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.
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.)
That will impact CPA, not CPC.
You can read more on it here:
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.
-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:
-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 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.
Would you please share some general advice on this?
-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
This one covers some of the worst and most common newbie mistakes:
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.
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."
It occurs to me that an ebook has a completely elastic supply curve, so the optimization of the demand curve is the equilibrium price.
Adwords is appealing since it's an auction, and they let you see some of their data. In your example of using SEO instead, you have to do the SEO work with either your time or someone else's, so it's not like the cost is zero.
Am I missing something obvious here?
The article is suggesting you use adwords demand compared to your expected optimal product price to determine if that market is over or under served.
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.
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.
If the Google ads list the price of the item clearly, then perhaps the conversion rate won't suffer so much, as those who click through are mostly the subset of people who are willing to pay the higher price.
But, if the ads do not list the price, then we have to assume that some fraction of those who click through will be scared off by the price, and that those same people would have bought had the price been lower.
Furthermore, as has been demonstrated in many A/B testing case studies, a website's conversion rate is heavily dependent on copy, design, product photos, and other such factors. It's not unusual to see sales double after a good round of A/B optimization. And that's just taking into account cosmetic changes. If you consider other market factors as well, you'll see that conversion rates can vary tremendously between different sites.
Therefore, I don't think you can just assume a given conversion rate and then solve for the price.
IF you list the price in the ads, that would maybe explain the measly 1% CTR and high CPC's (Low Quality Score).
I have rarely seen a case where charging more didn't increase profits, even if you lose sales and get some bad clicks. (within the context of providing the perception of more value than the price.)
His point is simply, take the most expensive source of traffic online and underwrite to solve for the bottom line margins you need to advertise.
Sure, but if you assume away all other sources of traffic, you're finding a break-even price. The reason this might actually make you profitable is because you've got nearly-pure profit flowing in from "free" sources: word-of-mouth, organic search engine results, good reviews, etc.
Which means your price may be much lower than optimal, if your book appeals to an audience with lots of disposable income. Or, perhaps, only people searching for "speed reading" on Google will actually buy a book about it, and no one else in the world cares enough to spend $20 on improving such a skill. And your price may be far too high to be profitable. There's a ton of selection bias in using Google AdWords as your baseline.
Plus, you discount 2.5k searches for "how to speed read," 2k searches of "how to read faster," and 1k for "speed reading techniques". You can't easily add them to the formula, since they all have different conversion rates. Users searching for "how to speed read" will be far more receptive to a ebook about speed reading than someone searching for "speed reading" in general.
TL;DR: You are participating in a pricing feedback loop with your competition.
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.
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.
$1.53/0.015 = $101.33
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?