Vlad Khaustovich

Dynamic pricing has been part of Amazon’s strategy for years, with the first mention of “automatic pricing” appearing in its financial reports as early as 2012. Since then, advances in Amazon’s algorithms-driven by rapid progress in AI-have made dynamic pricing increasingly sophisticated. This article explains how Amazon’s dynamic pricing system functions and identifies which businesses benefit most from this technology.

What is the goal of dynamic pricing?

Amazon’s dynamic pricing allows its sellers to automatically adjust their prices, as often as 2,000 times a day, in order to convert a larger pool of shoppers and maximize sellers’ chance of winning the Featured Offer.

Amazon’s dynamic pricing enables sellers to automatically adjust their prices – sometimes up to 2,000 times per day – to attract more shoppers and maximize their chances of winning the Featured Offer (formerly known as the Buy Box).

Which dynamic pricing features are available on Amazon?

• Competitive Featured Offer: Set your price to be below, match, or above the current Featured Offer. Repricing stops once you win the Featured Offer. Ideal for products with multiple sellers.
• Competitive Lowest Price: Adjust your price relative to the lowest available offer. If you’re already the lowest, the tool compares your price to the next lowest. Useful for highly competitive listings.
• Competitive External Price: Match or cap your product price based on the lowest price found at other retailers (excluding other Amazon sellers). If your price plus shipping exceeds this external price, your offer may become ineligible for the Featured Offer.
• Business Competitive Featured Offer: For B2B sellers, set single-unit and quantity-tiered prices relative to the B2B Featured Offer. Repricing stops once you win the Featured Offer.
• Business Price and Quantity Discount: Offer single and multi-tiered discounts to business customers that automatically adjust alongside your standard prices.
• Based on Sales Units: Decrease your SKU’s price based on sales volume targets within a set period. Useful for inventory liquidation or demand-based pricing.

How does Amazon monitor prices on other marketplaces?

While Amazon does not publicly disclose its exact methods, it is widely believed that the company tracks prices on external sites by matching products using universal identifiers (such as UPCs, SKUs, and product titles) and attributes like brand names.

What advantages does dynamic pricing provide?

The primary benefit of dynamic pricing is that it saves resources otherwise spent on manual price adjustments, as Amazon’s algorithms continuously track shifts in demand and competitor pricing to determine optimal prices for maximizing sales. By monitoring prices for products sold both on Amazon and other marketplaces, this tool is especially valuable for popular items offered by multiple sellers online.

What are the potential downsides of dynamic pricing?

• Price war risks: Automated repricing can trigger aggressive price competition, eroding profit margins, as sellers undercut each other to win the Featured Offer.
• Customer loyalty risks: Frequent price changes may alienate customers who expect stable pricing, especially for everyday or branded goods.
• Less suitable for unique products: Niche or highly differentiated products may not benefit, as demand for such products isn’t driven by price competition.
• Products with price restrictions: Sellers bound by minimum advertised price (MAP) agreements or other pricing restrictions need to exercise caution, as dynamic pricing can unintentionally violate these terms if price boundaries are not properly set.

Which types of businesses gain the most from Amazon’s dynamic pricing?

Businesses selling commoditized products in highly competitive categories like electronics and household items, where consumers are very sensitive to price changes, benefit the most from dynamic pricing. Additionally, businesses with limited resources can leverage automated dynamic pricing tools to reduce labor costs, allowing them to efficiently adjust prices in real time without the need for manual oversight.

Do other marketplaces support dynamic pricing?

Other than Amazon, few marketplaces offer built-in dynamic pricing tools, given the complexity of dynamic pricing and the resources needed to build such tools. Walmart Marketplace is one of these few. Similar to Amazon, Walmart Marketplace offers its Repricer tool, which automates prices based on Buy Box price, competitors’ prices, and external prices. While eBay does not offer a built-in dynamic pricing tool, eBay sellers sometimes use third-party tools, such as RepricerExpress or OmniaRetail.

Should you implement dynamic pricing?

Whether you should implement dynamic pricing largely depends on your business type and how price-sensitive your customers are. If you sell commoditized products in highly competitive markets where buyers frequently compare prices, dynamic pricing can help you stay competitive and reduce operating expenses. However, if your business offers normal or premium products, frequent price changes may not be as effective. Consider the market in which your operate and your ability to sustain low prices  before deciding if dynamic pricing is the right strategy for your business.

