Whether you love it or hate it, shopping is a part of life. Most of us wouldn’t last long if we couldn’t head to the grocery store for food, to the mall for clothes, or to the internet for both, and much more. However, shopping can be a headache, especially when we’re trying to keep our budgets in check. Stores and retailers have a vested interest in getting us to part with our hard-earned money, and it’s not always easy to know where to find the best deals.
A little familiarity with economics can help, though, which is why we’re taking some time today to look at one of the most important economic principles at play in the world of retail: economies of scale.
What is an Economy of Scale?
First things first: what is an economy of scale?
“Economy of scale” is an economics term that refers to any way in which things become more efficient as you increase the size of a business or operation. Economies of scale exist everywhere. While businesses deal with more and more expenses as they grow, they also tend to become leaner and more efficient. Let’s take a look at why.
Imagine that you own a store. Your store is a small general store. You buy products for a certain amount of money and sell them for a bit more to make a profit. You own a retail space and pay utility bills and hire employees. Business is good!
So, you expand. You buy the store next door, knock down the wall, and have room for more products (and more customers, too). Your expenses go up, but they don’t double just because the size of your space did. Perhaps you can still get by with one cash register and one cashier, so those costs stay the same.
Meanwhile, you now sell more stuff. More and more products fill (and fly off) your shelves, while more and more customers fit into the larger store. You can now afford to lower your prices, because you’re selling more stuff! Your business has become more efficient.
Taking Advantage of Economies of Scale
Economies of scale are the reason that big-box companies and massive ecommerce companies can afford to charge so little for what they sell. They’re selling so much of it that the little profits add up; and they’re ordering so many products on a wholesale basis that they’re offering economies of scale to their suppliers, who in turn may cut them better deals and create the possibility of even lower prices.
Economies of scale also create related savings opportunities. Massive companies like Target and Amazon can afford to absorb losses here and there in the name of efficiency. They may sell off returns pallets or excess merchandise at dirt-cheap wholesale prices — and here, too, savvy shoppers can profit. Snapping up Target liquidation pallets online is one way to get products at dirt-cheap prices. Smaller retailers smart enough to snag such opportunities can even get a taste of their larger competitors’ economies of scale by doing so.
Huge companies can and will also take losses on single sales to get customers in the door, trusting that such customers will then spend more on other products to even things up. Use price-tracking tools to keep an eye out for products being sold for slim profits (or even at cost or at a loss), and take advantage of large retailers’ price-matching policies to get the best deal at the place you most want to shop at. When big retailers fight, you win!
Economies of scale also exist for you, of course. If you have space to store non-perishable products, you may find that buying in bulk from stores that specialize in bulk purchasing will save you money. From paper towels to cleaning supplies, storing bulk buys can help you create your own efficiencies.
As you maximize your savings, the large retailers will do just fine, of course, thanks to their massive size and huge advantages. However you, the individual shopper, will get a taste of the savings, too — all because you know how the big companies do it.
