Advantages of Scale

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.