How Fixed vs. Marginal Costs Shape Habits

Understanding fixed vs. marginal costs is a big part of understanding a business. What technology and the Internet has done in general is convert a lot of marginal costs into fixed costs.

Take movies. Before the cable bundle and before streaming services, there was a marginal cost to watching a TV show or movie. You're buying a movie ticket. You're buying the DVD. This was a one-time purchase for every movie.

The cable bundle and streaming services changed content consumption from a marginal cost to a fixed cost. Pay one lump sum monthly or yearly and you can watch a movie basically for free.

Our brains like fixed costs instead of marginal costs. That's why things like gym memberships work. Imagine if you had to pay $10 every time you had to go to the gym. It's already hard enough to go to the gym in the first place — now add this additional friction of spending money.

Instead, gyms make this friction point happen once — right when you sign up — and then you never have to think about it again. Zero marginal cost to go to the gym.

I frequently use Lyft bikes to get around the city now. I pay for the yearly membership (also a fixed cost) instead of paying $4 for each bike ride. It feels free even though really I paid the average cost of all my bike rides for the year.

But because it's a fixed cost instead of a marginal cost, it feels free. I've been able to reduce the friction of something I want to do by converting it from a marginal cost to a fixed cost.

So when thinking about habit building and things you want to do (or don't want to do), convert things you want to do into a fixed cost and convert things you don't want to do into a marginal cost.