Understanding Marginal Cost with Facebook, Nairaland, GE and Dangote Cement

Understanding Marginal Cost with Facebook, Nairaland, GE and Dangote Cement

If markets are perfect, the marginal cost of a product will be absolute zero. Yet, online digital platforms are close, meaning that the price of a digital product tends to near-zero. This is the reason why digital platforms like Facebook, Google and Nairaland can make their products free for users: the cost of producing the product for an additional user (the marginal cost) tends to near-zero as output increases. If you studied economics in secondary school, the shape you see is actually the shape of Average Fixed Cost which benefits from economies of scale.

Marginal cost is broadly broken into Transaction Cost and Distribution Cost. If your distribution does not go lower as you grow, your unit economics will struggle online.

Image result for transaction, distribution cost tekedia

This curve differs from the typical U-shaped marginal curve which has been used in the industrial age era microeconomic modelling. Largely, for companies like GE and Dangote Cement, as output increases, the marginal cost would fall first, but over time it will begin to rise. Because of that eventual increase in the marginal cost, these firms are bounded and constrained on how far they can grow. That is why GE and Dangote Cement cannot be in every local government in the world because unbounded outputs will harm them as their marginal costs rise!  Digital platforms do not have this limitation as increasing output takes marginal cost to near absolute zero. With that, Facebook can be technically available anywhere. This video explains deeper on how to use this in your growth strategy.

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