(1+MP)2 =GR YoY
(1+marginal profit rate)2= monthly revenue growth rate YoY
If you find small good business like oil fountain or mcdonald brothers shop back in early 20 century, when you decide to invest in it and scale it? “marginalism” is key in decision-making processes when determining mass production investment.this chart is simplified correlation between marginal profit and revenue growth YoY derived from our investment experience.
e.g. if product A’s marginal profit rate is 40%, (1+0.4) squared, then there is potential to grow sales by 196%(+96%) in terms of monthly revenue year-over-year. This is to say, if the margin profit is over 40% then, the firm’s short term goal is doubling production capacity.After doubling capacity, if marginal profit is still 40% and there is no marginal revenue decline like price pressure, nor mariganal cost rate decline from lead generation order, charn rate, then the firm should double production capacity again.
Though in practice, while there’s a conceptual link between marginal profit and growth rate, the two aren’t perfectly correlated. Many variables can affect a firm’s growth rate, and marginal profit is just one of them. Analyzing the relationship requires considering both microeconomic factors (like cost structures and demand conditions) and macroeconomic factors (like overall economic growth and industry trends).
This chart is made by TANAAKK for simplifying investment decision making.
Although the basic fomula in economics, there is tradeoff in margin and growth. For example there is rule of 40 in SaaS metrics. If margin is 30 and growth is 15% it is over 45 so its healty. if margin is 10 and growth is 35% the fomula regard it as healthy. But our TANAAKK rule is different. if margin is 10 and growth is 35%, that business is in the critical phase before corruption. We usually find >51% EBITDA to start new SaaS business.
限界利益率と次年度増収比率には累乗の相関関係があります。例えば量産化した場合の限界利益率20％の事業の成長率は+44%ですが、限界利益率40%の事業の成長率は+96%（またはそれ以上）となります。TANAAKKの経験則では限界利益率40%の事業は前年度比で2倍から10倍程度に（最大では49倍に）成長することも経験しています。限界利益率とROEとの相関関係もとても重要です。ROEは8%以上であれば株式市場のTOP半分に入ります。借入過多により ROAが大きく毀損されていないことが重要です。ROE10%以上だと米国株式市場のTOP25%に入り、ROE20%以上だとTOP10%,ROE50%でTOP3％、ROE100％でTOP1％です。
EBITDA margin>Operating Profit Margin
It is very healthy if the company is growing and investing into infrastructure that generates future income.
EBITDA margin-Operating Profit Margin< Operating Profit Growth
If operating margin is lower than EBITDA by 15%, and operating income growth is more than 15%, that investment into fixed asset is effective. Earning growth without investment is very rare and difficult so fixed asset investment position is good indicator for future growth.
Understanding marginalism in scale economics
If you find small good business like oil fountain or mcdonald brothers shop back in early 20 century, when you decide to invest in it and scale it? “marginalism” is key in decision-making processes when determining mass production investment.
Marginal Cost (MC): the increase in total cost resulting from the production of one additional unit of a product.
Marginal Revenue (MR): the increase in total revenue resulting from the sale of one additional unit of a product.
For profit-maximizing firms operating in perfectly competitive markets, the decision rule is simply devided by 3 patterns.
1.MR>MC
If MR > MC, then the revenue from selling one more unit exceeds the cost of producing that unit. In this case, it makes sense to produce and sell more because doing so adds to the firm’s profit. The firm should pursue this state. marginal profit>0
2.MR=MC
If MR = MC, then the firm is maximizing its profit. Any deviation from this point would either add more cost than revenue or forgo more revenue than the savings in cost.The dominant players can utilize this state. marginal profit=0
3.MR<MC
If MR < MC, then the cost of producing one more unit exceeds the revenue from selling that unit. In this case, it’s better for the firm to produce less to increase profit.The firm should avoid this state. marginal profit<0
to defend margin of safety
If a company has a high marginal profit for an additional unit sold, this indicates that producing and selling more of that unit is beneficial in terms of profit. This could provide an incentive for the firm to expand its production, potentially leading to a higher growth rate.High marginal profit might not be sustainable in the long run. There for firms should build “economic moat” for competition and keep higher margin of safety by construcuting “fortress”.
marginal profit and income growth rate correlation
As firms increase production, they might experience rising marginal costs due to factors like capacity constraints or increasing input prices. If MC rises faster than MR, marginal profit will decrease, which might slow down the growth rate.
Demand forcasting
Predicting the demand for a product is crucial. If a company overestimates demand and produces too much, it can be left with excess inventory, which might lead to increased holding costs or the need for discounting to move products.Underestimating can result in stockouts and lost sales. Tools like market research, historical data, and advanced analytics can help in forecasting demand accurately.
Break-Even Analysis
Determine the point at which revenues from sales will cover the total costs.
speed and scale toward dominance
For monopolies or firms with market power, the rule changes slightly. Such firms will choose an output level where MR = MC, but they have the power to set the price above marginal cost, capturing a positive markup.
competition
High marginal profits can attract competition. As competitors enter the market and offer similar products or services, the original firm may experience reduced market share, price pressures, and a potential decline in its growth rate.
innovation
if there is tecnological evolution by moor’s law and wright’s law then there will be unknown player after building market. On the other hand, late entrants to the market can utileze this theory and exterminate existing players.
market imperfections
If there is market imperfections like political regulation or environmental cause, then marginal profit model should be customized.
Physical and social constraints
Capacity Constraints: Even if marginal profit suggests that more should be produced, real-world constraints such as factory capacity, labor availability, and raw material supply can limit production levels.
Product lifecycle
New products or those in the growth phase of their lifecycle may have different production considerations than mature or declining products. Early in the lifecycle, companies might prioritize rapid scaling and market capture, even if the immediate marginal profit is lower, in anticipation of future profits.