Northeastern University Academic Research Reveals How Algorithmic Pricing Maximizes Amazon Sellers’ Profits

By Chen Melamed
Published on July 20, 2016 | 3550 views

Northeastern University Study

A new study conducted by Northeastern University reveals a direct correlation between algorithmic pricing, higher Buy Box share, and increased profitability.

Amazon is much more likely to feature sellers in the buy box who use an automated practice called algorithmic pricing, even though their prices may be higher than those who don’t,” according to Northeastern University’s assistant professor, Christo Wilson who led the study.

This totally busts one of the most common Buy Box myths that lowering prices below your competitors’ prices amplifies your Buy Box share. With increased traffic and product page visibility, algorithmic pricing gives Amazon sellers a competitive edge, allowing them to beat their competition to the most coveted position on the marketplace – the Buy Box.

So what exactly does Northeastern’s study mean for sellers, like you? And how can you use algorithmic pricing to maximize profits?

Key findings from Northeastern University

Algorithmic pricing leads to increased market share

Although the number of Amazon sellers who use algorithmic pricing to reprice their products is relatively low – 2 to 10 percent – their selling power is immense. Algo-sellers cover a third of the best-selling products offered by third-party sellers.

By analyzing 500 of these algo-sellers for over four months, researchers at Northeastern discovered the prices of products offered by algo-sellers were 10x more dynamic than non algo-sellers, contributing to their increased market share ownership.

Algorithmic pricing encourages Buy Box eligibility with profitability

You don’t have to compromise on lower prices to gain traction and increase profits. According to the research, Amazon does not pitch the lowest prices available to buyers. So when a buyer searches for a product on Amazon and lands on the product page, they will need to go through various seller listings and make an extra effort before finding the cheapest price possible. Lower prices don’t equate to product visibility.

Northeastern discovered that “60 percent of sellers using algorithmic pricing have prices that are higher than the lowest for a given product… there are many cases where the price increase is on the order of $20 to $60.”

Northeastern’s research shows that a superior customer feedback score and higher product prices than your competitors’ can win you the Buy Box.

“These research findings are much aligned with what our data science and analysis activities show,” says algorithmic pricing expert, and Feedvisor’s Co-Founder and CTO, Eyal Laxner.

“By closely analyzing the behavioral and selling patterns of third-party Amazon sellers, we have realized that when it comes to winning the Buy Box, price is not the only factor. In order to reach maximal results, you need to continuously monitor and analyze additional data points from within your competitive landscape, trying to find the optimal pricing point which will best serve your business goals.

Furthermore, it’s important to understand that the optimal price may change depending on the product, seller and point in time. To reach that point, you need to apply algorithmic techniques over the vast amount of data points collected over time. Rule based solutions, just aren’t able to relate to such amounts of data, let alone apply the statistical connection between the points.”

So how does algorithmic pricing drive better results?

Algorithmic pricing is proactive as opposed to reactive

By applying machine learning and statistical analysis techniques, algorithms are able to construct predictive models, through which they can identify trends, and proactively adjust product prices according to market dynamics in real time.

Algorithmic pricing avoids human bias

As opposed to rule-based logic, algorithms eliminate the inherent human bias which accompanies such sets of rules. This is due to the fact that they base their decision points solely on the (many) facts collected from the market, rather than incorporating gut feeling into the equation.

Bottom line: to stay competitive, you need to go algorithmic

The Northeastern study sheds light on how algorithmic pricing empowers sellers and expands their performance capabilities. Sellers can strategically price their products, win the Buy Box and maximize profits with algorithmic repricing.

“If you’re that one lucky seller who gets the ‘buy box,’ you make all the sales. So if you want to be competitive for the top-selling products, you pretty much have no choice: You have to be an algorithmic seller,” says Christo Wilson.

To learn more about how you can maximize profits on Amazon using algorithmic pricing, click here

About the Author

Chen is a copywriter at Feedvisor with her finger on the eCommerce pulse. She loves easy-to-chew creative content, good food and discovering hidden gems.

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