Amazon Accidentally Inflation-Proofed Products. It’s a Case Study in Pricing That You’ll Want to Steal

With inflation skyrocketing, the price of just about everything has increased, from fuel and food to the things we do for fun. The cost of simply existing has forced many to become more conscious of their spending.

But while Amazon has essentially been inflating prices for years with its dynamic pricing strategy that automates pricing to increase sales volume and profit margins, it’s now doing what no one had imagined. 

Amazon’s dynamic pricing algorithm is now inflation-proofing its prices. 

As the economy slows and signs point to a recession, Amazon’s algorithm is actually dropping many prices. But it’s not as simple as a quick sale to push products, or reactively cutting costs to offset lower prices. It all boils down to five very simple pricing lessons that just about any business can use to become inflation-proof. 

1. Optimize pricing over time

Amazon is always testing the waters to see how much customers are willing to spend on an item before finally settling on a price. In fact, it is said to analyze product pricing every 10 minutes, according to Business Insider. While very few businesses would want to deal with pricing optimization every few minutes, many businesses fail to analyze pricing at all. That is, unless there is a problem, such as sales dropping. 

Rather than waiting to fix a problem, Amazon is avoiding problems by staying on top of pricing. Pricing requires optimization, and of course, optimization requires time, which understandably can be difficult to find, However, what’s more difficult to find is the right price after things have gone wrong. 

2. Set a price range

To avoid dramatic price changes, Amazon sellers can set a minimum and maximum price for each product listing — unbeknownst to consumers. By setting a price range, sellers can ensure that they don’t land a sale at the expense of their profit margin — or brand.

It’s vital for businesses to have a solid grasp on their target price range. With a minimum and maximum readily available, businesses can quickly optimize pricing, better reward loyal customers, attract new customers, and maintain a healthy profit margin.

3. Reward good customers

It’s not widely known, but Amazon may at times reward loyal customers by giving them lower prices. This is done by monitoring customer purchase patterns and giving the best discounts to those who buy frequently from the site, and frequently buy in volume.

Since its algorithm tracks what a consumer purchased in a month and how much they spent, Amazon can better gauge how often they will purchase the same product and what they will be willing to spend on it again — which is likely the same as what they paid before. With increasing prices due to inflation, this can actually result in consumers locking in pre-inflation prices.

4. Position lower prices as promotional sales 

When prices drop significantly — say around 20 percent or more — Amazon often positions the lower price as a promotional sale. In reality, it may simply be the result of dynamic pricing that favors a customer due to their historical buying behaviors or increased competition. This is a smart pricing strategy for two reasons. 

First, the time-sensitive nature of a promotional price increases sales. Second, because it makes the lower price seem like a promotion, consumers don’t associate the product’s value with the new, lower price. In other words, the lower price, when positioned as a promotion, doesn’t make consumers think the product should always be this lower price. In return, this gives businesses the ability to later increase the price without consumers batting an eye. 

5. Evolve to stay competitive within the market

Amazon uses dynamic pricing, which lends to healthy — if not fierce — competition with direct competitors seeking to undercut one another. While the assumption generally is that dynamic pricing leads to higher prices and profit margins, oftentimes it also drives competition and decreased prices. 

Profits on Amazon are largely derived from high-volume sales of low-profit-margin products. After all, it’s Amazon, and it’s dog food or nail polish we’re talking about — not the most efficient home heating system or the rarest collector’s Rolex. 

All this is not to say that weathering inflation will be an easy feat. However, businesses that work to strategically combat it by understanding their customers, their threshold, and their competition better position themselves to withstand a sluggish economy. It’s just one tool in a business’s toolkit, but it’s the businesses that do anything they can to avoid falling behind that end up ahead of those that don’t.