Hey everyone! Tim here with AMZ Fusion, bringing you insights to boost your business every day. Today, we’re diving into a repricing strategy known as the penny under method and why it’s a bad idea for your Amazon sales.
What is the Penny Under Method?
The penny under method is a repricing strategy where sellers continuously lower their prices by a penny to outbid competitors for the Buy Box. For example, if the Buy Box price is $9.99, you drop your price to $9.98 to gain more Buy Box share and sell more units.
Why the Penny Under Method Doesn’t Work
While it might seem like a smart move to undercut competitors by a penny, this strategy has several flaws:
- Geographic Limitations: The Buy Box varies by location. Just because you see yourself in the Buy Box in your area doesn’t mean others across the country do. This means your efforts to lower prices might not yield the expected results everywhere.
- Price Wars: Engaging in the penny under method leads to continuous price drops. If you’re at $9.99 and your competitor goes to $9.98, you might drop to $9.97. This back-and-forth can lead to a significant reduction in prices, hurting all sellers involved.
- Reduced Profits: As prices drop, so do your profits. A rapid decrease in prices can lead to selling products at a loss, especially when factoring in Amazon fees. For example, a drop from $9 to $7.27 means almost a $2 reduction per unit, which can wipe out your profit margins.
The Negative Impact of Penny Under Method
Here’s a detailed look at why this method is harmful:
- Accelerated Price Drops: Each reprice undercuts the last, often by two cents at a time due to fast repricers like Fusion, which reprice every minute. This rapid reduction tanks the Buy Box price quickly.
- Profit Erosion: Continuous price cuts can lead to zero profits. Even a slight initial drop can spiral into significant losses, transforming a profitable product into a liability.
- Amazon Competition: Battling Amazon for the Buy Box is futile. Amazon can afford to take large losses to maintain Buy Box control, something third-party sellers can’t sustain.
A Real-World Example
Consider this scenario: Amazon is selling a product at $9. As sellers engage in the penny under method, the price drops to $7.27. On a product that costs $7, this price drop means you’re barely breaking even or even losing money.
What Should You Do Instead?
- Match the Buy Box: Instead of undercutting, match the Buy Box price if you can afford it. This maintains price stability and profitability.
- Strategic Pricing: Only lower prices when Amazon is out of stock or when you have a clear margin advantage. Avoid unnecessary price battles.
Wrap Up
The penny under method may seem like a quick win, but it’s a race to the bottom that benefits no one. By understanding the pitfalls of this strategy, you can make more informed decisions that protect your profits and promote a healthier marketplace. Fusion Repricer is in the works and will be available soon.
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