The Big Costs of Small Transactions

by Joy Johnson on May 24, 2012

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There is one basic challenge we all need to think about and work hard at. Scale. No – not the one you step on, although that’s a challenge too, but scale as it applies to life and business. The business term is “Economy of Scale.”

Fact: It costs more, per unit, if the total units are small. I can think of only one instance that might “seem” like an exception – and it isn’t. If you have a gigantic flawless diamond, each carat in that diamond will cost more than the sum of the prices of 8 of the highest quality 1/8 carat diamonds. That’s because the size is the rarity, not the fact it’s flawless diamond. Until you get to a place where the size itself turns it into a different commodity, price per unit drops as the number of units rise.

This explains why things cost more in poor neighborhoods. It explains why it costs just as much to have your tax return down when you’re losing money as when you’re making a profit. It explains why it costs $6.95 to ship the first item and only $2.95 per item if you add them to the package.

It’s a law – like gravity.

How can we break the law? If you can find ways to minimize the effect of scale, you can profitably sell to people who can afford to pay less – and that market is huge. If you can profitably get the costs under control and sell at the lower price point, the quantity you sell will soar.  There is enormous profit in finding ways for small quantity markets to not have to pay a quantity premium. Just ask Sam Walton.

In fact, it even effects weight loss.  Those last five pounds are always the hardest to lose.  They’ll cost you more effort than the first thirty combined, right?  Economy of Scale gone awry.

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