Amazon Case Study #2 – Premium Priced Product – should they drop their price?

In this week’s webinar, this Amazon Seller has a premium product priced at $149 with monthly sales of $25,000.

The question is “Should they drop their price to get more sales?”

We look deep into their Amazon Seller Central reports to find out:
– if that is the best course of action
– what other factors do they need to consider
– what can we see that should be looked at first.

Replay below:

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Transcription

Welcome to our second Amazon case study where we look in depth into the Seller Central data to find out what lessons we can learn from actual Amazon data. eCommerce is all about numbers and because we don’t have the face to face interaction of traditional retail, we can’t understand where people are standing in the queues or in the aisles or what products they’re looking at that grabs their interest. All the interactions and decisions of your customers is measured by the data. Today’s case study is a seller of a product. They’ve got a number of products with variations. It’s a second year operation. It’s got sales of US$426,000. That’s for the sales for the last 12 months.

We’re going to look at one product in particular which is the blue product. It’s the majority of the products, 77% of the sales. It’s something that we needed to look at. The issue with the product, it’s premium priced. It’s $149. It’s way above the usual $15 to $20, fits in a shoe box type arrangement. They’re currently selling about 154 units a month, monthly revenue $23,000 average. Gross monthly profit, $11,300. They’re making a pretty good level of profit with a great gross profit rate. We’ll deal with that later. The question is, in this one, should they drop their price to increase their sales?

That was the problem they came to us with so we wanted to have a look at what’s involved. Should they drop their price? Going over again, this is the information we got from Seller Central. We asked them to download the reports. First one is just the business reports by date, sales and traffic. We have to make sure we grab the following information. In Seller Central, if you mouse across to the far right in business reports, it’ll come up with columns and you can tick the columns you want. We just need to make sure we’re picking these ones because these are the main drivers. There’s some other ones we looked at in this as well, which I’ll go over. That’s give an overall for your whole business and then we have to look at it the “by ASIN” so we looked at the detailed sales pages, and we got out the same items that we needed there.

The trick with this is you have to go down and download each month in particular and then put it into Excel, massage it a bit so it’s all looking right.

Let’s look at an overview of the top level. We’ve got a big jump in Christmas which is interesting. It’s coming up, so that’s always quite good. This is where they started in April last year. Bit of a bump there but it could be promotions. I suspect they ran out of stock at this point and then in July, and then they’ve got this increase in sales. A bit of a concern as it’s starting to dribble off a bit here. The trend lines are showing down.

You have to remember, sales is just doesn’t happen. The results of someone coming to your product pages, you need visitors, which is measured by sessions times the conversion rate which is the number of orders divided by the number of sessions, which is shown in your Seller Central reports as a unit session percentage, times the price. Let’s look at those individual items along the way. We can see here the sessions is … Well, we’ve got a bump over Christmas but we were looking at about 5000-6000 before Christmas and then it’s bumped up to 8,500, and it’s been slowly trailing off. We’ve got this problem here where we’ve got this drop in September whereas previously, it was showing an increase in September over that period.

Is there something we can learn there or is that trend going to continue? We’re really looking at only 1 month there, so the concern would be if October’s particularly low as well, especially as we’re leading up into the Christmas period. This is 5000 to 6000 visitors to this particular product page each month. Now, that’s the joy of Amazon. If you’re running an eCommerce site, it’s going to take you a lot of time and a lot of money to build up to that level. That’s one of the joys of Amazon is that it’s already got the traffic there. Yes, it’s competitive but if you go out into the wide world, it’s competitive as well and probably far more competitive. If you try buying ads on Google and Facebook or trying to build up your traffic and email subscribers, it takes a long time.

The other issue we look at conversion rates, the conversion rate’s fallen a bit. It’s got this period here, but this is a lower sales period. It was looking at 3 to 3.5%. It’s jumped over Christmas which we would expect. A significant jump over Christmas and then we’ve got, it’s kind of trending at about 2 and 1/2 percent. It’s probably the most interesting in this, which I was quite surprised about, was they are showing on the first page of Amazon for their search terms which is not a major search term but it’s still, obviously it’s showing quite a bit of traffic. I think they’re at the bottom half of that, so below the fold.

In terms of prices, they’ve kept price pretty stable. I mean, they dropped it by $3 at one point, so they haven’t mucked around with the pricing points. The other thing we should note there, at the price, it’s 149.25. It’s a high price product. The other factor is, and I usually don’t mention which category it’s in but I think it’s important in this case. They are in the fashion sector. People, women buy a couple of different products, try them, and then return the ones they don’t like. We’ve got basically a 14.7% average return rate here. We can see we’re getting these returns along the way.

