In order for a small business to establish competitive and profitable pricing they must understand the difference between fixed cost and marginal cost. Knowing how much it will cost the company to produce one more item or provide one more service helps the company construct pricing schedules, create coupons, and give discounts. This is marginal cost and it is the key element a company needs to understand to stay afloat in a competitive market.
Fixed Cost Versus Marginal Cost
Fixed costs are those that the company has regardless of sales, like employee training, rent, equipment costs, insurance, advertising, utilities, and other industry-specific costs. In order for a company to be in business, all of these fixed costs must be taken care of, whether the business sells a lot, a little, or nothing at all.
Now, a company needs to start thinking about margin when considering whether to produce more products. The amount of this expenditure is known as marginal cost. This is a very important number because it can help a small business owner determine pricing, sales, and discounts. This concept is important for all stages of business from those just getting started to well established companies looking to expand, and businesses who experience seasonal lulls.