Discounts and promotions are powerful tools that businesses can leverage to attract new customers, encourage repeat purchases, and influence consumer behavior. When thoughtfully integrated into a broader marketing strategy, discounts allow for pricing flexibility without altering the core pricing structure. However, to maximize their benefits and avoid common pitfalls, businesses must develop a well-planned discount strategy tailored to their unique products and customer base.

Understanding the purpose of discounts and promotions

• Attract new, price-sensitive customers. Discounts and promotions can lower the barrier to entry, making your products more accessible to first-time buyers who might otherwise overlook your brand.
• Encourage larger orders through volume or bundle discounts. Motivate customers to increase their purchase size by providing incentives such as discounts on bulk purchases or special pricing on product bundles.
• Drive repeat purchases by re-engaging previous buyers. Targeted discounts can remind previous buyers of your brand and encourage them to return, turning one-time shoppers into loyal, repeat customers.
• Respond to shifts in demand due to seasonality or competition.  Timely promotions can help maintain steady sales, even when external factors impact consumer behavior.
• Clear excess or soon-to-expire inventory efficiently. Markdowns can help you quickly move inventory that might otherwise go to waste, thus improving your cash flow.

When are discounts right for your business?

Not all products benefit equally from discounting. Luxury goods, such as high-end designer handbags, and commodities like salt, typically do not respond well to price promotions. However, for most everyday “normal” goods, a discount strategy can be a valuable sales driver.

If your products have a short shelf life, discounts become an essential tool for managing inventory before expiration dates. Similarly, if your products are easy to bundle or complement each other, discounts can encourage customers to add more items to their carts. The diversity of your customer base also plays a role; when selling to a heterogeneous group with varying price sensitivities, discounts help reach segments that might be unreachable at higher prices. Finally, businesses experiencing seasonal demand spikes can use discounts strategically to boost sales during off-peak times.

Tailoring discounts to different buyer segments

Understanding how different types of buyers respond to price reductions is crucial. New customers tend to be more price sensitive since they have not yet developed brand loyalty and often compare multiple options. Offering introductory discounts can be an effective way to convert these shoppers.

Repeat buyers, on the other hand, are generally less sensitive to price but can be encouraged to stay engaged through loyalty rewards or personalized promotions. Volume buyers, who purchase multiple items at once, often require incentives such as bulk discounts to increase their order size. These discounts can also benefit sellers by reducing average fulfillment costs.

Choosing the right timing for discounts and promotions

The optimal frequency for promotions and discounts depends on their type. Promotions should be used sparingly and unpredictably to avoid training customers to wait for deals. Simon-Kucher recommends spacing promotions at least four weeks apart to ensure each one has maximum impact and maintains the perceived value of your products.

In contrast, some discounts can be ongoing. Volume discounts, for instance, are typically available at all times to encourage larger orders whenever customers meet set quantity thresholds. Similarly, discounts for abandoned carts are often offered continuously, as they target shoppers who are already close to making a purchase and represent a prime opportunity for conversion.

Finding the optimal discount levels

An analysis of over 28,000 eCommerce SMS messages and push notifications revealed that discounts in the 15–20% range are the most effective. Specifically, a 15% discount leads to the highest conversion rates, while a 20% discount further increases customer engagement, such as clicks and likes. These results align with Etsy’s recommendation for sellers to offer at least a 20% discount to boost order volume.

Risks to consider when offering discounts

While discounts can boost sales, they come with risks if not managed carefully. Frequent or deep discounts can erode profit margins, making it difficult to cover costs and invest in growth. Over time, customers may begin to expect discounts as the norm, devaluing your brand and reducing their willingness to pay full price.

Discounting can also trigger price wars with competitors, leading to a downward spiral in prices that harms the entire market. Additionally, promotions often attract deal-seekers who may not become loyal customers, increasing customer acquisition costs without delivering long-term value.

Four principles for a successful discount strategy

1. Know your customer. Understand your customers’ price sensitivity, shopping motivations and purchase journey. This will help you tailor discounts that resonate.
2. Have a consistent price strategy. A consistent price strategy sets the right expectations both for your customers and your competitors. When a company starts offering uncontrolled discounts, it can erode profit margins, damage the brand image, delay purchases and initiate a price war.
3. Personalize discounts. Tailor offers to individual customers using their purchase history and motivations. For example, provide discounts on related products after a purchase, or offer cart abandonment incentives to encourage checkout.
4. Monitor and optimize. Regularly track metrics like conversion rates, average order value and cart abandonment rates. Use this data to refine your discount strategy and maximize its effectiveness.

