

Pricing in reverse: use a product's price to figure out what you need to build - nate
http://ninjasandrobots.com/pricing-in-reverse

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ankeshk
I have been using this strategy since quite some time now to develop a
frontend product. And then use the profits from that product to advertise and
attract enough visitors that lead to at least 1 more sale - and create a
perpetual traffic cycle out of it. (I'm writing a 60 page book on it.)

Some things I've learned from experience.

1\. You don't want to use the Google Keyword Tool. Thats a good tool for
keyword suggestions. Not for keyword bidding. You want to use Google's Traffic
Estimator tool instead. You will have to login to your Google Adwords account
to use it. (Adwords > Tools & Analysis > Traffic Estimator)

2\. You don't want to use category defining keywords. You want to make it
slightly long tail. Don't search for "crossfit". Search for "crossfit
training". Don't search for "speed reading". Search for "learn speed reading".
Why? Because Google starts minimum bids for category defining keywords from $1
- even if there aren't any competing advertisers on that keyword. This
inflates the numbers in your formula.

3\. After searching for a keyword in the Traffic Estimator tool, click on
"Impressions" and hover your mouse over the cliff in the graph they show. That
is the Max CPC you want to take while calculating your price.
(<http://i.imgur.com/upj77.png>)

With the above steps, the CPC you get for learn speed reading is 41 cents. If
you expect a 1% conversion rate, you need a product that sells for about $41
minimum.

If you go to the clickbank.com marketplace and search for speed reading, you
will see that the most popular product on speed reading (Quickeye Speed
Reading Software) is infact priced at $47.

~~~
netmau5
I've noticed if you lower your Max CPC bid, the Traffic Estimator will show
that you get a lower click-through rate, but at a better price. Do they
restrict your add to less competitive time frames to give you that better
price? Does that then impact your conversion rate, or is a click a click?

~~~
ankeshk
If you lower your CPC bid then the Traffic Estimator shows you the rates for
lower positions. The ad on the top of the page always gets more click throughs
than the ad that is shown 5th on the page. And thats what Traffic Estimator
takes into consideration.

But you should know that the Traffic Estimator is just that - an estimator.
Your real cost per click and ad positioning with Google depends on a lot of
other factors. Including things like how good your landing page is. And how
better your ad is than others.

So determine the CPC at the cliff on their graph. And then optimize your
Google ads. (Also, a lot of ad networks are cheaper than Google Adwords. So
use Google Traffic Estimator to find an optimal price point. But start
advertising your product at other places.)

~~~
corin_
> _Including things like how good your landing page is._

That will impact CPA, not CPC.

~~~
ankeshk
Actually, Google has this measurement scale called "Quality Score." Your
landing page is one of the things they evaluate to measure the quality score.
And your quality score affects your CPC.

You can read more on it here:
[http://support.google.com/adwords/bin/answer.py?hl=en&an...](http://support.google.com/adwords/bin/answer.py?hl=en&answer=2454010)

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hermitcrab
It is definitely useful to do these sort of 'back of the envelope'
calculations. A few things to bear in mind:

-It is strongly in Google's interest to inflate bid prices. I would take their suggested bid prices with a pinch of salt. The Google traffic estimator shows that I should be able to get around a 4% CTR on [speed reading] at around $0.50 per click in the USA: <https://adwords.google.com/ko/TrafficEstimator/>

-The amount you have to pay for a conversion in Adwords depends hugely on how well you play the game of Adwords. Most people using Adwords have very little idea how to set up or manage their accounts and are paying a lot more per click than they need to (I have looked at quite a few Adwords accounts).

-There are more countries in the world than the USA. You may be able to get clicks and conversions a cheaper elsewhere.

-There are probably lots of keywords related to speed reading that are cheaper to bid on than the exact match [speed reader], e.g.

speed reader course

speed reader techniques

speed reader software

speed reader tips

speed reading

speed reading course etc

They will probably have lower search volumes, but it shouldn't be hard to come
up with a few hundred of these. Some of them might also have higher CTR and
conversion rates.

-I think the numbers used are reasonable (1% CTR, 1.5% conversion rate). My own numbers are a bit better than that, but not too far off. But my average cost per click (selling downloadable software) is waaaay lower than $1.53.

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omarchowdhury
"Most people using Adwords have very little idea how to set up or manage their
accounts and are paying a lot more per click than they need to"

Would you please share some general advice on this?

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rfergie
For someone without much cash, expeimenting in a new market I would give the
following advice:

-Don't use broad match to begin with.

