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EcommerceBytes-Update, Number 302 - January 08, 2012 - ISSN 1528-6703     3 of 7

How Merchants Can Cope with Pricing Volatility on Amazon - Part One

By Ina Steiner

January 08, 2012

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After talking to Alasdair McLean-Foreman, you get the idea that selling on Amazon is a bit like trading on the commodities market - terms like "supply and demand" and "floor price" intersperse the conversation. Sellers are certainly aware of the downward pressure on prices on Amazon, but many believe repricing tools are contributing to the pricing wars. In June, McLean-Foreman took his Harvard degree in economics and his years of ecommerce experience and launched Teikametrics to provide online merchants with tools to tackle the dynamic nature of ecommerce markets.

McLean-Foreman explains repricing and says there are other factors to take into consideration that make it possible for sellers to do more than simply compete by lowering their prices. He also offers advice what to look for in a repricing tool, suggests how to look at winning the buy box, and when sellers should consider using Fulfillment by Amazon (FBA).

How did you get your start in ecommerce?

Alasdair McLean-Foreman: I built my first ecommerce website whilst in high school in the UK in 1998. It was a basic site with only a handful of products built with static HTML, I tested it by emailing my classmates and asking them the next day in class if they'd received an email from a "cool website" and got quite a bit of interest. I think the first product I sold was a Sony Mini-Disc Player that I had imported into the UK from Japan.

At the end of my freshman year at Harvard, I built an ecommerce website selling home cholesterol test kits after the company that had asked me to build a website for them chose not to launch their ecommerce store and gave me a pile of free products instead. With the profits from the test kit sales, I diversified into heart rate monitors and GPS speed and distance watches that I had been using whilst training for the national track and field team.

At that time (2002), GPS speed and distance watches used for running were very new and I was able to get traction with organic keywords in Google. I continued to focus on the high-end sporting goods category and was later able to grow the business into new markets, including luxury eyewear and apparel. In 2004, we started working with Amazon.com as one of their first sporting goods third-party sellers.

In 2008, I sold the business to a private-equity investor and since then have been working on consulting projects whilst building the technology behind Teikametrics.

Why did you decide to launch Teikametrics?

Alasdair McLean-Foreman: When we sold sports products on Amazon, we used a number of other repricing services with limited success. We felt they weren't up to par in terms of technology, product support, and features. Ultimately with the services available we weren't able to execute the tasks we needed to in order to be scalable to sell competitively on the Amazon platform.

In building Teikametrics we felt there was an opportunity to innovate and offer a service that is a lot more accurate and effective than services currently available in the market. In addition to cutting-edge technology, as a team, we have significant domain knowledge in the area of ecommerce and are leveraging this to help merchants grow.

You've said selling on Amazon is somewhat like commodity trading. Why does pricing fluctuate on Amazon even in fixed-price commodity categories?

Alasdair McLean-Foreman: Amazon is by definition a marketplace where buyers and sellers meet - sellers get to choose their own pricing and for that reason the market price for products is always changing as supply and demand moves for each product.

This is of course great for the consumers who buy from Amazon and is why Amazon has established itself as a trusted source for excellent service and new products at very competitive prices. A number of members of our team, including myself, studied economics at Harvard, so it's very interesting to observe the dynamics of a market like Amazon with so many sellers and such high demand.

We're generating a lot of data and it's exciting to build tools around it. Our business name comes from the Japanese word "teika" which means market price. The core of the technology we provide helps our clients use this data and understand the supply and demand dynamics of their products and the corresponding "teika" to react and maximize profits.

Is it true that whoever wins the Buy Box on Amazon gets the majority of sales, and if so, isn't there a "race to the bottom" in pricing?

Alasdair McLean-Foreman: Generally, yes, most sales come from the featured seller in the Buy Box position. Amazon has designed the "Buy Box" to signal to a potential customer that is browsing an Amazon product page which available offer has the lowest price and "best" offer. For this reason, with all things held equal, a rational buyer would always pick the Buy Box offer over the other available offers for the same product.

In practice, buyers also get a chance to review things such as the shipping lead-time and customer feedback rating for the seller. Sellers who are eligible for the Buy Box must meet Amazon's very strict criteria for short-term delivery and service metrics. Due to these small signals that are designed to educate buyers to make their own decision, we know that some customers choose to purchase from sellers who have a slightly higher price if for example they see that the Buy Box offer has an additional lead-time of 2 to 3 days before shipping or if the merchant has a higher short-term feedback percentage.

The "race to the bottom" certainly does apply to many products sold on Amazon, and the end result is that consumers get a very competitive price. However, just like any commodity, supply is not infinite and there are other factors to take into consideration that make it possible for sellers to do more than just always price their products lower. This is the exciting part for us as there are many additional metrics and data points that need to be analyzed and used to make pricing decisions for our clients.

Take for example, a case where a seller has a "close-out" opportunity on a particular product line and knows that they have all of the quantity of a product available left in production from a manufacturer. In this scenario, not lowering their price to win the Buy Box and waiting until the other sellers are sold-out could be an optimal strategy since after their competitors sell out of inventory they can control the market price without being contested.

To be successful in an efficient marketplace such as Amazon, strategies such as those that take into account supply, seasonality, and competitive dynamics are very important. Much of this relates to product selection (e.g. Selecting the right high demand commodity), forecasting, competitive analysis, demand analysis, and a lot more. We help our clients understand these metrics and then execute an optimal strategy accordingly.

What is Amazon repricing?

Alasdair McLean-Foreman: Amazon repricing is the process of routinely updating and adjusting prices for a seller's listings. Doing this manually for a large number of SKUs is not scalable, so we provide services to do this automatically.

Our automated Amazon repricing allows our clients to implement different rules to do a lot more than simply match the lowest price. For example, many clients come to us wanting to quickly beat all of their competitors on price to win the Buy Box but then we show them the importance of repricing upward based on competitor's price increases or reprice differently against other competitors who are using FBA.

See Part two of today's interview on this page.

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About the author:

Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to ina@ecommercebytes.com.

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