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Economies of Scale
Economies of scale allow bigger businesses either to sell their products at lower prices or to take more profit per item.
One of the most compelling reasons to grow a business is to achieve economies of scale. This concept underlies all growth. Ideally, as a business increases in size, costs per unit fall, resulting in lower prices or higher profit - or both.
Larger companies obtain economies of scale because:
- They buy more: High-volume purchasers can obtain lower prices for everything from raw materials to transportation and warehouse space - even cleaning services.
- They sell more: While low prices are not often a long-term strategy for big companies, they can afford to defend themselves strongly against price-cutting by offsetting lower per-unit profit with larger sales volumes.
- They have more resources: Larger operations fund R&D, sponsorships, promotions, better locations, bigger premises and other features that add value for customers.
- Administrative costs-per-unit come down: The cost of centralized advertising, accounting, personnel, purchasing, legal services and other functions are spread among many income-producing projects, products and locations.
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