Marginal Cost And Unit Economics [Video]

Marginal Cost And Unit Economics [Video]

In a perfect internet market, the marginal cost of a digital product is zero. But no market is perfect, so, what we have in reality is that the marginal cost tends towards near-zero. What that means is that the transaction and distribution costs stay low even as output increases. Whenever you attain that positioning, your unit economics improves since you are essentially having accelerating returns which keep compounding. 

Unit economics is defined as the “direct revenues and costs associated with a particular business model, and are specifically expressed on a per unit basis”. Some even go so far as say that unit economics are the fundamental or basic financial building blocks of a business.

In theory, you can just keep growing, unlimited by the typical industrial age marginal cost which begins to go low, but quickly ramps up with output (recall your average fixed cost shape in secondary school economics) thereby restricting growth. 

If you do not understand how marginal cost affects your business, you cannot drive growth in that business. Make time and study marginal costs. In Tekedia Mini-MBA, we have a course on marginal cost. It is the most important cost you must understand if you want to develop a growth playbook.

 

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1. Advance your career with Tekedia Mini-MBA (Sept 13 – Dec 6, 2021): 140 global faculty, online, self-paced, $140 (or N50,000 naira). Click and register here.

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4 thoughts on “Marginal Cost And Unit Economics [Video]

  1. From practical viewpoint, is there really a possibility for marginal cost of internet based business to tend toward near-zero in this part of the world? This is because, to grow here, you will have to build the support systems on your own, and anytime you wish to grow further – you build again.

    For instance, to double the number of mobile app users in Nigeria, you may have to purchase smartphones and distribute to non smartphone users, for free; and if they complain about data subscription cost, then you may have to cut deals with telcos that could offer them cheaper data; and if they complain about power for charging batteries, then you may have to purchase solar power packs and share. So when next you are thinking of market expansion in this part of the world, that is the formula.

    Here, you don’t just launch a product and start raking in revenues, you have to create the market, train and empower your future customers, and then hope and pray that they would be enthusiastic on the long run; if all the stars align, then you are the new sheriff in town.

    Support systems are what allow knowledge economy to scale quickly, else you will still run it like industrial age firms.

    Reply
    1. Holding the limiting factors you have stated above constant, have you thought of a way of marketing your product that the users and potential users willing bear the above costs which rightly they should bear?

      Reply
    2. Holding the limiting factors you have stated above constant, have you thought of a way of marketing your product such that the users and potential users will be willing bear the above costs which rightly they should bear?

      Reply

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