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.
