The first person who ever really explained newsletter monetization to me was James Altucher, and if you’ve seen the Newsletter Engine business model we published at Trends, it was strongly influenced by him.
If you haven’t, here’s the short version – there are three ways newsletters make money:
- Free Products: Monetized via ads and affiliate deals
- Frontend Products: Low-cost (typically $50-$100 max)
- Backend Products: Typically start around $500 and can go up to the many thousands of dollars.
“Free sells the frontend, frontend sells the back,” James told me. “Backend’s typically where you make all your money. Frontend either loses money or breaks even.”
Those last seven words haunted me for years…
The Newsletter Engine
In fact, the whole front end haunted me a little.
Firstly, because of the name – if you line up all three product types in the order customers encounter them, the frontend isn’t in the front. It was hard to develop a visual model that used these names and explained them intuitively.
But secondly, because of what James said about breaking even. Let’s face it, if you’re a solo operator, you don’t want to break even. You want to make money. Indeed, we were making millions on Trends at the time, which was a frontend product of sorts.
So what gives?
Recently, I set out to get to the bottom of all this, and came away with a new insight that’s adding a lot of important texture to how I think about monetizing newsletters overall.
Let’s get into it…
The Key Insight:
It turns out that the terms “frontend” and “backend” come to us from the world of direct mail marketing.
There, the “frontend” was generally defined as the first thing customers bought from you, and the “backend” was comprised of everything else they purchased over their lifetime as your customer.
Here’s the key…
The whole purpose of a frontend product was to sell something – anything – to a new reader because once they’d bought one thing from you, they were much more likely to buy future products too, even if those future products were much more expensive.
“It can cost a marketer as much as 15 times more to find a new customer as it does to sell an additional item to an existing customer,” direct marketer Craig Simpson says.
Thus, the reason people were willing to break even or even lose money on the frontend was that conversion rates and profit margins were much much higher on the backend afterward.
Think About It This Way…
If you have a list of 10k free subscribers and you try to sell them anything, you can reasonably estimate ~1% to ~3% of them will buy.
So if you have a $500 course, for example, and you market it to that list, a 1% conversion would make you about $50,000.
Not bad. But here’s the thing…
If you’d sold those same people a front-end product first, you’d still expect at least ~1% (or 100 people) to buy that. Then, those 100 people would have a much higher conversion rate when it came time to sell the $500 backend.
I haven’t seen conclusive data on this yet, but I’ve read that 20% conversion from frontend to backend isn’t crazy. We’ll use 10% here.
So that small list of 100 people who previously bought from you drove 10% of the revenue of a list 100x the size. And we’re using some of the most conservative numbers I’ve seen here –
- Relatively small list
- Low conversion rates
- Low-price backend offer.
You can imagine how all this stacks up if you can grow even one of those three.
The kicker is, if you do it right, the extra $5k should be almost all gravy, since as James said, the frontend is designed to cost you either nothing, or very little.
How This Changed My Thinking…
Three things
First, I finally get what James meant. If conversion rates really are 10-20x higher on people who’ve bought from you before, it makes sense to break even on the frontend in order to boost conversion on the backend.
Second, I used to think of the three product types – free, frontend, backend – as interoperable. You can pick which ones you want to build. But this makes them more interdependent. It’s still possible to get by without one or more, but you’re likely leaving money on the table.
Finally, it cements another piece of advice I got recently from Ryan Carr, co-host of the Newsletter Operator podcast.
We worked together atThe Hustle, where he ran growth on our frontend product Trends, and a couple weeks ago, I asked him when he thought people should launch frontend products.
“I can’t think of a downside to producing a frontend offer to start driving traffic to immediately,” he said.
At first I was skeptical because paid products take a lot of time, effort, and often money to make. Without a big free audience, there’s not much chance you see a return on that.
But I get it now. The frontend’s job is to give you a highly motivated marketing list to sell more expensive products to in the future. So he’s exactly right – the earlier you start building it, the better.
A few other things still swirling through my head on this…
It’ll take me time to fully incorporate this into the way I think about newsletter monetization, but here are a few things I think are true in light of this…
1 . Your Frontend Should Be Fulfilled Automatically
If you’re a solo operator, you can’t spend a lot of time each week on something that only breaks even (unless you have another job, or deep cash reserves, and a plan for a killer backend). So start thinking about product types that can be fulfilled automatically.
Rather than paid newsletters, maybe think email courses, ebooks, guides, etc.
In a recent interview, Ryan Carr, co-host of the Newsletter Operator podcast, suggested was going back through your old content to compile a guide you can sell as a welcome offer to new subscribers for $15-$25. “That provides value to folks so they don’t have to scroll back through all of your old newsletters,” he said.
If you’ve got a paid newsletter already, and it’s struggling to reach profitability, I think there are a couple of options:
- Add a lower-price frontend product (like Ryan’s option above) so that you build a bigger pool of pre-qualified purchasers to market your paid newsletter to. Higher conversion rates might make a $100/yr newsletter profitable if it isn’t already. Or…
- Price the paid subscription higher (like $500 and up), effectively making it a backend product, and add a new frontend product that can be fulfilled automatically.
Obviously larger organizations can run paid newsletters that break even because they’re not limited to the mental bandwidth of a single person.
2 . You Should Ideally Own Frontend Data
Right now, on my site, I have one paid product. It’s a book I wrote. It’s fulfilled completely through Amazon, which is nice because it truly functions as passive income.
BUT I now realize that carries a price for me, because I don’t own any of the sales data. Anyone who buys the book is Amazon’s customer, not mine.
Theoretically, some of them are on my email list. So if I were to launch a backend product, they might see it.
But I can’t segment them out, or factor their purchase into overall estimates of LTV.
That may not matter for me. I’m not sure I ever want this to be more than a high-six to low-seven figure business, and you can probably do that without a high level of granularity on reader behavior.
But it’s interesting. I get ~$1-$4 in royalties for each book sold. And I think the value of that data is actually higher than that in the long run. So part of me is thinking through other potential fulfillment options that’d bring those insights in-house.
3 . This Adds Nuance To Pricing
I used to say that frontend products are typically priced $50-$100. And that’s true – if you look across the web, a loooot of companies price their frontend there. It works as an easy place to start.
But if the goal is to maximize conversions on the frontend, and you’re willing to break even or potentially lose money, the real math on how to price it would be more similar to how you set your Target CPA on ads.