Economists love to talk about, “marginal this, marginal that”. Two relevant terms to producing and pricing widgets are, Marginal Cost (cost to produce and sell one additional widget) and Marginal Revenue (additional revenue by selling one more widget). The commonsense rule is no one should sell widgets at a price lower than its marginal cost, otherwise you are losing money on each marginal unit you sell.
Now there is wider uptake of the marginality concept among the some of the well known names of the digital media world. The first is Mr.Chris Anderson who makes a case for his “FREE” based on the argument that marginal cost of digital goods is $0. Recently, Mr. Seth Godin, author of several marketing books made this same marginal cost argument about education. He is making a valid point, except from cost and producer perspective and not from the consumer value perspective. He writes,
MIT and Stanford are starting to make classes available for free online. The marginal cost of this is pretty close to zero, so it’s easy for them to share. Abundant education is easy to access and offers motivated individuals a chance to learn.
Scarcity comes from things like accreditation, admissions policies or small classrooms.
The marginal cost is $0 only for units 2 through N, the first unit has a very high marginal cost (the cost to set up the operations and run it). But that is still not relevant to the value argument.
Being admitted to the school, accreditation, the many learning opportunities from the classmates, the network and the complete immersion all are considerable value to the the customers (the students). The value-add increases when schools restrict their class sizes and implement stringent admission criteria – in other words by creating scarcity.
Even for the digital course one could argue that with proper segmentation there exists a segment that is willing to pay for it or some aspects of convenience. Again it is the value-add to customers argument not the cost argument that is relevant to pricing.
For any marketer the key is to know what their customer segments are, what they value , what they don’t and make a credible value proposition. It is not about the marginal cost!