you price it at the same time, don't overprice it to the point where now you have a problem with other retailers, right? Because how you price on Amazon will impact whether you're able to sell it and whether Amazon's going to drop to price match and whatnot. And so you have to just be very strategic about your costs that you're giving Amazon, you can't make it too low, you can't make it too high, assume that you're not going to get a cost increase for a long time. And I think that's, that will help a lot. 

The second piece of that, I think, is be willing to create variations. So you're not so reliant on pricing staying right where you need it to, because if you create variations on products and create volume regularly, you can continue adding new products with stronger margins that will help offset those items where Amazon's discounting or bringing the price down. And that will help you maintain the PPM that you need to maintain so that that AVN conversation goes a lot better for you come December, January. Yeah, assortment, be planful there and launching new products that can offset those lower margin products, I think is also key.

Paul Sonneveld
Cool. Thanks so much, Josh. That has been really fantastic. Unfortunately, that wraps up another episode of Marketplace Masters today, but thank you so much for really sharing again, coming in second week in a row, sharing your insights, wisdom and pitfalls, actually. So thank you so much for that. You know, if I'm sure those vendors are listening to if you hope you find it useful, but if you want to pick up the conversation with Josh and maybe pick his brain a little bit more around cost price increases and how you navigate around that or retails or map all that. Josh, what is the best way for our audience to get in touch with you?

Josh Cowan
Yeah, you can reach out to me on LinkedIn. It's great. I'm always responsive there. You can also shoot me an email. Yeah, either way.

Paul Sonneveld
Excellent. I think I had your email address here. I just put it on the screen there. Hopefully, that doesn't result in too much spam for you. There you go. 

Josh Cowan
No worries at all. 

Paul Sonneveld
Excellent. Cool. All right, Josh. Thank you so much. Really great. And yeah, I hope to see you in Accelerate in a few weeks' time. And just a reminder to the rest of the audience, if you're there, come and say hi. Tell me what episodes you enjoyed the most, and let's brainstorm some ideas from future episodes as well. 

Josh Cowan
All right. Thanks, Paul. 

Paul Sonneveld
Awesome. All right. Take care. All right, everyone, that is the end of today's episode. I hope you found that useful. Don't forget, you can explore all of our past episodes, including Josh's episodes on cost price, you know, Managing Cost Price Increases as an Amazon Vendor on our website at merchantspring.io. 

And of course, if you're looking for a software partner to help you simplify reporting and drive strong performance analytics across Amazon and 120 other e-commerce channels. We'd love to show you what we're building here at MerchantSpring. Just drop me a note. My name is Paul Sonneveld. Thank you so much for tuning in, and we'll see you next time. Take care.