Amazon pricing dynamics and how Vendors can adapt

Amazon has historically operated as a price follower, benchmarking its prices against competitors to ensure customers receive the best deals and fastest services. However, things have shifted:

• Price Leader Role: Amazon now scans competitors’ prices to adjust its own. This, in theory, should drive competition, but instead, it has positioned Amazon as a price leader.
• Impact on Other Businesses: Many online retailers can no longer compete, leading them to stop offering discounts or withdrawing from the pricing race entirely.
• Resulting Price Wars: With fewer competitive options, prices have started climbing instead of dropping. Ironically, this hurts customers—the very people Amazon claims to serve.
• Cartel Office Investigation: The German regulator has accused Amazon of manipulating market prices, citing potential harm to fair competition and consumer interests (Bundekartellamt, 2022; Bundeskartellamt, 2024).

Amazon dominates roughly 60% of the online market through its Marketplace and Vendor business models (HDE Online-Monitor, 2024). The image down below shows how Amazon evolved over the last two years regarding the overall online market space. Its pricing strategy is driven by two key factors:

Amazon scans prices from other online shops to adjust and often undercut them.

Sellers and vendors establish prices, which Amazon monitors and adjusts to suit its platform needs.

Amazon aims to secure customer trust by offering unbeatable prices and exceptional services. However, this approach doesn’t necessarily benefit sellers, as they often face price adjustments to align with Amazon’s broader objectives.

During major sales events—such as Prime Days, Black Week, and Cyber Monday—Amazon openly acts as a price builder. This intensifies the pressure on sellers to keep up with the platform’s aggressive pricing.

For vendors, Amazon’s pricing approach creates several hurdles:

1. Annual Negotiations: Amazon evaluates its year-over-year (YoY) return on investment. If profits fall short, they aggressively seek to recoup losses during annual vendor negotiations.
2. Balancing Pricing and Distribution: Vendors must strike a delicate balance between pricing that maximizes their revenue while staying competitive on Amazon.
3. Sticking to RRP: Vendors often aim for prices close to the Recommended Retail Price (RRP), which ensures a balance between their profits and Amazon’s margins.

If your current pricing strategy isn’t delivering results, it may be time to hit the reset button. Here’s how to navigate the complexities of pricing on Amazon:

A “tabula rasa” approach can be helpful. Discard outdated strategies and develop new pricing models that better align with both your needs and Amazon’s demands. Ask yourself how would my price and condition model look like when Amazon was already in the market?

Consider raising wholesale prices and use commissions instead of selling the products in your given markets and not on Amazon. This can discourage them from undercutting your products on Amazon, helping you regain control of margins.

If price adjustments aren’t an option, focus on increasing visibility and sales through targeted advertising. This can boost margins without cutting prices.

Lower prices for wholesalers who agree to handle distribution, allowing you to reduce Amazon’s involvement in your sales pipeline.

When it comes to reevaluating your pricing strategy, there are multiple paths forward:

• Raise Wholesale Prices: This strategy discourages wholesalers from selling on Amazon at lower prices, helping stabilize your profit margins.
• Invest in Marketing: Use Amazon’s advertising tools or other promotional tactics to drive sales and offset tighter margins.
• Diversify Distribution: Shift some focus away from Amazon by working directly with wholesalers who can lead distribution efforts independently.
• Disrupting Pricing Strategies: Traditional pricing- and condition models might not apply for Amazon leading to disrupting your given pricing strategy

Each option comes with its pros and cons, so careful evaluation is essential.

The key to thriving as a vendor on Amazon lies in understanding the broader picture of your pricing and distribution network. Start by asking yourself:

• Who are your distributors?
• Who are the third-party sellers (3Ps) involved in your business?
• Where are prices being pushed down—Amazon or wholesale?
• Trust your brand!

It’s crucial to take a holistic view rather than fixating on one area. Tools like Amazon analysis software, which integrate pricing and distribution management, can help you gain deeper insights into your overall strategy.

Remember, while adapting to Amazon’s pricing dynamics may feel challenging, it’s also an opportunity to refine your approach and ensure long-term success in a highly competitive market.

By proactively addressing these challenges, you can build a pricing and distribution strategy that not only aligns with Amazon’s expectations but also maximizes your profitability.