Module · Thinking at the margin
What it really costs
Lesson 2 of 5 · 6 min
What does one more cost? asked what changes if you say yes. This one asks the harder half of the same question: changes compared to what?
The cost of the road not taken
You have $30,000 and two ways to spend it. Marketing wants it for ads. Sales wants it for a new hire.
| Option | Returns over the year | Profit |
|---|---|---|
| Ad campaign | $54,000 | +$24,000 |
| New salesperson | $64,000 | +$34,000 |
Ad campaign
- Returns over the year
- $54,000
- Profit
- +$24,000
New salesperson
- Returns over the year
- $64,000
- Profit
- +$34,000
Run the campaign and the books will say you made $24,000. The books are right and the decision is still wrong, because the campaign did not cost $30,000 — it cost $30,000 and the $34,000 you could have had instead. Measured against the alternative you gave up, running the ads lost $10,000.
Opportunity cost: the value of the best thing you did not do. It never appears in an account, and it decides whether a profitable choice was a good one.
This is why "it made money" is a weak defence of anything. Almost every option makes money. The question is whether it made the most money available at the time — and answering it means putting the options in the same unit, per dollar, over the same period.
Why the second one is always worth less
You are buying leads. The first $10,000 of advertising reaches the people already looking for you. The next $10,000 has to reach people who are harder to find, and so on outward.
| Ad spend | Leads | Extra leads for the last $10,000 | Cost of each extra lead |
|---|---|---|---|
| $10,000 | 400 | 400 | $25 |
| $20,000 | 700 | 300 | $33 |
| $30,000 | 900 | 200 | $50 |
| $40,000 | 1,020 | 120 | $83 |
| $50,000 | 1,080 | 60 | $167 |
$10,000
- Leads
- 400
- Extra leads for the last $10,000
- 400
- Cost of each extra lead
- $25
$20,000
- Leads
- 700
- Extra leads for the last $10,000
- 300
- Cost of each extra lead
- $33
$30,000
- Leads
- 900
- Extra leads for the last $10,000
- 200
- Cost of each extra lead
- $50
$40,000
- Leads
- 1,020
- Extra leads for the last $10,000
- 120
- Cost of each extra lead
- $83
$50,000
- Leads
- 1,080
- Extra leads for the last $10,000
- 60
- Cost of each extra lead
- $167
Nothing here is broken. Spending more genuinely does bring more leads at every level. The question is where to stop, and that needs one more number: a lead is worth $60 to you.
Now read the last column against $60. At $30,000 the next batch of leads costs $50 each — cheaper than they are worth, so buy them. At $40,000 they cost $83 each — more than they are worth, so don't. Stop at $30,000.
Watch what average cost says here. At $40,000 you have 1,020 leads, which is $39 each against a lead worth $60 — a healthy-looking number that invites you to spend more. But that last $10,000 bought 120 leads worth $7,200. It lost $2,800. The average was still improving while the decision had already turned bad.
Same lesson as last time, one level up: averages describe, margins decide.
The money that is already gone
You have spent $200,000 over eighteen months building something. It needs $50,000 more to finish. Someone asks whether to continue, and the room says: we have already put in $200,000, we can't stop now.
That sentence has the logic backwards. The only question is:
- Will the $50,000 still to spend earn more than $50,000?
- Is there anything better to do with $50,000?
The $200,000 does not appear in either question, because no decision available to you now can get it back. It is sunk — the same status the $6,000 of fixed cost had in the last lesson, except that this one is buried in time rather than in a monthly total, which makes it far harder to ignore.
The uncomfortable version: if a competitor offered you the half-finished project for free today, would you spend $50,000 to complete it? If no, then finishing your own is also a no, and the $200,000 is the only difference between the two situations.
Three questions, one habit
| Ask | To catch |
|---|---|
| Compared to what? | opportunity cost — a profitable choice that beat nothing |
| What did the last one buy? | diminishing returns — spending past the point it pays |
| Would I start this today? | sunk cost — throwing good money after committed money |
Compared to what?
- To catch
- opportunity cost — a profitable choice that beat nothing
What did the last one buy?
- To catch
- diminishing returns — spending past the point it pays
Would I start this today?
- To catch
- sunk cost — throwing good money after committed money
Next: the other half of every pricing decision. We have been asking what things cost us. Now we ask what customers do when the price moves.