The Advantages & Benefits of Economies of Scale | GoCardless

Economies of scale are cost advantages that can occur when a company increases their scale of production and becomes more efficient, resulting in a decreased ... SkiptocontentOpensitenavigationsidebarWhyGoCardless?ForusecaseSubscriptionpaymentsRecurringpaymentsbuiltforsubscriptionsInvoicepaymentsCollectandreconcileinvoicepaymentsautomaticallyCharitiesOptimisesupporterconversionandcollectdonationsOurcustomersCustomerstoriesHearfromourcustomersCustomersuccessOurcustomerfirstapproachCustomerHubTrainingresources,documentation,andmoreForsmallbusinessOverviewImproveyourcashflowKeeptrackofpaymentsReducecostsReducefailedpaymentsIncreaseconversionsForenterpriseOverviewReducechurnReduceinternationalbarriersReduceoperationalcostsReducetimetogetpaidReduceconversionriskProductFeaturesRecurringpaymentsIdealforsubscriptionsandinvoicesInstantBankPayIdealforone-offpaymentsInternationalpaymentsCollectfrom30+countriesSuccess+ReducepaymentfailuresVerifiedMandatesStoppaymentfraudIntegrationsAPIintegrationsBuildacustomintegrationPartnerintegrationsConnectto200+partnerappsVariableRecurringPaymentsInstantBankPaywillsoonsupportvariablerecurringpaymentsPartnersAllPartnersGoCardlessforChargebeeGoCardlessforXeroGoCardlessforZuoraPricingLearnHelp&SupportCustomerHubTrainingresources,documentation,andmoreFAQCommonquestionsansweredAPIdocumentationGuidesforintegratorsNews&resourcesLatestarticlesandresearchGuidetoopenbankingGuidetoDirectDebitTech@GCMasteringPaymentswebinarsLoginSignupBreadcrumbResourcesGrowthHowyourbusinesscanbenefitfromeconomiesofscaleWrittenbyGoCardlessLasteditedMay2020—4minreadTableofcontentsWhatareeconomiesofscale?ExampleofeconomiesofscaleWhatarethedifferenttypesofeconomiesofscale?AdvantagesofeconomiesofscaleDisadvantagesofeconomiesofscale(MakingeconomiesofscaleworkforyouWecanhelpEverwonderedwhyalargerbusinesscanchargesomuchlessthanasmallerbusinessforasimilarproduct?It’sallabouteconomiesofscale–costreductionsthatcanoccurwhenbusinessesincreaseproduction.Findouteverythingyouneedtoknowabouttheadvantagesanddisadvantagesofeconomiesofscaleandseewhymaximisingbusinessgrowthissoimportantforstart-upsandearly-stagebusinesses.Whatareeconomiesofscale?Economiesofscalearecostadvantagesthatcanoccurwhenacompanyincreasestheirscaleofproductionandbecomesmoreefficient,resultinginadecreasedcost-per-unit.Thisisbecausethecostofproduction(includingfixedandvariablecosts)isspreadovermoreunitsofproduction.Economiesofscaleprovidelargercompanieswithacompetitiveadvantageoversmallerones,becausethelargerthebusiness,theloweritsper-unitcosts.ExampleofeconomiesofscaleAcommonexampleofeconomiesofscaleinactionisseenwhenlookingatlargesupermarketchainsversusindependentgrocers.Withthelargerchainshavingmorecashinthebankandagreaternumberofcustomers,theyareabletopurchaseahugequantityofgroceriesfromsuppliers,resultinginalowercostperunit,comparedtotheindependentstores.Thisiswhyit'scheapertodoyourweeklyshopatabigchainratherthanasmallbusiness.Whatarethedifferenttypesofeconomiesofscale?Therearetwomaintypesofeconomiesofscale–externalandinternal.ExternaleconomiesofscaleExternaleconomiesofscalearedependentonexternalfactors.Anythingthatenablesacompanytocutdownoncostscanbeconsideredanexternaleconomyofscale,includingtaxreductions,governmentsubsidies,animprovedtransportationnetwork,orahighlyskilledlabourpool.InternaleconomiesofscaleInternaleconomiesofscalearecontrolledbythecompany.Theycanoccuranytimeacompanycutscosts,frombuyinginbulkandinvestinginstate-of-the-artmachinerytoaccessingextrafinancialcapitalandhiringaspecialisedworkforce.TechnicaleconomiesofscaleTechnicaleconomiesofscaleareatypeofinternaleconomyofscale.Theyareeconomiesofscaleachievedviatechnology.Thatis,largerbusinessesmorereadilyhavethecapitaltoinvestinnewerandbettertechnology,whichcanbringthemcostadvantagessmallerbusinessesareotherwiseunabletoachieve.PurchasingeconomiesofscalePurchasingeconomiesofscale,alsocalledbuyingeconomiesofscale,areatypeofinternaleconomyofscale.Theyareeconomiesofscaleachievedviabuyinginbulk.Thatis,largerbusinessesmorereadilyhavethecashandoutputtowarrantbuyingmaterialsinmuchlargerquantities,whichcanbringthemper-unitcostadvantagessmallerbusinessesareotherwiseunabletoachieve.FinancialeconomiesofscaleFinancialeconomiesofscaleareatypeofinternaleconomyofscale.Theyareeconomiesofscaleenablemorefavourableratesofborrowing.Thatis,largerbusinessesareseenbylendersasmorereliableorworthyofcreditduetotheirsize,whereassmallerbusinesseswilltendtopayhigherratesofinterest.AdvantagesofeconomiesofscaleThebenefitsofeconomiesofscaletoindustriesandbusinessesarewide-ranging,butgenerallyspeaking,itenableslargecorporationstoreducetheircosts,passthesavingsontotheconsumer,andgainanadvantageoverthecompetition.So,whataretheadvantagesofeconomiesofscale?Reducedlong-termunitcosts–Oneofthemainbenefitsofinternaleconomiesofscaleisreducedcosts,enablingbusinessestoimprovetheirpricecompetitivenessinglobalmarkets.Increasedprofits–Economiesofscaleleadtoincreasedprofits,generatingahigherreturnoncapitalinvestmentandprovidingbusinesseswiththeplatformtogrow.Largerbusinessscale–Asabusinessgrowsinsize,itsolidifiesandbecomeslessvulnerabletoexternalthreats,suchashostiletakeoverbids.Thisisoneofthekeybenefitsofeconomiesofscaletoindustriesasithasapositiveeffectonthecompany’sshareprice,aswellastheirabilitytoraisenewfinancing.Ofcourse,therearealsoplentyofadvantagesofeconomiesofscaleforconsumers,aslowerunitcostsoftenfeedthroughtoreducedprices.Whataretheadvantagesofeconomiesofscaleforconsumers?Lowerprices–Reducedcost-per-unitleadstolowerpricesfortheconsumer,meaningthatoverall,consumerswillhavehigherrealincomesandeasieraccesstoaffordableproducts.Productimprovements–Businessescanpotentiallyreinvesttheircapitalsavingsinresearchanddevelopment,leadingtoimprovedproducts(e.g.cheaperpharmaceuticalsandfood).Higherwages–Foremployees,anotherkeybenefitofeconomiesofscaleisthepotentialforprofitsharingandhigherrealwagesduetosavingsoncost.Disadvantagesofeconomiesofscale(Diseconomiesofscale)Whenabusinessbecomestoolarge,itsunitcostsmaybegintorise.Thisisreferredtoasadiseconomyofscale,andit’samajordrawbackthatgrowingbusinessesneedtopayattentionto.Diseconomiesofscalecanbecausedbyanumberofdifferentfactors,including:Poorcommunication–Ineffectivecommunication,whereinitbecomesmoredifficulttocoordinatealargeworkforceasyourcompanygrows,isoneofthemajorfactorsbehinddiseconomiesofscale.Lossofcontrol–Asabusinessgrows,itbecomesincreasinglydifficulttomonitortheproductivityandqualityofthousandsofemployees,leadingtoinefficientproductionprocesses.Duplicationofeffort–Duplicationofeffortcanalsobeanissue,wheremorethanonepersonendsupworkingonthesamefunctionortask.Weakmorale–Asbusinessesbecomelarger,staffaremorelikelytofeelremoteanddevelopasenseofalienation,whichcanleadtoreducedproductivityandwastage.Externalopposition–Behaviourthatwouldhavegoneunpunishedinasmallerfirmismorelikelytobeseenasathreatasabusinessincreasesinsize,leadingtopublicandgovernmentopposition.Inaddition,thebenefitsofinternaleconomiesofscaleforconsumersmaynotbeasimpressiveastheyappear.Forastart,economiesofscalemaynotalwaysresultinlowerprices,asdominantfirmsmaysimplyformamonopolyandenforcehigherprices.It’salsoworthrememberingthattheenvironmentalconsequencesofmassproductioncanbesignificant,frompollutiontoe-waste.MakingeconomiesofscaleworkforyouWhiletherearesomedrawbacksassociatedwitheconomiesofscale,thesecanbeavertedthroughagreaterfocusonmanagementandcommunication.Andwhilethebenefitsofeconomiesofscalecanbeleveragedmoreeffectivelybylargecompanies,evenstart-upsandsmallbusinessescantakeadvantage.WecanhelpAhealthycashflowisakeyfactorinachievingbusinessgrowth,makinganefficientpaymentsystemlikeGoCardlessagreatinvestment.FindouthowGoCardlesscanhelpyouwithadhocpaymentsorrecurringpayments.Over70,000businessesuseGoCardlesstogetpaidontime.Learnmoreabouthowyoucanimprovepaymentprocessingatyourbusinesstoday.GetStartedLearnMoreRelatedtopicsGrowthRecommendedforyou2minread—SmallBusiness10BesttoolsforsolopreneursLearndigitaltoolsforsolopreneurs.2minread—SmallBusiness10Besttoolsforsolopreneurs2minread—SmallBusiness6TopmetricsforaSaaSstartup2minread—SmallBusinessSaaSstartupchecklist2minread—SmallBusinessBestpricingstrategyfornewproducts2minread—PaymentsInvoicinginfluencerandcontentcreatorpayment2minread—SmallBusinessTop5pricingstrategiesforsmallbusinessInterestedinautomatingthewayyougetpaid?GoCardlesscanhelpContactsales