Marginal Benefit

Finance allah shmoop what is marginal cost All right let's

start with profits No different profits Gross operating net those

kind of profits Those are the big three for now

Anyway if you don't recall the income statement that gave

you those margins well here it is in all its

glory Our awesome lemonade stand So from a resource is

allocation perspective margins drive everything you ever read Animal farm

Well if you look in the very fine print you'll

see that it really says high margins good higher margins

better But margins are a contextual thing They're evaluated on

a relative basis Basically the more of a commodity Something

is generally speaking the more rivalrous the industry there in

meaning tons and tons of sellers all competing on price

for the same product and thus lower margins for that

highly competitive industry Think about the very mature in declining

paper in pulp industry long history tons of competitors They

all sell the same old dead tree product There's almost

no differentiation between one seller or another of paper and

pulp And they're filled with unions Yeah way low margin

world less and less demand for paper and paul peach

Year is everything moves online Polluters mostly overseas have a

structural advantage over non polluters because it's cheaper to make

paper pulp when you could just pollute dump everything in

the river right Well in the us where houser is

the paper and pulp gorilla And in a great year

this very commoditized company filled with union workers has only

ten ish percent margins where houser sells a ton of

pulp for some three grand or so which cost it

just two grand and change to manufacture But then if

you add in operating costs like shipping union pension funds

senior management lawyers rent and more lawyers will even its

scale that three grand of revenues from a ton of

pulps sold cost warehouses something well over twenty five hundred

bucks So that pretax they only make five hundred box

or less from every three grand of revenues right that

be their operating margin there Well compare warehouses with google's

search business Google owns the world in the search category

with over eighty percent of all searches going to its

servers Essentially no riel competitors today Sorry microsoft Just keeping

it real Google makes money by selling virtual real estate

Or cliques and views a typical click on ah highly

big keyword like taxes help or mesothelioma Ambulance chasing lawyers

is something like fifty cents per click or more Well

google's marginal cost for that click Well not a lot

the electricity to serve the page but well that's about

it Call it a penny So google search business alone

is like a ninety percent plus gross margin kind of

business Pretax They have almost no marginal cost of goods

sold Really amazing business way different from twenty five hundred

dollars to sell three grand worth of pulp Google has

no cost of shipping and a small handful of highly

paid engineers a call in a few hundred of them

who actually matter to the process today Well they created

a mathematical algorithm that truly scales meaning it gets bigger

and more profitable The bigger it grows well the marginal

additional cost of one more click to google is almost

nothing and it's a vast contrast to that paper and

pulp business where yet more forests have to be planted

more lumberjacks need to be hired and then probably injured

More trees need to be killed and shift and chemically

altered with bleach and on and on and on so

relative to its competitors wear hauser might be doing great

with ten percent plus margins But the fact is the

paper and pulp business is a lousy industry a lousy

business when compared with the search industry Who's n plus

one thor Additional units sold Cost google almost nothing The

basic idea is that you have to understand margin in

the context of an industry and in the context of

an economic climate that could be good bad and or 00:04:09.298 --> [endTime] ugly