Game Theory and AI Repricing on Amazon
You are probably familiar with the term Game Theory, but do you know what it actually means?
Read on, because you will quickly understand the advantages of this mathematical concept, or AI Repricing on Amazon, to sellers.
We’re assuming you are an Amazon Seller having no idea what Game Theory is. Or you do, but you can’t imagine how your Amazon store could benefit from it.
Game Theory and John Nash
Let’s start with a fun example. The superstar who actually came up with the concept of Game Theory is the mathematical genius and slightly crazy John Nash. In the movie “A Beautiful Mind,” his Hollywood Biography, Nash (played by Russell Crowe) explains Game Theory with the example of seducing one or more women.
What it comes down to, is that if four men are in a bar with four women. They all want to dance with the hot blond one. If they decide to all try to go for her, there is a significant chance that none of the guys will end up dancing at all. Because the other women don’t want to be the second choice. Best case scenario, three of them will sit lonely at the bar, and only one of the guys will get to dance with the blond girl.
Better to Dance Together than Not to Dance at All
Game Theory tells the men to each pick a different girl to dance with. This way chances are high that all four women and all four men get to spend their evening close to a woman. No one feels like second choice and no-one gets rejected. Three men might not be dancing with their hot blondie, but at least they are dancing.
How to Dance in Amazon Price Wars
If you aim always to win the buy box (or always go for the hot blond girl), then this will usually result in a price war (only one guy gets to dance, and chances are that it’s not you). Other sellers will quickly react to your drop in price, and the buy box price will go down fast. A race to the bottom is on.
To automate this repricing process, the majority of professional Amazon sellers are using some form of repricing software. They apply complex rules or use artificial intelligence machine learning. Game Theory repricing on Amazon in other words.
Today, you stand little chance of competing against other FBA sellers if you are not using some form of repricing software. These softwares change your price every few minutes, but unfortunately, it becomes an impossible task when doing it manually. With that, come two more disadvantages:
- Your repricing decisions quickly affect the repricing decisions of other sellers.
- If you aim always to win the buy box, then this will usually result in a price war.
How does AI Repricing on Amazon Work?
By collecting data – on pricing for example, directly from Amazon it’s possible to predict the behavior of the competition. With a superior repricing tool that always seeks the optimal strategy for each Amazon listing, AI automatically applies the best approach for each specific situation.
Here’s Where Game Theory Comes In
The behavior of Amazon sellers using a rule-based repricer can be described as the seller trying to do what is best for him short term. However, he ignores the fact that selling on Amazon doesn’t just involve one cycle of price changes.
Seller Snap’s AI repricer will automatically apply the best strategy for each specific situation. When you sell on Amazon, your goal should be to get the buy box-share you are “entitled” to while keeping the price high, instead of racing to the bottom.
Examples of AI Repricing on Amazon
A competitor is matching your price.
His strategy is to share the buy box with you, and he is probably using a rule-based repricer set to match the lowest FBA price. AI repricing on Amazon will find the highest rate that the competitor is willing to go to and increases your price. You stay at that price, and this results in sharing the buy box at the highest possible rate. Any other solution would either lead to losing the buy box or sharing it at a lower price.
A competitor behaves aggressively on price.
Say his strategy is to beat the lowest FBA price by $0.05 and he is probably using a rule-based repricer set to match the lowest FBA price. He will always undercut your price by the exact amount that will lead to him winning the buy box.
AI will mirror the behavior of the competitor by reducing the price until the reset point. This is usually the point at which you win the buy box 50% of the time. When this happens, the repricer will increase the price to your maximum. You will temporarily lose the buy box while waiting for your competitor to raise his price. Then the process will start again, ultimately resulting in the highest possible buy box price.
How to apply AI on your Amazon storefront?
The Seller Snap platform offers an advanced AI solution for repricing on Amazon as described in this article. In our opinion, AI-powered game theory repricing is the best solution to ensuring optimal sales on Amazon. However, as with any AI product, there will be scenarios for which the AI is not the most suitable strategy. In this case, you might achieve better results by applying a simple rule-based repricer. This is why in our system, you can switch between AI and rule-based methods very quickly at all times.