Post on 14-Apr-2017
General Business Principles: Economics
- Part 1Warren Leow
Why is Economics important for startups?
Microeconomics
Macroeconomics
Prioritisation & allocation of resources to optimise
for returns and work around competition, costs, constraints
Preempt and react against macro factors beyond control which might
affect your startup
As competition increases, startups need to be more scientific and data driven
What do founders need to understand?• Allocation of scarce resources to achieve
objectives via microeconomics• Clarity on business tactics:
• Revenue maximisation• Cost minimisation• Profit maximisation• Cash maximisation• Impact maximisation
If you can’t count, you should not be in business, because you will definitely fail
1. Are you able to cover your fixed costs? Can you make money?
2. What does marginal and average costing and pricing mean?
3. How to balance opportunity cost using Pareto analysis?
Key Questions for Today
Laptop required: Working examples
What is your Total Cost?Illustrative
Examples only
Are you making money?Illustrative
Examples only
Breakeven is key
Breakeven
Illustrative Examples only
Marginal Cost drives Average Variable Cost Illustrative
Examples only
Marginal Revenue drives Average Revenue Illustrative
Examples only
Continue investing when MR > MC Illustrative
Examples only
Profit maximisation: Marginal Revenue = Marginal Cost Illustrative
Examples only
Lets try some practical examples
Lets try to tie back to earlier concepts• What is Marginal Revenue? Marginal CLTV• What is Marginal Cost? Marginal CAC
If your CLTV > CAC, keep investing.. but..
Only if your resources do not have better competing uses
How to balance opportunity cost?• Use Pareto Analysis to focus on 80/20 or
optimised risk to reward ratio• Rank all pricing and problem solving strategies in
descending order by returns (value) and (effort) cost
• Merchants• Customers• Product line, SKUs• Complaints
• You must measure, rank and then prioritise to be efficient in resource allocation
How to balance opportunity cost?
Key Takeaways
• Total Cost = Total Variable Cost + Total Fixed Cost
• Total Profit = Total Revenue – Total Cost
• Average Revenue > Average Cost = Profit
ACTION: Download MAP Economics Model v2 and play with it
• Marginal Revenue > Marginal Cost = Sell & Market More!
• Marginal Revenue = Marginal Cost = Maximum Profit
• Prioritise with Pareto analysis
Next lessons for General Business Principles
• Part 0: Sensitivities Analysis• Part I: Basic Microeconomics• Part II: Supply and Demand Curves• Part III: Critical Path Analysis & Decision Trees• Part IV: Competitor Analysis
You might be able to build product, but if you can’t scale scientifically,
you cannot grow big