Economies of Scale
Week of September 20, 2021
At a basic level economies of scale represents the simple fact that the greater the quantity of product, the cheaper each one costs to produce. Even though this concept seems straightforward, in some ways it is a bit foreign to me coming from a software and web development background. When dealing with software scalability almost all costs are upfront during the research and development phase. When the final product is completed it can be scaled out online with virtually zero incremental cost. You can see this happen all the time on Google Play and Apple’s App Store. In some ways, this creates difficulty in “finding the right price” as it is just determined by the value proposition observed by the customer. We can see some level of economies of scale when looking towards SAAS (Software as a Service). Web hosting companies such as Amazon (AWS) take advantage of this by scaling their costs as their customer’s products grow — in this case, increase in web traffic. In conclusion, we have seen many businesses successfully grow following this concept, and as the web continues to flourish more media companies have taken advantage of the much cheaper growth path that SAAS presents.
