Skip to main content

Sunk Costs, Marginal Costs and Economics

When I was in college, I hated Economics. Then, several years later, I found myself teaching undergrad Econ and learned an appreciation for it. Now today, I have an even bigger appreciation for it. I have also noticed that not enough people have a solid grasp of some basic econ concepts that can be applied to everyday life. Two of these are cost related. Here are some basic definitions from The Economist website:

Sunk Costs - When what is done cannot be undone. Sunk costs are costs that have been incurred and cannot be reversed, for example, spending on ADVERTISING or researching a product idea. They can be a barrier to entry. If potential entrants would have to incur similar costs, which would not be recoverable if the entry failed, they may be scared off.

Marginal Costs - The difference made by one extra unit of something. Marginal revenue is the extra revenue earned by selling one more unit of something. The marginal cost (or whatever) can be very different from the AVERAGE cost (or whatever), which simply divides total costs (or whatever) by the total number of units produced (or whatever). A common finding in MICROECONOMICS is that small incremental changes can matter enormously. In general, thinking “at the margin” often leads to better economic decision making than thinking about the averages.

You have lots of sunk costs around you. For associations, your AMS is a big one. Do you keep throwing money at it because you "want to get the most out of your investment?" Don't. It is a sunk cost. See where that money you might spend would be more effective.

Marginal costs rarely get a second thought. Are you producing a webinar? The marginal cost of more attendees is probably zero! So use it as an extra value add for members who may not attend an in person meeting, or a sponsor or exhibitor.

Brushing up on econ is always a good idea. :)

Comments

Tony Rossell said…
Thanks for this post. Understanding "sunk" costs, "marginal" costs and also "fixed" costs are some of the most important, yet least understood concepts in developing a marketing plan. For example, once your fixed costs are covered, the economic returns of adding a new member or an additional meeting attendee are very beneficial. But many organizations do not take this into account when building a marketing strategy. Tony

Popular posts from this blog

10 Thoughts on #ASAE10

Ok, so I could have spelled out the title, but chose the hashtag - #asae10. Supposedly there were over 8,000 tweets with the hashtag, but probably countless more direct messages of messages that left out the hashtag but were conference related. Two years ago, we were using twitter as a backchannel to talk about speakers. Now, over 800 people sent conference related tweets. If you aren't on Twitter, you are already late to the party. Anyway, on with the post... In no particular order, my thoughts on this years ASAE Annual Conference: 1. LA was a good venue. Lots to do. Hotels close by. Only downside was the rooms were a bit of a hike. 2. I missed Sunday because of family obligations. That really put me behind the 8 ball. Since I led a session, that meant I only got to go to 3 true sessions. Sorry, I don't count Joy Behar and the closing session. Although Marshall Goldsmith was good, I probably wouldn't have gone to see that speech as a Learning Lab. 3. Based on #...

Do you want your association to be Walmart?

Earlier this week, I had a small Twitter discussion with Kevin Holland ( @associationinc ) regarding aggregation as a value proposition. @associationinc - Deciding your role is to aggregate other people's value is like George Costanza wearing sweatpants. "You're telling the world, 'I give up.'" @cardcat - Interesting comment about aggregating. Don't you think it is a viable option for a small association who can't afford it? @associationinc - Nothng wrong with aggregating content as long as you don't perceive it to be your value proposition. There's no real future in it. @cardcat - Don't think it is THE value proposition, but I think it could be A value to members, a big value. @associationinc - A big value is something you offer that nobody else can or that u can do better. Aggregating content is easy, there4 unsustainable. @cardcat - True, it isn't sustainable. But I almost think if you don't act as an aggregator, you risk folks...