The optimal price is defined as the one that strikes the best balance between sales volume and profit margin per unit, ultimately maximizing total profit. Several key factors influence this profit-maximizing price, including:

• Perceived value
• Competition
• Discounts and promotions
• Product assortment
• Cost structure

Understanding Customer Perceived Value: How Much Is Your Product Worth to Them?

Hermann Simon, chairman of the consulting firm Simon-Kucher, offers a simple definition of price: Price = Value. The value a customer perceives in your product—not necessarily its objective value—is what ultimately determines how much they’re willing to pay.

It’s important to note that perceived value and objective value aren’t the same. Many factors, like brand image, product presentation, and customer experience, shape perceived value. To influence it, sellers must clearly communicate the benefits and advantages they offer.

As Hermann Simon puts it:

“Premium pricers invest heavily in communication: They know they have to make the value and advantages of their products perceptible and understandable to consumers. Remember: only perceived value counts.”

However, one big challenge remains: how do you find out how much value customers actually place on your product’s quality, scarcity, shipping, customer service, and other attributes?

One of the best ways to uncover this is by asking customers directly using the Van Westendorp Price Sensitivity Meter. This method involves four key questions:

1. Too Expensive: At what price would the product seem so expensive that you would not consider buying it?
2. Too Cheap: At what price would the product seem so inexpensive that you would doubt its quality?
3. Not a Bargain: At what price would you start thinking the product is getting expensive, though not yet out of the question?
4. Not Expensive: At what price would you consider the product to be a great deal—a real bargain?

Once you collect the responses, you’ll want to organize the data and create frequency distributions for each question. Then, plot the cumulative curves to find key intersections:

• The Point of Marginal Cheapness marks the lower limit of an acceptable price.
• The Point of Marginal Expensiveness marks the upper limit.
• The Optimal Price is typically found where the “Too Cheap” and “Too Expensive” curves intersect.
• The acceptable price range generally falls within the rectangle formed by these points.

Another approach is to measure willingness to pay indirectly through conjoint analysis. In a conjoint study, customers are shown different combinations of features and prices and asked which option they would choose. By analyzing their choices across multiple scenarios, you can infer how much they value specific features—and how price impacts demand.

Ultimately, asking customers directly (or indirectly) about their willingness to pay helps you define the minimum and maximum price points for your product, ensuring you don’t risk making it seem too cheap or unaffordable.

Analyzing Market Competitiveness: How Intense Is Your Industry Landscape?

With customers easily able to compare prices, features, and reviews across multiple stores, competitive analysis is an important component of your pricing strategy. A thorough analysis typically covers four key areas:

• Availability of similar products
• Price range of competing products
• Discounts and promotions offered
• Value-added services provided

Understanding these dynamics allows you to position your products more strategically—whether that means undercutting competitors, matching their prices to signal comparable value, or charging a premium based on unique features or superior service.

Several free tools can help you analyze your competitors, including Amazon’s Product Opportunity Explorer and eBay’s Product Research tool. For example, Amazon’s research tool lets you view important metrics like product prices, units sold, return rates, search volumes, customer reviews, and average FBA fees—giving you an easy way to benchmark your offerings against the competition.

The screenshot below shows some competitor metrics that can be accessed using the Amazon tool.

To enhance your pricing strategy using competitive insights, follow these five steps:

1. Estimate the total market size by calculating the overall volume of products sold. Larger markets often allow for wider price variation.
2. Identify the 20 most comparable products and determine the price range they’re sold at. This helps establish your acceptable price range.
3. Analyze customer complaints about competitor products. If your product addresses common issues, you may be able to justify a higher price.
4. Study discount patterns among competitors by looking at historical price variations. Frequent discounting could suggest customers expect deals.

The Impact of Promotions: How Do Discounts and Deals Affect Your Sales?

Promotions can serve several key purposes:

• Attracting new customers
• Encouraging repeat purchases
• Driving sales of newly launched products
• Boosting short-term revenue
• Clearing excess inventory

Industries like fast-moving consumer goods, apparel, food, cosmetics, and consumer electronics often rely heavily on discounts. In contrast, luxury brands, B2B services, high-end professional services, and niche markets with little competition use promotions much less frequently.

The role of promotions heavily shapes a company’s broader pricing strategy. When promotions are central to marketing efforts, pricing tends to become more dynamic.

