What is marginal cost and why it’s good to have less of it
Marginal cost is the additional cost to produce each additional unit of a product. It is the principle that most drastically changes your cost structure and profitability as you scale.
So for example, let’s say you were selling hoodies and a digital course for $45 each.
- Physical hoodie: Each additional one costs you $27 to produce
- Digital course: Each additional one costs you $0 to produce
So functionally, having less marginal cost means you keep more profit for each item you sell. This concept matters enormously for creators because it fundamentally changes the risk profile and scaling potential of your business.
Why this matters
If you’re not going to read this section, you can just skip to the end to see the graph that gets the main point across 👇️
Let's run the numbers on a theoretical creator merch operation that is making / selling hoodies:
- Manufacturing cost: $27 per hoodie
- Selling price: $45 per hoodie
- Profit per hoodie: $18 ($45 - $27)
- Margin: 40%
Sounds decent, right? Yes...but also, to reach $500,000 in sales:
- You need to sell 11,111 hoodies ($500,000 ÷ $45)
- Your manufacturing cost: $300,000 (11,111 hoodies × $27)
- Your profit: $200,000 ($500,000 - $300,000)
That's also not accounting for:
- Upfront inventory investment (goodbye, cash flow)
- Shipping and handling costs
- Returns and exchanges
- Unsold inventory (those XS and XXXL sizes nobody ordered)
- Storage costs (that's a lot of hoodies in your garage)
All of these also increase your marginal cost; for every unit you sell, you incur at least some additional cost.
Now let's compare with a theoretical digital course:
- Upfront development cost: $100,000 (one-time)
- Cost per additional sale: $0
- Selling price: $45 (same as the hoodie for comparison’s sake)
To reach $500,000 in sales:
- You need to sell the same volume of 11,111 courses ($500,000 ÷ $45)
- Your production cost (AKA marginal cost) doesn’t scale: $100,000
- Your profit: $400,000 ($500,000 - $100,000)
- Margin: 80%
That's an extra $200,000 in your pocket compared to physical merch. And sure, this is an oversimplification because there would be some marginal costs if you needed to do additional customer support or run paid ads, but those are minimal in comparison to physical goods.
Here’s a visual comparison if that’s more your thing:
How marginal cost impacts creators more than most
So you might be saying, “Wait a second, Miles. That merch business still looks pretty good to me.” And you’d be right…kind of.
For creators, the real problem with physical products is that they lock cash up. That $300K you spent on hoodies is money you can't use for:
- Hiring a better editor
- Upgrading your equipment
- Funding your next big video
- Outsourcing your bookkeeping
Creating great content is expensive, and most creators operate on tight cash flows, often reinvesting brand deal money into their next big piece of content.
Revenue streams with low marginal costs fit perfectly into creator businesses:
- Lower upfront investment - Instead of ordering $300K worth of inventory before seeing a single sale, you're investing less money, and only once. There are obviously print on demand services that help alleviate this for merch, but many creators still buy their own inventory, especially if it a highly custom piece.
- Faster breakeven - In our hoodie example, you’d need to sell 6600+ units just to break even on your investment. With a digital product, you’d need to sell less than half that.
- Cash flow friendly - Revenue from any sales becomes available immediately, without needing to worry about the cost of unsold inventory.
- Scalable with success - If your product resonates and sales spike (hell ya, good job), you don't face inventory stock outages or rush reordering headaches.
Also…tariffs? lol, not gonna go there.
