First on our list of mental models is the concept of advantages of scale. In short, it’s the idea that as a company grows and does more of the same type of work, it can do that work more efficiently and lower their costs quite a lot.
A great example of this is Amazon. Because of their amazing infrastructure, they can sell and deliver items for far less than almost any other company, and still turn a profit while doing it. This is a great thing for them, of course, but makes it difficult for other companies to grow and compete with them.
Investopedia explains it this way:
Most consumers don’t understand why a smaller business charges more for a similar product sold by a larger company. That’s because the cost per unit depends on how much the company produces. Larger companies can produce more by spreading the cost of production over a larger amount of goods. An industry may also be able to dictate the cost of a product if several different companies are producing similar goods within that industry.
Focusing on a tight niche is more likely to help create an economy of scale for your business, but the tight niche can be dangerous if things change. If you had build a huge and efficient CD-ROM manufacturing business, you’d be in big trouble today.
In our agency, one area that we’ve developed some degree of advantage of scale is with website management. With any website, you need to have systems in place to manage software updates, plugin updates, backups, malware scanning, uptime monitoring, etc. It’s a lot to do for one site, but once you grow to managing many sites, those systems become less and less expensive per site, so we can offer a always improving product at a great price.
Do you have an area in your life or business that has benefitted from scale?
