You should never consider your cost of goods when pricing products on Amazon.
You’re pricing your products wrong
Tell me if this is relatable:
You have an item of inventory. And you assess the best price for this item is $20. Then you remember you paid $10 for it. And the payout is only $12. Which means your net is a max of $2. And that’s well beneath your standards of 40%. So while you would normally price that item at $20, you need to price it higher. So to hit your targets, you price it at $24.
Makes sense, right? You wouldn’t list something you were going to get a $2 payout for, right? So $24 is as low as you’re able to go.
Bad news: That $24 is a misguided act of delusion. And in this short article, I’m about to save you from yourself (and save you a lot of money as a result).
Your customer does not care what you paid
This is a tough one for many sellers to swallow. Get ready to throw your tomatoes at the page in protest, but I know I’m right.
The amount you paid for something is totally irrelevant, and should never be a factor in how you price.
Ever.
At first, this sounds insane. If you paid $10 for something, why would you price it in such a way that you’re only making $2? Or $1? Or even selling at a loss? Of course the amount you paid matters. Otherwise you’d lose money, right?
Take this in again:
The amount you paid for something is totally irrelevant, and should never be a factor in how you price.
The reason why is deadly simple:
Your customer doesn’t care what you paid.
Amazon customers are not running a charity
Here’s what no Amazon buyer has ever said in the history of the world:
“I want to buy this item. And I see that there are several listings around $20. But then I see this $24 way down the page. And while I could get exactly what I want for $20, Bobby McSeller paid $10 and he needs to hit his profit margin targets. So I’m going to spend $24.”
Of course, this is absurd. Because your customer doesn’t care what you paid. They are going to spend what they are going to spend, and your buy cost is 100%, totally, completely irrelevant.
I was talking to an Amazon buyer not too long ago, troubleshooting their low sales. One of the first questions I’ll ask in this situation is: “What is your general pricing strategy?” Since low sales is always a matter of either listing low demand inventory, or pricing, asking how someone prices usually reveals the problem.
She said, “Here’s my pricing strategy: I take what I paid for a book and I quadruple it. That’s the price.”
This was hard to hear. And I had to deliver some tough love: That formula was completely insane.
The market does not care what you paid. The market does not care what you want to get for your inventory. The market is unfeeling.
I don’t mean that what you paid shouldn’t be a major factor in how you price. I mean it is literally an irrelevant factor. The item is going to sell for what it’s going to sell for regardless of what you want. It’s going to sell for what it’s going to sell for regardless of what you paid.
A product is going to sell for what its going to sell for (your cost doesn’t matter)
Whether you paid a penny for something or $100, the price it will sell for is exactly the same.
What you want should never, ever, ever factor in because the market does not care, period.
So maybe you have inventory you paid $50 for. And the current lowest price is $60. And you’re thinking: “I have to sell this for at least $75.”
No you don’t. You need to not make that buying mistake again. But you don’t need to sell it for $75.
Maybe the price will rebound, and you can get a sale at $75. But the point is, what you paid for an item is not a factor.
It would be equally insane to say, “Me and my spouse want to go to Cabo for spring break. So I’m going to triple my prices on everything so we can afford it.” Your customer cares as much about what you paid for something as they care if you want to go to Cabo. And the amount they care is zero.
If you catch yourself factoring buy cost into a pricing decision – stop.
-Peter Valley
Interesting concept Peter. I’ve also heard you say you have a hard minimum price set. What is the happy median? One question I would ask is what about seasonal inventory? There are times when it pays to hold it until the right season.
Peter, I agree with your core point, the market sets the price, supply and seasonal demand will steer the price, not my buy cost, and pricing above the market because I want a margin is a losing strategy. No argument there.
I also agree with Leslie Seasonal pricing can be a key point.
Where I think this gets overstated is the claim that cost of goods is “literally irrelevant”. You know better…
It’s irrelevant to the customer, agreed.
But it is not irrelevant to the business.
Cost of goods absolutely matters for:
1) Tax treatment (COGS vs income, losses, write-downs)
2) Cash flow & capital allocation (what inventory I can afford to replace)
3) Opportunity cost (capital tied up in low-ROI items)