Economies of Scale in the Service Industry

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An increase in production scales may generate economic efficiencies termed "economies of scale." An efficiency is the ability to carry out a particular job with minimum time, effort and other cost expenditures related to its performance. Economies of scale typically exist when production or operational costs are fixed so that increases in production volume reduce unit costs. Although service industries generally involve delivery of unique services in person, as opposed to mass-production processes that replicate items, they may still achieve economies of scale in business operations.

An increase in production scales may generate economic efficiencies termed "economies of scale." An efficiency is the ability to carry out a particular job with minimum time, effort and other cost expenditures related to its performance. Economies of scale typically exist when production or operational costs are fixed so that increases in production volume reduce unit costs. Although service industries generally involve delivery of unique services in person, as opposed to mass-production processes that replicate items, they may still achieve economies of scale in business operations.

Contracting Services

A contracted service might be a business service that's offered to a number of companies that have a similar need for the service, such as call center providers. By outsourcing such functions, a company is able to pursue economies of scale by reducing capital and human resource allocations that would be required if performed using internal mechanisms. Such shared services are a way to control costs related to staffing and operational processes.

Advertising and Marketing

The variable costs for advertising and marketing are impacted, in part, by their scale. Cost efficiencies might exist after the fixed cost of producing a print advertisement or a television commercial has been satisfied. As an example, if a television commercial's total cost is $20,000 and it's set to run 1,000 times on a prime-time cable station, the average cost to the advertiser for each commercial run is $20 each. If the advertising costs to run the same commercial 2,000 times is $30,000, the average cost for each commercial run is $15 — creating an economy of scale for the advertiser.

Aggregating Risk

Services such as group health insurance exploit economies of scale by presenting an insurance carrier with the opportunity to provide service to a large group of individuals. The cost for group services generally lowers the cost that each individual would pay if the policy were sought under an individual policy. In this way, a company is able to provide health services for large numbers of individuals at the most efficient market costs.

Technology and Automation

Service businesses are able to create economies of scale by lowering their operational costs using technological developments and automated business solutions. For example, computer technology and Internet usage have generally made small businesses more productive in performing business functions such as marketing, communicating and data collection.

References

About the Author

Vanessa Cross has practiced law in Tennessee and lectured as an adjunct professor on law and business topics. She has also contributed as a business writer to news publications, including the "Chicago Tribune," and published in peer-reviewed academic journals. Cross holds a B.A. in journalism, a Juris Doctor and an LL.M. in international business law.

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