The Most Important Cost To Understand As A Web Entrepreneur

If markets are perfect, the marginal cost of a digital product would be zero. Marginal cost is the cost added by producing one additional unit of a product or service. The implication is thus: if marginal cost is zero, users can pay zero or near-zero. Unfortunately, markets are not perfect, and that means marginal cost is not zero.

In a perfect market, the marginal cost of a digital product is zero. This means that the price of a digital product tends to zero: welcome freemium and ad-supported business. However, only firms with network effects dominate and benefit. The core reason is that if in a perfect market, and the marginal cost of producing digital product is zero, the price will inevitably go to zero.

This is the heart of the freemium model where you get many things free, which is possible because of the aggregation construct, where companies provide those digital products and then create an ecosystem to sell adverts. The firms benefit more than the suppliers by providing the platforms [Facebook makes money for photos supplied by families. Sure you like the Likes]. As shown in the Figure, great companies deliver the near-zero marginal price for high quality product, making it challenging for anyone that carries a non-zero marginal price to compete, exacerbated if the product is even not top-grade. This is one of the biggest challenges digital entrepreneurs face.

Nonetheless, as a web entrepreneur, your job is to make that marginal cost near-zero. It is only when you make that possible that you can improve your scalable advantage.

Digital marginal cost comprises mainly transaction cost and distribution cost. The transaction cost includes processing fees like the ones Paypal and Interswitch charge you. Largely, that cost is agnostic of domain: it is paid whether online or offline.

But distribution cost is the real deal. That is the cost associated with distributing the goods. For a digital product like subscription to my blog, the distribution cost is zero. But if you run an ecommerce company, you have a huge cost to ship the items after the customer has paid. If that distribution cost is not near-zero, you have a problem as a web entrepreneur.

By that I mean: if your distribution cost is huge like an ecommerce company, even though you think you are a web entrepreneur, you are actually NOT running a web business since your cost is now dominated by the offline component. That is the reason why I maintain that an ecommerce company in Nigeria is not a web business but a physical business with a web channel.

Yes, the largest component of the marginal cost is offline and that makes ecommerce an offline business. You know what? Ecommerce entrepreneurs fix that problem by mapping geographical locations within a nation where they can serve customers, making a case why they are not a web business since web businesses are neither constrained nor bounded.

In summary, understand your marginal cost by watching this video below.

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