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by nate·14y ago·view on hn ↗
There's another way of looking at pricing that comes up more and more in my thoughts on starting a new business/product. I've been calling it "pricing in reverse". I'll blog about it soon in more detail, but the gist is...

As a new startup or business, it's likely you have no audience, no fans, and no customers. You are going to have to go get them. One method, that can be very effective to get them if you do it right is online advertising through pay-per-click ads on places like Google/Facebook/LinkedIn.

Assuming you pick some niche with X searches, those ads are Y per click. And the per unit revenue of my product is Z.

Making bold but average assumptions about your conversion rates you can say something like let's assume 1% of searchers click on my ads. So my ad cost is going to be searches * CPC * 0.01.

Assuming I can get a 1.5% conversion ratio the revenue I'll bring in is searches * 0.01 * 0.015 * Z.

So:

Revenue(searches * 0.01 * 0.015 * Z) - Ad Cost(searches * 0.01 * CPC) = profit.

Set profit to zero and solve for Z. Get searches and CPC from the Google adwords tool.

You'll now know your product NEEDS to cost Z to break even doing pay per click ad campaigns.

Sometimes this is going to be an eye opener for you. You'll realize that you probably need to charge a ton more and so maybe your product needs to have a much more powerful feature set to warrant that higher price.

This example and thinking was inspired from Tim Ferris' Muse Math:

http://www.fourhourworkweek.com/bonus/pdf/musemath.pdf

1 comments
Cost plus pricing. You should definitely know you numbers like the customer acquisition cost etc. I agree with you there. But relying on the cost to come up with the price point usually leaves money on the table. Price based on the value for the customer, not your cost.
Just make sure to find out these numbers, so you font go into a market where value is below cost.