Average Costs

Definition:

The average cost of a unit of product is made up of its fixed costs/#units produced, and the variable cost per unit. With digital products, where the variable costs are very small (and in some instances zero) the average cost of the product declines as more units are produced and sold. Thus the market leader for a product typically has the lowest average costs per unit. This allows the leader to have increased margins, and increased flexibility to lower price. This is one of the reasons why first-mover advantage can be so important.

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