Definition
Marginal cost is the incremental cost to serve one more unit or customer.
Why it matters
Marginal cost drives unit economics and sets the floor for usage-based pricing.
Pricing implications
If price per unit is below marginal cost, margins erode as usage grows. Use marginal cost to set overage rates.
Measurement tips
Use blended unit costs from billing data and update regularly.
Checklist
- Calculate marginal cost per unit.
- Separate marginal cost from fixed overhead.
- Use marginal cost in tiered pricing models.
- Validate marginal cost against invoices.
- Update marginal cost after vendor changes.
- Model p50 and p90 usage scenarios.
- Avoid using list prices as marginal cost.
- Document assumptions for finance alignment.