To understand the importance of promotions for your business, ask yourself:

• What percentage of your total sales comes from promotions?
• How often do customers buy multiple products at once?
• Are certain sales channels more discount-driven than others?
• Do frequent product launches require promotional incentives?
• Is your inventory seasonal, creating a need for clearance sales?
• Are competitor discounts common in your market?
• Do discounts harm your brand’s perceived value?
• Do you have the resources to manage frequent price adjustments?

If promotions are important, build an effective discount strategy by focusing on these steps:

1. Set clear objectives for your promotions (e.g., customer acquisition, inventory clearance).
2. Offer different types of discounts to meet various needs (e.g., bundle discounts, loyalty incentives, seasonal sales).
3. Tailor your discount approach to each sales channel (e.g., Amazon, Walmart).
4. Continuously monitor and adjust your strategy based on customer response and sales data.

Product Assortment and Pricing: How Your Product Range Influences Price Strategy

If you offer a range of products or variations (SKUs), you have an opportunity to set different price points across your assortment to maximize profits. Varying your prices helps you reach different customer segments and boost conversion rates. Here’s how it works:

Many marketplaces allow customers to filter products by price ranges. For example, Etsy highlights a “Gifts Under $30” category, while Amazon lets shoppers filter products in $5 increments. By offering products at varied price points, you increase your chances of being discovered by a broader audience—especially by price-sensitive customers.

Product variations can also appeal to different customer groups, each with their own perception of value. For example, basic-colored t-shirts, like black or white, typically attract the broadest customer base and are usually priced at a standard rate. Limited-edition colors, on the other hand, cater to niche markets and can command a premium price because customers perceive them as more exclusive.

Additionally, offering different price points helps guide customer behavior through the center-stage effect. When all products are priced the same, customers often find it harder to make a decision. Introducing price variation gives them clear reference points, making it easier for them to choose—often steering them toward a mid-priced option.

When buyers know neither the price range of a product category nor have any special requirements (e.g., high quality, low price), they gravitate toward a price in the middle of the range. – Hermann Simon

To effectively price across your product variations, follow these steps:

1. Assess perceived value across variations. Are some versions of your product less common or face less competition?
2. Set minimum and maximum price points based on customer feedback and competitive research.
3. Adapt your strategy to each marketplace to ensure your products appear in multiple price segments where customers search.
4. Factor in promotions and discounts when setting your final prices, especially for lower-priced items where margins are tighter.

Cost Structure Insights: How Expenses Shape Your Pricing Decisions

Your cost structure sets the minimum price you must charge to cover expenses and achieve profitability. A key metric to understand is your break-even point—the sales level where total revenue equals total fixed and variable costs, resulting in neither profit nor loss. To maximize profits, you should generally avoid pricing your products below this point.

To calculate your break-even price, first identify your fixed costs (such as liability insurance, WiFi, website hosting, or rent) and your variable costs per unit (like materials, shipping, and sales commissions). Then add your total fixed costs to your total variable costs and divide by the number of units you expect to sell. Alternatively, you can use the formula:

As your sales volume grows, your average unit costs typically decrease due to more efficient purchasing and lower fixed costs per unit. This improvement allows you to either lower your prices to stay competitive or maintain higher profit margins, giving you more flexibility to implement aggressive pricing and discount strategies.

Exploring Alternative Pricing Strategies: What Other Options Can You Consider?

While this article focuses mainly on value-based pricing to maximize profit, several other strategies can help you achieve different goals, such as entering a market, growing market share, or reinforcing a premium brand image. These include:

• Penetration Pricing: Setting a low introductory price to quickly attract customers and build market share, ideal for launching new products.
• Price Skimming: Starting with a high price for innovative or premium offerings to target early adopters, then gradually lowering the price to appeal to a broader, more price-sensitive audience.
• Premium Pricing: Charging a consistently high price to signal superior quality, exclusivity, or brand prestige, attracting customers willing to pay more.
• Competitive Pricing: Continuously benchmarking your prices against competitors by matching, undercutting, or slightly exceeding them, depending on your positioning goals.

Final Thoughts: Align Pricing with Customer Value and Cost Efficiency

Optimizing your product pricing is one of the quickest and most effective ways to improve profitability—without the need for lengthy supplier negotiations or drastic cost-cutting measures. However, successful price optimization requires a strong understanding of your target customer and your cost structure. Fortunately, with the help of product research tools along with proven survey techniques, sellers can access valuable market insights to make smarter pricing decisions.

As Hermann Simon wisely said,

Price is the only marketing instrument you can employ with no upfront investment. This makes it an especially powerful marketing tool for small businesses or startups with tight financial resources.