Yeah, you are. The assumption is you wouldn't try to sell an e-book for $102 (it says this explicitly) and you wouldn't try to sell fertilizer on the e-book advertisement (it doesn't say this, but it is common sense.). It is also assumed that we aren't making a shoddy product, nor something earth shattering.

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.

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.

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.

Agreed. Basic econ theory predicts that if you hold all else equal and increase the price of a product, sales will drop.

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.

I think the author underwrote very conservative numbers. You can always adjust the math on your own. His reasoning is sound though.

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.

> "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.

I agree in practice this formula is not very practical. It is however a good place to start in getting a picture of what it takes to buy customers in your industry. (Bear in mind the author is talking about math before ever building your product.)

I think his point is more that adwords, as an auction marketplace, represents the higher end of what it costs to buy a customer, so if you underwrite conservative numbers for buying customers with adwords, and used that number as the threshold of the minimum price you have to charge. This number is a great bottom line margin to build your product around.