# Scale Economies Shared ## The Idea in Brief Most companies capture scale economies for themselves—as costs fall with volume, margins rise and shareholders benefit. But a few companies *share* scale economies with customers, passing savings through as lower prices. This creates a flywheel: lower prices attract more customers, which drives more scale, which enables even lower prices. Generosity, structured correctly, becomes a source of durable competitive advantage. --- ## Key Concepts ### The Standard Model As companies grow, unit costs typically decline (fixed costs spread over more volume, purchasing power increases, processes become more efficient). In the standard model, companies keep these savings as profit. Margins expand. Shareholders benefit. ### The Shared Model A few companies take a different approach: as scale increases, they pass savings to customers rather than keeping them. Costco maintains low markups regardless of purchasing power gains. Amazon reinvests efficiency into lower prices. IKEA scales production to reduce prices, not expand margins. ### The Flywheel Effect Sharing scale economies creates a compounding loop: 1. Lower prices attract more customers 2. More customers create more scale 3. More scale enables lower costs 4. Lower costs fund even lower prices 5. Return to step 1 This flywheel is extremely difficult to disrupt. Competitors who try to match prices without the scale advantage destroy their own margins. ### Customer Loyalty as Moat When customers trust that you'll always pass savings through, they stop comparison shopping. Costco members don't check competitor prices—they trust the model. This creates loyalty that doesn't depend on promotions or marketing, reducing customer acquisition costs and increasing lifetime value. --- ## Implications **In business strategy:** Consider whether sharing surplus with customers might build more durable advantage than capturing it. This is counterintuitive—it looks like leaving money on the table. But the flywheel can become unstoppable. **In competitive analysis:** Look for businesses that consistently lower prices as they scale. They may be building moats that aren't visible in current margins but will dominate over decades. **In valuation:** Companies pursuing scale economies shared may look less profitable than competitors capturing scale. But their competitive position may be far stronger. Don't mistake generosity for inability to raise margins. **In market entry:** If an incumbent is running a scale economies shared model, competing on price is nearly impossible. They can always match and sustain lower prices. Entry requires differentiation, not cost competition. --- ## Sources - [[Richer, Wiser, Happier]] — Nick Sleep and Qais Zakaria's insight; destination analysis and long-term inputs - [[7 Powers]] — Related to counter-positioning: incumbents can't copy without damaging existing profit models - [[The Origins of Efficiency]] — How learning curves and scale effects drive cost reduction over time - [[Retail Disruptors]] — Hard discounters exemplify the virtuous cycle: volume per SKU drives value, which funds expansion, which drives more volume