Understand Marginal Cost for Your Online Business

Understand Marginal Cost for Your Online Business

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.

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. It is the most important cost you must understand if you want to develop a growth playbook.

Yes, before you launch that online business, I want you to understand Marginal Cost. Watch the videos.

 

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3 thoughts on “Understand Marginal Cost for Your Online Business

  1. The cost of running a digital business can be misleading most times, and that is why the rate of failure is dizzying. The setup cost might look small initially, but the cost of customer acquisition (branding and marketing) and that of running the platform as it grows are actually intimidating.

    So, while on the surface, it might look like adding extra customer costs almost nothing, but the process that led to adding those extra customers, plus cloud and security costs aren’t getting smaller, they keep increasing as the platform grows.

    The distribution cost is just one component of the story, as it tends to zero, customer service and experience costs grow, because it will always cost more money to satisfy more people.

    There are many unwritten and untold stories in the digital platform sphere, and without a holistic understanding of the facets and intricacies, miseries and frustration await…

    Reply
    1. “The setup cost might look small initially, but the cost of customer acquisition (branding and marketing) and that of running the platform as it grows are actually intimidating”.-True. However, I believe overtime as the profit surge, and the name is known, it no longer matter.

      Reply
    2. Mayokun Akinradewo · Edit

      Thank you for opening a window here @FrancisOguaju.

      How would you advise digital platform start-ups on reliance on secondary data of industry behemoths for growth strategy function?

      Would you predict an asymptotic behaviour (or quasi) of the MC for the digital platforms as indicated in @NdubuisiEkekwe’s reference considering the cost elements of customer service and experience you referred?

      My focus actually is on identifying the merit and demerit of relying on secondary data of the majors to inform scaling roadmap by smaller players.

      Reply

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