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Economics & Markets

The Margin Mirage

If a business model relies on high volume, its pricing strategy may be its own worst enemy.

2026-07-071 min read

A company that prioritizes high volume over high margins may inadvertently create a self-reinforcing cycle of declining profitability. This occurs when the pursuit of market share through low pricing leads to increased sales, which in turn fuels the need for even lower prices to maintain growth. The causal chain is straightforward: low prices drive up demand, which increases production costs, forcing the company to lower prices further to remain competitive. However, this downward spiral neglects the second-order effect of diminishing marginal returns on investment in marketing and advertising. As the company expands its customer base, the cost of acquiring each new customer rises, eroding the already thin margins.

The story of Dollar Shave Club illustrates this margin mirage. Founded in 2011, the company offered affordable razor blades and shaving accessories through a subscription-based service. Its low-cost model and clever marketing quickly gained traction, attracting millions of customers. However, as the company grew, so did its marketing expenses. To maintain its impressive growth rate, Dollar Shave Club had to continually invest more in advertising and promotions, which cut into its margins. When Unilever acquired the company in 2016 for $1 billion, Dollar Shave Club's profit margins were reportedly thin, highlighting the challenges of sustaining a high-volume, low-margin business model.

The margin mirage has significant implications for businesses seeking to scale quickly. By focusing on volume over margins, companies may create a vicious cycle of declining profitability, where the pursuit of growth becomes an end in itself, rather than a means to achieve sustainable profitability. To avoid this trap, businesses must carefully balance their pricing strategy with their growth objectives, recognizing that high volume does not always translate to high profits.

Key insights
High-volume business models can create a self-reinforcing cycle of declining profitability if not balanced with margin growth.
The pursuit of low prices can lead to diminishing marginal returns on investment in marketing and advertising.
Careful pricing strategy is crucial to avoiding the margin mirage and achieving sustainable profitability.
Companies must balance their growth objectives with their pricing strategy to maintain profitability and product quality.
Why it matters

Ignoring the margin mirage can lead to a business model that is inherently unsustainable, as the pursuit of high volume at low prices erodes profitability and increases the risk of bankruptcy.

Furthermore, the margin mirage can also lead to a decrease in product quality, as companies may be forced to cut corners to maintain low prices, ultimately damaging their brand reputation and customer loyalty.

Use this tomorrow
1
Review your company's pricing strategy and calculate the marginal return on investment for each additional unit sold, to determine whether the pursuit of high volume is eroding your profitability.
2
Conduct a customer acquisition cost analysis to identify areas where marketing expenses can be optimized without compromising growth objectives.
Go deeper

The concept of the margin mirage is rooted in the economics of scale and the law of diminishing returns. As companies grow, their marginal costs increase, making it more challenging to maintain profitability. By understanding these economic principles, businesses can develop more effective pricing strategies that balance growth with profitability.

The margin mirage also has implications for the way companies measure and evaluate their performance. Traditional metrics such as revenue growth and market share may not accurately capture the sustainability of a business model. Companies must develop more nuanced metrics that account for profitability, customer lifetime value, and return on investment.