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150928 MAP Economics v1

150928 MAP Economics v1

  1. 1. General Business Principles: Economics - Part 1 Warren Leow
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. What is your Total Cost? Illustrative Examples only
  6. 6. Are you making money? Illustrative Examples only
  7. 7. Breakeven is key Breakeven Illustrative Examples only
  8. 8. Marginal Cost drives Average Variable Cost Illustrative Examples only
  9. 9. Marginal Revenue drives Average Revenue Illustrative Examples only
  10. 10. Continue investing when MR > MC Illustrative Examples only
  11. 11. Profit maximisation: Marginal Revenue = Marginal Cost Illustrative Examples only
  12. 12. Lets try some practical examples
  13. 13. 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
  14. 14. 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
  15. 15. How to balance opportunity cost?
  16. 16. 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
  17. 17. 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

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