The Incremental Margin

As an early founder, I’d built a manual operation and was having a hard time growing it while maintaining operational consistency. Our workflow was complex, with many potential points of failure. It was expensive, and it couldn’t scale. I figured technology could help make our processes consistent so we could grow. There were other benefits I didn’t realize.

After we built technology, things got predictable. I began to model growth scenarios, and something jumped out at me: the incremental margin. As revenue increased, our costs went up, but not nearly as quickly as revenue did. With every additional dollar of revenue we earned, a bigger fraction fell to the bottom line. Said differently, the more we grew, the more profitable we became —mainly because of the efficiency gains from the software we’d built. For the first time, I could clearly see the profit potential of the business.

Seeing the impact that the incremental margin could have on the business was a big aha moment. It was as if I could see into the financial future of the company and I just needed to figure out how to grow to get there.  

Side note: I had assumed that customer acquisition costs would stay flat, and that assumption proved incorrect years later because our market wasn’t growing. Nevertheless, thinking in incremental margins is something I do to this day.