There’s a difference here because we’ve got this Christmas/January period where you’re getting the refunds, but the question is whether the price produces some degree of a buyers’ remorse and one thing I’ve looked at in terms of refunds is well, can they reduce it some way by making people feel better about their purchase? You could do that via inserts or follow up emails or et cetera. That’s one way you could look at reducing the refund level. It seems a function of the category in fashion because the other products they’ve got which are not as high priced have got a similar level of refund rates. It may just be a factor of the sector that they’re in.

The other thing, too, they put quite a bit of effort into managing the returns, the returns are sent off Amazon warehouse, repackaged, where they can be resold back on Amazon, they’re put back into stock or they are used as samples and sold on different channels, et cetera. The other thing to remember when we’ve got this level of refund rate and the reason I brought this in is because it is a significant item, is we need to take account of it in our pricing and in our gross profit rate. Otherwise, we’re going to be kidding ourselves and thinking that we’re selling at a higher rate when we get to the end of the period, at the end of the year, and suddenly you haven’t made as much money as you thought.

Even if you’ve got a 1 or 2% refund rate, you should be thinking about costing that into your pricing. We see here, we’ve got this declining trend in sales. It’s a result of a decline in the sessions of 5% a month on average and we’ve got a slight increase in that conversions of that 5% a month, so since January, sales have actually increased by 2% but we’ve got this bit of declining period at the end which is somewhat concerning. What we found. Let’s look at the sessions and conversions and see if we can find out anything there. The main issue that I can see is we’ve got this really low conversion rate, which is the solid blue line at basically around 2.5%, but we can see no definitive relationship between sessions and conversions.

This is the one period where they did reduce their price by $3. It did bump the conversion rate up slightly, but it’s a bit hard to tell. They haven’t conducted any real tests of this to see whether price and conversions are matching. There could be a number of other factors in there. The other thing we saw is, we’ve got this 100% increase in November and December sessions, so we’ve got this bump from October, just under 5000, to basically 8000, almost 9000. We’ve got this big jump in sessions and we’ve also got this bump in conversion rate which deals with a big increase in sales. I mean, their sales jumped from $25,000 on average to $60,000 over Christmas. A big jump there and we can see here, we’ve actually got a decline in the conversion rate, so the sessions increased in November, but their conversion rate dropped slightly.

In December, maybe it’s due to people looking at this stage and actually buying at this stage, but December was $60,000 in sales, whereas the November period wasn’t nearly as good because they didn’t have that double whammy of an increase in the number of sessions combined with an increase in the conversion rate. The lesson over Christmas is to check both your sessions and your conversions, not just your sales. You don’t want to lose sales because something on your product page is wrong. We want to make sure that coming into Christmas, we’ve got everything firing there so it’s an ideal time to do it, is to make sure that all those things are right.

There’s actually 2 conversion points in Amazon and I’ve use the marshmallow sticks as an example. The first conversion point is the catalogue page through the product page. We haven’t got a lot to deal with. We’ve got image, price, discount, we’ve got title as you can see, all these titles are looking pretty much the same. Amazon’s now preventing people, they’re changing the titles and then preventing people from doing that. We can’t do much about that. The number of reviews, we can obviously work at that. The “Best Seller” badge, well, in this case, they’re never going to be the best seller because their product is a premium product, it’s not going to be in that rate.

We’ve got the delivery time, obviously get it by October 3rd, and we’ve got just one line of product features in there. In this one, this is … Don’t know what you call this layout, but in some, they’ve got a grid layout as well. Then, the second conversion point we’ve obviously got images, titles, reviews, in detail product descriptions, question and answers, et cetera. If we looked at this in terms of what things that we can change to a great degree to influence both conversion points is really the images and one of the things we noted with this client is that they haven’t really mucked around with doing any split testing. They haven’t been testing their prices, they haven’t been really testing their product images, et cetera, and they’ve got an ability to take a lot of images and test that.

That’s a really strong thing that we can look at there. All we have to do is get another 2 people to their site out of every 100 to buy the product and they’ve doubled their sales. It’s really the low hanging fruit that we can look there. An extra 1 person out of 100 buying their product will lead to a 50% increase in sales. Given that they haven’t optimized their site in terms of really testing these things to work out which works, I would say that that’s probably the biggest thing. If they were looking at a 20% conversion rate then it’d be a different story. Then you’d be saying, “Okay, let’s look at the price” because they’ve gone through and optimized whether that product is … They’ve optimized their conversion rate along the way, and as I’ve said before, if you’ve got a really high conversion rate, chances are your price is too low.