-Stay off high volume terms - instead make up the numbers by adding a large number of long tail terms.

-Consider geo-targeting: I've seen much lower CPCs on ads targeted at a small region.

-Take your time - getting big fast will cost you.

My email is in my profile if you have specific questions

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davemel37
The brilliant point in this post is... "I can't just sell an ebook for $102.
I'm going to have to create some kind of online video course perhaps. Maybe I
could create a software program to help speed readers practice. Etc."

Too many businesses limit their marketing to their existing margins, instead
of finding ways to increase their margins and open up more doors for
marketing.

The way I see it... Businesses are investment vehicles and marketing is how
you turn over your investment. The more times you can turn over your
investment, the more money you make.

I am constantly perplexed by people bragging about how little they spend on
advertising or marketing. I would be much more impressed if you bragged to me
about how much you can spend on profitable marketing.

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primatology
I don't think this is accurate at all.

Suppose you do have an ebook. Theoretically, certainly, you can find the price
at which no consumers purchase your book, and the price at which nearly every
consumer who sees your book purchases it. Thus you have a demand function.
Optimize your demand function, and you have the ideal price for your book.

Sure, you can go backwards. Again, theoretically, peg a price, then write an
ebook such that its demand curve results in your desired optimal price.
Practically, it's impossible to measure potential consumer preferences and
interest with much accuracy, but at least it starts you off thinking about
what the consumer wants. And the more your consumer wants your product, the
more demand shifts outward. I agree that this "backwards" model may be a
beneficial mindset, because your product will already be optimized for
consumer wants.

But _why_ would you use Google AdWords as your measure of demand? I could
spend a month writing a speed-reading ebook, create an search-engine-optimized
website, and notify my friends. With $5/month hosting I already own, my cost
structure is essentially zero. Every e-book I sell is pure profit, and I never
touched AdWords.

The trick is optimizing AdWords spending. For every $1 I spend, will I gain $1
of revenue? If yes, keep spending until that's no longer true. Ceteris
paribus, a $100 video course will generate more revenue per $1 of marketing
spending than a $20 ebook, because you have 5x more chances to make the sale.
That's too much of an abstraction, however. Maybe only 0.01% of click-throughs
will be a $100 video course, but a solid 1% of click-throughs will buy a well-
reviewed $20 ebook. So thus it's actually _more profitable_ to advertise on
Google AdWords

Perhaps a conversion rate of .015 is a decent ballpark for estimating AdWords
revenue. But not total demand for the product.

~~~
davemel37
"Optimize your demand function, and you have the ideal price for your book."

As Brilliant as that statement is, it reflects a limited mentality.

This post is arguing, "Optimize your product and demand function to have the
ideal price."

~~~
primatology
Exactly! That's a great way of summarizing the "backwards" mindset.

It occurs to me that an ebook has a completely elastic supply curve, so the
optimization of the demand curve _is_ the equilibrium price.

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jrmg
How does this make sense? It seems to be assuming that the conversion rate is
independent of the product's price, the product's quality, and, perhaps even
more crazily, what the product is and how it relates to the search term.

Am I missing something obvious here?

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reneherse
I don't think so. I would think the technique of dividing CPC by the
prospective conversion rate might be useful in determining ballpark _costs_
for Adwords as _one specific channel_ of marketing, but it's quite a leap in
logic to say "this is what your product's price needs to be".

The idea that a potential market can be understood through such a swift and
simplistic means is taking the paradigm of Adwords testing to absurd lengths.

~~~
davemel37
I think the OP meant that this is the bottom line margin you need.

As an Auction Marketplace, with highly motivated prospects, searching for what
you offer, only a click and a buck away, and an extremely low barrier of
entry, I would argue that Adwords is as close to an efficient marketplace as
possible, and represents the high end of the cost per customer within the
framework of profitability.

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ljd
I don't entirely disagree with this article but I do know that Google Ad
prices are driven by market demand which means that if you price your product
to break even on Google Ad conversions you are really just piggybacking on
your competitor's math. That's what they have found to work. If enough people
use this logic you'll converge on an average market price - not what customers
are willing to pay.

TL;DR: You are participating in a pricing feedback loop with your competition.

~~~
mdda
... which is part of the point of this simplistic method : You're quickly able
to pick the brains of all your (future, potential) competitors, without even
knowing who they are, or researching what they're selling.

