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Scaleability vs marginal cost (a business lesson)

Marie Price
by Marie Price on 22/11/13 18:00

If you are in the business of producing e-books, once the book is written, purchased from the author and digitised it costs almost nothing to distribute it.

The systems will already be in place from your previous e-book ventures so you can actually almost give the product away to generate more interest in your business. Alternatively, once you have sold a million copies of your e-book for £1, you can then give the book away free of charge when people buy one of your new e-books because the marginal cost of producing the initial book is next to zero but the value to your customers is not.

When Tesco set up a new shoppers restaurant they have an initial outlay on equipment, premises and training but they estimate (I think I have said this before) but to provide the large coke with ice, a cup, a lid and a straw is in the region of 6p with a sale price of well over £1 (compare that to a large drink at the cinema which will be about the same production price) The marginal cost to Tesco of providing the drink once everything is set up is tiny, therefore if you spill your drink they are happy to give you another one free of charge.

Dentistry is not the same, the marginal costs in dentistry of producing the next product are extremely high so to place a single dental implant in a patient and then to 'pop another one in at the same time' does not cost next to zero. There is also the issue that 'buy 1 get 1 free' in dentistry would have to be very carefully managed without begin unethical.

When your marginal costs are low you can invent a product, manufacture it in whatever way necessary and sell 1 or 100 or 1000 or 1million just by increasing your production capacity. If that happens to be software it is completely scaleable, once the product is written it can be downloaded a million times for £100 and you have a proper scaleable business.

I don't think dentistry is scaleable in the same way, most practices have 3 or 4 surgeries and very few people have opened a 3 surgery practice and increased it to a 25 surgery practice over time.

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Marie Price
Written by Marie Price
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