The other thing is images are the best and the easiest ones to deal with. A thing on split testing, they’re only selling 150 units a month so when you’re doing split testing, you’ve got to control and you’ve got the test and really, you want to get what’s called “statistical relevance” so that you’re not just dealing with 3 sales and then saying … You really need basically 100 sales. The issue that they’ve got is that they’re going to need to run some split tests for quite a period of time, 1 to 2 months. With that it means that you change 1 item, otherwise you’ve got to get statistical relevance, it’ll take years if you change more than 1 item in it.

Images are the best and the easiest ones to deal with. Change an image, see how it works, see what the change is, move along to the next thing, once we’ve got the test beats the control, the test becomes the new control. I think we mentioned last time Splitly seems to be the Amazon split testing tool, unlike Google Analytics where you can, or there’s a couple of others around where you can run split testing and measure it quite effectively and individual words, et cetera. Amazon doesn’t have that. You’re really looking at Splitly works on the basis that they change it at 12 o’clock each night and run it for 1 day. Let’s look at the cost of the refunds as one of the things that jumped out in this case study.

They’ve got 14% of refunds so what I’ve taken is 14% of the total costs associated, the landed unit costs, the FBA fees and the Amazon fees. Now that’s their total cost of it, they do have some degree of management of that so the actual figure could be a bit lower because they repackage it, put it back into stock, et cetera, so they’re saving on the landed unit cost a bit there. They’re using it for refunds, some refunds and exchanges, they’re using it for samples, so as they’re taking it from the other warehouse, their FBA fees and Amazon fees are obviously not going to be as high.

The price that they’ve got reflects this refund cost that we’ve got. If you’ve got a product with a low gross profit margin, if you don’t count in your refund costs, you’re going to find that at the end of the year or the end of when you happen to do your accounts, you’re going to say, “Okay, I thought I made heaps of money because I was dealing with a 20% gross profit rate on this enormous margin,” but if you haven’t costed in your refunds, it could be that you’re really dealing on a 10% gross profit rate if you haven’t accounted for that properly. Probably the lesson from this one is, look at the cost of refunds and make sure you’ve got that costed into your products.

Let’s look at what, and I’ve given a bit of an extreme example, said, “Oh, okay. What would they be required to sell to have the same level of gross profit if they drop their price by $50, from $149 down to $100?” Now, they’ve still got, including the refund cost, a 32% gross profit margin so it’s still within the range of a profitable area, but it’s nowhere near the 49% they had beforehand. The other issue they’ve got here, basically, they have to increase from 150 units to 350 units per month to get the same level of profit. Now, that’s not taking into account advertising costs et cetera. Some of that, their advertising costs may decrease as a result. They can get that 350 by increasing their conversion rate, so would the price increase their conversation rate? Would they rank higher because they’ve now got a higher conversion rate? Therefore, we’ll rank them higher in the lists, therefore they’ll get more traffic. In essence, it may not be they have to get effective at whatever that percentage is, 230% more traffic. They may have to just increase their sessions by a portion, increase their conversion rate, but they’ve done no testing as to the price, so we don’t know what the effective price will be on this particular product. It may not make any difference. This isn’t selling at the $20 mark. This is a premium product. It may be that dropping the price has no effect on the conversion rate or the sessions. Basically, if they drop their price down along here at various rates, and if their volume ends up being here, they’re better off at a profit percentage.

However, if they’re lower in the red section, the worse off section, they’re obviously going to be worse off. The other thing to remember, let’s say they decide to go with this option, they’re going to drop their price by $50 and they can get to 350 units. Same profit level, but there might be some savings in other areas, they can get a bit higher. It feels like they’re going forward but things not forgotten that most people forget is the cash flow effect of it. Now, have to bear with me a bit because I can either do it this way or via a large spreadsheet of numbers, but I wanted to give you an idea. At the $149 price point and 150 units a month, this product’s got a 3 month lead time. They send it by sea, it takes quite a while to put together, probably reflective of that unit cost as well, and they place orders 3 times a year so every 4 months.

