Economies of scale

Cost advantages that arise as output grows, lowering the cost of each unit produced or delivered.

Example

A delivery network whose cost per parcel falls as volume in each area rises.

Important

Scale only becomes an advantage if competitors cannot easily reach similar volume.

Related terms

  • Moat — A durable competitive advantage that protects a business from rivals.
  • Competitive advantage — Something that allows a company to win customers or earn profits that competitors find hard to match.

Lessons that explain it

  • A moat is what stops a competitor copying your success — Competitive advantages come from switching costs, network effects, proprietary data, brand, scale and distribution. Network effects are especially powerful, and especially often claimed without evidence. (11 min)

All 578 terms in the Investing glossary