general thoughts

economies of scale

Today: A raining day here in Zurich. Perfect weather to write packlists and for a factory day, packing perfumes.

Today’s musing here on my blog: Economies of scale. The other day I gave a little speech about the “life of a self made perfumer” to a class running a special project, high school level. The speech was nice and we crossed a lot of topics that all are important. I also mentioned that growing and building a company comes with contradictions. Here is one, dealing with the economies of scale, and the paradox that, under certain circumstances, growing does not always means more money coming back.

Here’s an example and the today’s little picture tries to highlight the situation.

The curves show you growing numbers of perfumes that you sell (x axis) and the profit you make  on the y axis. So you start your venture, sell more and you make more profit. As you would expect. But then, there might be a point where things change. Suddenly, you sell more and earn less. I call this the valley of death that a lot of small companies do not survive. A lot of factors can lead to this: One example is this: In order to sell more, you need to work with external sellers, your margin goes down, your costs go up, as you need a larger warehouse, more stock, maybe a coworker, maybe extra insurance etc. There are a lot of factors that might play into this picture.

The bottomline: You need to try to make this valley of death as flat as possible, by reducing Delta y and keeping the Delta x small, too.

Otherwise, it might not end, the valley, and in the end it will kill you. I know a couple of companies where exactly this happened: Making the next big step, falling into the valley and there was no time to reach the point where the return goes up again.

I think this is super interesting, as it sort of contradicts a general belief that getting bigger always means more profit. It translates also into, for instance: Being willing to work for less, keeping costs down, making compromises in the valley….

And now: Packlists. Have a great day!