How to Use Costs – An Example

Here’s an interesting article titled “Pricing in Reverse” on how to “price” a product based on costs.

The article looked at the cost of an eBook.  Obviously, the variable costs are zero.  However, the article looked closely at the amount of spending required on Google Adwords in order to sell books.  Simplifying the math, here are the conclusions:

Google charges \$1.53 per click on the keywords selected.  If we assume a 1.5% purchase rate on people who click through, then we pay \$1.53/.015=\$102.

That’s right, our advertising costs would come out to \$102 per book.  Obviously we can’t sell our book for that much (unless it’s a college text book) so we would end up losing money.  Hence, don’t even bother writing the book.

Yes, it’s not a perfect analysis.  However, it is a great example of estimating all of our costs before we even begin the project. Then we can decide if the project is worth doing.

Most costs don’t drive pricing, but rather they help determine whether or not to even get into the business. How are you using costs?

Mark Stiving, Ph.D. – Small Business Pricing Expert

Photo by Mike Licht