3 ms·

Exactly... startups aren't aiming to maximize profits (where marginal cost is equal to marginal revenue). When marginal cost is greater than marginal revenue a

Exactly... startups aren't aiming to maximize profits (where marginal cost is equal to marginal revenue). When marginal cost is greater than marginal revenue a startup can either a) find more vc funding to raise marginal revenue, or b) cut expenses to lower marginal cost. Startups will press a) until the button breaks leaving b) the only option.

zepolen 18y ago
I took an economics class at school and while I don't give much merit to theory vs practice, one lesson that was taught was that if MR < MC you close the business /right away/ because with every passing day you are losing money. Now when investing it's a different matter, but the point stands, and so the after b) the only real option is actually c) liquidation
- jfornear 18y ago
  Before closing, you would want to first look at short run vs. long run.
- MaysonL 18y ago
  The point is that MR and MC are not fixed. MR tends to go up with number of users (network effects), MC tends to go down (economies of scale).
  - zepolen 18y ago
    MR doesn't go up with number of users. "Marginal Revenue" by definition is the difference in revenue from selling one extra unit. In many cases it would be the price of the product being sold, and is fixed. Economies of scale works on average cost, more specifically long run average cost, while it contributes to the MC going down, MC is more affected by fixed vs variable costs in the short term and more importantly it increases at a certain point when you reach the maximum capacity of your current infrastructure.
    - jfornear 18y ago
      For most web startups, MR is not fixed, and it does increase with the number of users. This is mostly due to the price of advertising not being fixed. The value to advertisers increases for every additional user.
      - deleted 18y ago
        [deleted]
      - zepolen 18y ago
        The increased value for advertisers only holds true if the advertisers are paying a fixed rate per month regardless of impressions/clicks. As for marginal revenue of the startup: - Fixed rate = MR falls with increasing users. - CPM = MR falls as the more the pageviews you get, the better a price advertisers will demand from you. - Per click = MR remains relatively stationary but as with CPM, at some point demand and supply kicks in and when you supply more clicks than advertisers want (for a certain price), they will pay less /per click/. To get increasing MR in advertising would require changing the rate of 'more likely to buy' users relative to users in general. On the internet it's the other way around, more users == less likely to buy, and with things like Adblock becoming more and more mainstream, it hinders it even more.

zepolen 18y ago

I took an economics class at school and while I don't give much merit to theory vs practice, one lesson that was taught was that if MR < MC you close the business /right away/ because with every passing day you are losing money. Now when investing it's a different matter, but the point stands, and so the after b) the only real option is actually c) liquidation

jfornear 18y ago
Before closing, you would want to first look at short run vs. long run.
MaysonL 18y ago
The point is that MR and MC are not fixed. MR tends to go up with number of users (network effects), MC tends to go down (economies of scale).
- zepolen 18y ago
  MR doesn't go up with number of users. "Marginal Revenue" by definition is the difference in revenue from selling one extra unit. In many cases it would be the price of the product being sold, and is fixed. Economies of scale works on average cost, more specifically long run average cost, while it contributes to the MC going down, MC is more affected by fixed vs variable costs in the short term and more importantly it increases at a certain point when you reach the maximum capacity of your current infrastructure.
  - jfornear 18y ago
    For most web startups, MR is not fixed, and it does increase with the number of users. This is mostly due to the price of advertising not being fixed. The value to advertisers increases for every additional user.
    - deleted 18y ago
      [deleted]
    - zepolen 18y ago
      The increased value for advertisers only holds true if the advertisers are paying a fixed rate per month regardless of impressions/clicks. As for marginal revenue of the startup: - Fixed rate = MR falls with increasing users. - CPM = MR falls as the more the pageviews you get, the better a price advertisers will demand from you. - Per click = MR remains relatively stationary but as with CPM, at some point demand and supply kicks in and when you supply more clicks than advertisers want (for a certain price), they will pay less /per click/. To get increasing MR in advertising would require changing the rate of 'more likely to buy' users relative to users in general. On the internet it's the other way around, more users == less likely to buy, and with things like Adblock becoming more and more mainstream, it hinders it even more.