They need to place an order one month after the receiving their stock into the Amazon warehouse. At 30% deposit, that’s $8100. Within the first month, they’ve collected $18,000 into fortnightly payments from Amazon of $18,000. They’re close to $10,000 ahead in their cash flow, and then they pay the balance of the order in the third month, so they’ve got to pay another $21,000. This is not taking to account growth. This is just buying 4 months’ worth of stock and I suppose there is some growth in there, but not a great deal of growth. Then, the 4 payments from Amazon, by the time they reach that between this one and the third month is $36,000 so they’ve got an extra $14,000 there. They’ve got almost $10,000 there, $14,00 there, $24,000 ahead in their cash flow, so they’ve got enough for growth, they can buy some more stock, they’ve got money for expenses and advertising, et cetera, and they’ve got some money to pay themselves.

This business at this stage, assuming it doesn’t get any massive degrees of growth, is basically funding itself which is a lovely position to be in. Now, they have put in money along the way but it’s something to consider there. The cash flow effect, if you go through that cash flow spreadsheet, you can see the effect of growth on your cash flow. The faster you grow in Amazon and in Amazon businesses, you can grow incredibly quickly. It’s going to use up more cash so if you’ve got a budget of “I’m going to get to a million dollars this year from a zero start,” you’re going to have think, “I’ve got to have some money in there to be able to put in to buy the extra stock,” because it’s not just going to fund itself and it’s probably going to be a year before you can start to say, “Oh, when am I going to get that money back?”

Let’s look at this second price point which is $100 and we’re selling 350 units a month. We’re still making the same profit, I think it was about $11,000 profit per month. Product with 3 times lead time, and we’re buying every 4 months. We need to place an order after the first month of receiving stock but this time, rather than buy $8,000, we’re buying $18,000, almost $19,000 worth of stock, and with the first 2 payments from Amazon, because effectively we’re getting more but less per unit so we’re getting $26,000, but it’s actually $2,000 less than this point. We’ve got $2,000 less to spend just in for the first month. Then, the balance of the order and freight after the third month, so we’ve got to pay another $44,000 and the first 4 payments from Amazon are going to be $53,000.

We’ve got this total less cash available between the 2 price points of $6,400. That’s less money that you’ve got to be able to spend on things like … To be honest, that ends up being your drawings or your wages. That’s just in a 3 month period we’re looking at $6,000. That is just, where is it? Well, it’s in stock. It’s in inventory. At this price point, and this volume, we obviously have to hold more inventory so that the difference is actually sitting in inventory. If we look at what we can learn from this one, is that I would focus on building the conversions first. They haven’t done any testing of that. It’s a low hanging fruit, 2.5%. They’re still getting great sales. They have verified, they’ve validated their product. Their product sells, it hasn’t got no sales.

They’ve actually got sales of $426,000 for the year and 77% of that was from this 1 blue product, so they’ve validated the product, it’s just other products are selling more but they’re obviously selling for a lot less. I would be concentrating on building out conversions first because it’s a low hanging fruit. Small amounts of effort can produce massive increases. Is it the image? It’d be good to have a case study where we actually look at the images and what changes can happen along the way with that, but we’ll have to deal with that for another episode perhaps. I’d be split testing the images and the bullet points to see if we can get a greater conversion there.

The other thing I’d do, when you’ve got a premium product, I’d be looking at the off Amazon medium or content, website, social, to ensure that it matches the brand and the value. You don’t want to have this premium product sitting in Amazon and then have a less than premium product elsewhere. I had a look at their website, it’s a beautiful looking website. They did have the same prices so if there’s no traffic yet to your own website and you’re just getting traffic from people looking from Amazon, then I’d be thinking about whether you should just bump up your prices on your own website if it’s not getting any traffic there at the moment. Reducing price, in this case, I wouldn’t recommend it.

I mean, they haven’t done any testing of pricing so I’d be looking at doing the conversions first but you can end up being a lot more work. I mean, we’re basically taking 150 units to 350 units. If you thought about all of the customer service issues, the extra questions, the extra risk. I haven’t deal with risk yet, but we will come back to that in another case study, but the extra risk involved with all that extra work and potentially, you’re in exactly the same position and we haven’t taken into account the cash flow effect, so you’ve got the same level of profit but for less cash.

If we were saying, “We’re going to drop the price and it’s going to increase to 350 units,” I’d be thinking, “Well, I want to get to the same cash position, not to the same profit position,” because as you’re increasing faster, it could be that they start having cash flow issues where they have to go back into their own pocket and put more money into the business. Just on the refunds, don’t forget to cost in the cost of the refunds into your profit.