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.
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.
2. Click to join Tekedia Capital Syndicate and own a piece of Africa’s finest startups with a minimum of $10,000 investment.3. Register and join me every Saturday at Business Growth Playbooks w/ Ndubuisi Ekekwe (Sept 4 – Oct 23, 2021), Zoom, 4.30pm WAT; costs N20,000 or $60.