The e-commerce sector is continuing to grow. Hardly any retailers can afford not to be active in this marketplace. And platforms such as Amazon Marketplace in particular make it really easy to offer products for sale. But the marketplaces are highly competitive. When it comes to sourcing new products, many retailers are asking themselves:
Is it better for me to sell cheap products or expensive products?
Michael Hecker has an answer to this question. With his company, “quantified markets GmbH”, he is a specialist in Amazon marketing automation.
This is best explained with an example: You are selling an affordable pair of white-label headphones for around 40 Euro. However, you could also sell Bose headphones at a significantly higher price. You are selling using exactly the same concepts, such as headphones, although both products have a completely different price. Here, we ask ourselves: What influences the cost-per-click? For example, is the cost-per-click for more expensive products greater than for cheaper products?
The cost-per-click is largely unrelated to the price of the product.
This means: For one click on the advertisement, you are paying exactly the same price, regardless of whether you are selling the cheap no-name headphones or the expensive, premium headphones from Bose. At the same time, the “conversion rate”, i.e. the number of sales in relation to the number of product page hits, decreases exponentially. This is only logical. For the cheap article, the customer does not weigh up the purchase for as long as for the expensive product. Where can they go wrong with a purchase of 40 Euro? This is, therefore, a typical impulse buy. We ask ourselves:
Does it make sense to fight with the competition over price, or should we just select a product with a higher price?
Firstly, higher-priced products have a larger profit margin. You also have to consider the ACoS. The “ACoS” (Advertising Cost of Sale) can be calculated as follows:
“ACoS” = Advertising costs / sales
This KPI represents an important figure for evaluating the performance of a marketing campaign within Amazon Advertising. The ACoS break-even point equals the profit before advertising costs. But finally, it’s enough to explain the idea using advertising costs in a brief example:
|Cost structure||Premium||White label|
|Sales price||100.00 €||40.00 €|
|Manufacturing costs||40.00 €||10.00 €|
|Transport costs||5.00 €||5.00 €|
|Profit before advertising costs||55.00 €||25.00 €|
|Advertising costs||15.00 €||15.00 €|
|Margin||40.00 €||10.00 €|
Here, it logically follows: The advertising costs must be less than the profit before advertising costs, so in our example, € 55.00 or € 25.00 – otherwise, the company will soon be making a loss. A reminder: The price-per-click is independent of the product price. Accordingly, the ACoS decreases exponentially with the product price. This increases the profit margin. And with a higher profit margin, you as a retailer can also invest more in your advertising budget. At the same time, you can also offer your customers considerably better support. Finally, you have significantly more time for every single customer. This increases customer satisfaction and thus also their recommendations of your shop and your products. This will make you more independent of your marketing activities, and you will build up a faithful customer base.
However, the margin per sale is not the only important factor. The sales volume is also crucial. And this is where the low-price segment is actually miles ahead of the premium segment. This is a mass market. But what use is the high volume if you can’t earn anything from it? – “Sales create work, profits create joy”, is a suitable phrase among entrepreneurs. This is why you should consider the advantages of premium products.
Because: while the competition is significantly higher in the low-price segment, there are only a handful of competitors here. This makes it much easier to mark yourself out from the competition.
The online marketing strategy of betting on higher-priced items should definitely be considered. The pros: the consistent price-per-click, the lower ACoS, the higher margin and the lower competition. The advantages of a cheap product in the mass market, the higher sales volume above all, should be carefully weighed up against this. In the end, there’s no point in such high sales if the profits and profitability of the business model do not match.
You can see the current developments that Michael Hecker has observed in Amazon marketing by watching the following video of his appearance at the IAW trade fair in September 2019: https://www.youtube.com/watch?v=nQHL4SH8ABk (German)