Maybe you can envision a higher-priced product with the same purchase rate (a
win), or a lower-priced product with a vastly better purchase rate (also a
win). But, using the assumption that there are people already trying to
optimize their offerings in the market-place, the back-of-the-envelope
calculation from the article is a quick sanity check.

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drinkzima
He could just divide the CPC by the conversion rate and figure this out in
about one sentence:

$1.53/0.015 = $101.33

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prawn
Reminds me of something I'm coming up against with a physical product I'm
selling online.

We started by creating our product, picking a price point, finding off-the-
shelf packaging and going from there. End result is a box that's too large,
costing us up to $25 to ship. Our product is currently priced at $95,
including shipping anywhere in Australia. Already our sales are low due to the
cost.

I'm starting to see value in picking an easy-to-ship product, or designing a
product around ease and affordability of shipping.

Our next steps are: choosing a fixed-price postage satchel so we can maintain
consistent postage ($11ish), having boxes custom-made that fit in that satchel
(not much more expensive than what we're getting now) and then tweaking our
product to fit those smaller boxes.

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_delirium
One of (probably many) caveats to keep in mind is that how ad prices relate to
fundamentals can differ a lot across markets. For example, in some markets
companies are willing to take a loss on advertising (in the sense that
conversions times conversion rate is less than advertising cost), because they
value acquiring a customer highly. Sometimes they even are willing to pay more
to acquire a customer _than the (direct) lifetime value_ of that customer, if
the goal is to build up critical mass to break into a network-effects-heavy
market. At the other end, in some markets, prices are based on fairly short-
term returns, so people pay $0.50 only if there's a reasonable expectation of
> $0.50 in conversions.

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reubenswartz
This is a great check on your product plans-- for example, it will catch you
trying to sell things for $20 when you can't make money at that price. When I
think of "pricing in reverse", I think customer -> problem -> value -> price
-> price -> cost. Check cost at the end. Most people think cost -> product ->
price -> value -> problem -> customer. This leads to poor solutions and bad
pricing. As Nate notes, using his method allows him to realize that he needs
to create more value.

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alastair
I think this article represents a great starting point when brainstorming, but
obviously it should be only one of many tools in your toolbox. Some of the
more critical posts here are attacking it as if the author suggests this is a
fool proof formula for product success.

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ameyamk
Interesting analysis, but with one flaw - Assuming 1-2% conversion rate, and
$1 on avg on google ads (thats what I have seen at least for most keywords
with decent frequency), your formula is yielding $50-$150 for everything you
build.

~~~
nate
I don't see a lot of keywords where you can just assume they'll all be $1 CPC.
Project management software: $14 a click. "iphone camera app" - $2.90 a click,
"stop smoking" - $4.62 a click. And those are just the first 3 i looked up.

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scottkrager
The article assumed 1% Click Through Rate (CTR) not a $1 cost per click (CPC).

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sparknlaunch12
This is a a great article however confirms the sad fact that you need to pay
Google (a lot of money) to drive customers to your website. What happens if
you don't need to pay for traffic? Do you still sell your book for $102?

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SpaceDragon
Slick mobile version. I'm reading the article from my iPhone and I'm
impressed.

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nate
I love it. It's all Dustin Curtis' doing and design. <http://dcurt.is/>. He
created the SVBTL blog network I'm a part of.

~~~
OpenAmazing
Was just reading your website and saw the Joe Vs. The Volcano clip. That's one
of my favorite movies and I've never met anyone else that has even heard of
it, much less quotes from it. We might have to be friends.

~~~
nate
That's awesome :) Fantastic movie. Are you on twitter or facebook or have a
blog?

~~~
OpenAmazing
@OpenAmazing

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masenghi
Amy Hoy doesn't say you should use adwords, does she? Correct me if I'm wrong
as I've only read the free chapters and watched the video, but she basically
tells you to find a suitable group of customers, see what kind of product they
need, and create it. Also, blog about things which that group would find
interesting, like 37signals does, to connect with these customers.

Now after reading this article I wonder whether this can actually work. Can
you not make a living by creating a product and getting some sales from your
blog + SEO?

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zuralski
It seems to have worked for people you're quoting. Why the doubt?

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masenghi
This article states that 37signals uses online ads in addition to their
'thought leadership' marketing strategy, which, if true, I would find slightly
discouraging.

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dneb7
Although a good little starting point, this just helps you break even when
considering your advertising expense. Are there other expenses? Do you hope
for any actual _profit_??

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GigabyteCoin
How does one compete with Gmail, then?

