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# Does Marginal Cost Affect Your Pricing?

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Why marginal cost approaching \$0 is not a reason for giving away your product for free.

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### Does Marginal Cost Affect Your Pricing?

1. 1. Relevance of Marginal Cost In Pricing<br />Rags Srinivasan, IterativePath.com<br />Free<br />MC = 0 does not mean your price =0<br />MC = MR<br />
2. 2. Suppose you made and sold cup-cakes that costs you \$2 to make<br />… and you are wondering how to price it<br />The marginal cost, the cost to make each cupcake is \$2<br />
3. 3. You First Need To Find How Many You Can Sell At Each Price<br />
4. 4. Your Revenues At Each Price Point Will Look Like …<br />
5. 5. Your Total Profit Will Look Like …<br />Total Profit<br />
6. 6. Your Revenue From Selling Each Additional Unit …<br />Marginal Revenue<br />
7. 7. Your Total Profit Will Look Like …<br />Marginal Revenue (revenue by selling one additional unit)<br />
8. 8. You Can Make And Sell Until The Revenue From Each Additional Unit Is Greater Than The Cost To Make It<br />Marginal Revenue meets Marginal Cost at 4.5 units<br />
9. 9. Let Us Assume Abundance Of Flour, Chocolate etc<br />Let us say your Marginal Cost drops to \$0<br />
10. 10. Demand For Your Product Does Not Change<br />
11. 11. Your Revenues Do Not Change<br />
12. 12. Your Marginal Revenue Does Not Change<br />Marginal Revenue, same as before<br />
13. 13. You Still Can Only Make And Sell Until The Revenue From Each Additional Unit Is Greater Than The Cost To Make It<br />Marginal Revenue meets Marginal Cost at 5.5 units<br />
14. 14. Did it make sense to give your product away for free because your Marginal Cost dropped to \$0?<br />