Today’s post will be about a topic I have received several questions on over the past couple of months. Most recently from Brent, here is Brent’s question:
“I have a question about adjusting prices on items I’ve sent into FBA. It seems that items I have recently sent in to FBA the prices have dropped even before my items arrive at the warehouses. Some of the items I send into FBA are clearance items from Target and Walgreens. Do you think prices drop on these items because they are on clearance at Target and Walgreen stores nationwide so there is more competition? How do you normally handle when something like this happens? Wait for prices to rebound after the competition has run out of inventory? Or lower your prices to try and get those items to move?”
This is a very good question and it is something that I have noticed as well on several items. Let’s take a look at 2 examples on Target clearance items that I have sold over the past few months where I have noticed something similar and then I will get into how I normally handle situations like this.
Price Drop Examples
Example #1: Spy Gear Mission Extreme Kit purchased 6 on clearance at Target on January 4th, 2014 for $19.98 each. On this date the current low FBA price was about $52. Now let’s take a look at the camelcamelcamel chart for this item to see what happened to the price (click to enlarge):
The #1 on the the chart shows the pricing information on the day I purchased this product. The chart above shows the lowest price available at each date without factoring in the merchant fulfilled shipping cost. For example, if the low seller was 12.99 plus 4.99 for shipping, this chart would show the low price of $12.99. If the the low price was an FBA seller was selling for 12.99, it would still show the low price as $12.99. Make sure to keep this in mind when looking at these charts, as they give a good idea of the prices, but can’t be relied upon 100% for the aforementioned reason.
I ended up selling all of these for $35 each between March 28th and April 4th (#2 on the chart), which left me with a profit of about $6.28 after it was all said and done. If I would have sold at $52 (low FBA price when purchased) I would have made about $20.73 on each one.
Let’s take a look at a second example and then I will get into my reasoning for pricing as I did.
Example #2 Hello Kitty Hair Dryer purchased 5 on clearance at Target on January 14th for $9.98 a piece. The low FBA price at this time was around $31.99. Let’s take a look at the chart from camelcamelcamel:
As you can see from this one, I purchased at point #1, and ended up selling all 5 of these between March 10th and March 27th (#2) for $22.99 to $24.99 each. Selling at this price made me a profit of between $6.10 and $7.80 on each one, compared to a profit of about $13.75 a piece if I had sold at $31.99 (low FBA at time of purchase).
So example #1 it took about 3 months to receive about a 30% return on investment (ROI) and example #2 took about 2.5 months to see about a 70% ROI. In the end both of these turned into profitable situations, but it took a bit longer than I would have liked to get my money back.
Let’s get into my basic strategy with clearance items purchased from large retailers. First off, I know that they might be available nationwide and as a result available to a large number of resellers at the same time. Knowing this, I first like to purchase at as big of a discount as possible. Target for example normally follows a pretty regular markdown schedule along these lines 15% to 30% to 50% to 70% off the original price. This doesn’t hold true every time, but with clearance items at Target in general I am looking to purchase items at a minimum of 50% off the retail price. Both of the examples above were purchased at 50% off the retail price, and it’s important to know that some other sellers may have found these items for 70% off the retail prices. This would have been $11.98 on the Spy Gear item, and $5.98 on the Hello Kitty item. As you can see sellers purchasing at 70% off can sell at a significantly lower price to see a good ROI, compared to my purchasing at 50% off.
So step #1 is to be aware that the prices could drop and to be aware of any regular markdowns. After taking this risk into account, you decide to purchase the item. You list it for sale at the current market price, send it in to FBA, and the price starts to go down, now what?
Now it’s decision time. The main choices as I see them are:
- Sell at the current market price regardless of if you lose money or not
- Price at break even and wait for a sale
- Price at a level that is somewhat profitable and wait for a sale
- Don’t adjust your price at all and wait for a sale
It is very important to note with all of these options that it is not guaranteed your item will sell, or that the price will indeed start to increase.
Option 1 – I rarely choose this option at least initially. If after 3 or 4 months it appear the item is still something I am going to loose money on, then I will price it to sell and take the loss, but it’s not my first choice.
Option 2 – Again, I rarely choose this option. If I think the price will recover then I like to price in some level of profit as well.
Option 3- This is my most common decision when I see a price dropping significantly. When I see the price dropping significantly and to a level that is not profitable, I will try to find a price that I can sell at that will still make me a few bucks. In the items previously mentioned this was $35 and $22.99 to $24.99, respectively. I chose these prices by looking at the current product offerings listed for sale. Oftentimes there will be a group of sellers that are priced similarly that is a good amount above the current low selling price and at a level that would be profitable based on my buy cost. I normally price somewhere in this group, as if/when the lower priced sellers are out of stock, my offering will be competitive with the market.
Option 4- I will occasionally choose this option. If I think the price will make a full recovery I will sometimes hold out for my initial listing price, but not often. This is the riskiest option in my opinion. It is worth noting that the current low FBA sellers on the 2 examples above are now higher than what I sold for. So, if I would have held out longer I could have some additional money to show for it. The problem with this option is waiting a long time to get any money back on your investment.
Those are the options as I see them. I normally try option 3 whenever possible to find the balance of making a profit and still selling my item quickly. Getting cash in hand is very important, as this allows me to reinvest the cash in additional products to resell. You will have to determine which options makes the most sense for your business. I may dive a little deeper into some of the economic reasons for the price changes in a future post, but that’s for another time.
What are your strategies when prices start heading south? Please share your strategies, along with any other questions, in the comments below or send me an email at firstname.lastname@example.org.
My next post will be my April 2014 financial results, which will be published later this week, so make sure you subscribe using the form below so you don’t miss out!