Business is Always At The Margin

At the margin is a term often used in economics.   Economists often examine things at the extreme to learn things about the entire situation.  At the margin is a calculus problem.  The answer tells you how much “one more” really costs.

Hence, in microeconomics a company always tried to produce where marginal revenue equals marginal costs.  That is an iron law of economics, MR=MC.

Calculating it can get messy, especially for startups.  We see it in different forms and it makes its way into different equations. LTV > CAC for example.  There are plenty of blogposts with opinions on how to calculate it.

In the rush to get stuff done, often startups forget about these principles.  Out of fear, the startup just chases revenue.  However, saying no to some customers might be better than saying yes.

Often at early stages of a startup’s life, the startup looks at all kinds of opportunities.  One time an entrepreneur asked me, “Here are 6 different industries we could target, which one should we go after?”  It could be that they were really asking, “If we get traction in any one of these industries, you’ll write a check correct?

Instead, I asked, “What’s the realistic sales cycle in each of the six opportunities?  What’s the profit margin in each of the six opportunities?  Layer them.  Figure out which sector has the shortest sales cycle combined with the highest profit margin and you will know where to start.”

Going after that sector helps everything else about the company fall into place. Spray and pray isn’t a good investment strategy for venture capitalists and it’s not a particularly good strategy for startups.

It’s important to accurately try and figure out what it costs you to acquire a customer and how much revenue they will produce for you.  What’s the cost of doing one more? Keep doing it until the revenue from doing one more equals the cost.  Then stop.