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