What is Demand Side Economies of Scale?

What is Demand Side Economies of Scale and why is it fundamental to the success of Facebook, Twitter and LinkedIn?

Demand Side Economies of Scale exists in those industries where the value of a product or service increases in accordance with the number of users of that product or service. So, where the more users there are, the more valuable the product / service becomes.

Therefore, Demand Side Economies of Scale predominantly exists in industries where networks are important, such as online social networks, online dating sites, online games. This is because the more users they have in their network, the more valuable their service becomes. Clearly a dating site with lots of users will be more appealing and therefore more valuable to a potential new user than a dating site with only a few users.

However, the benefits of developing a wide network of users, will not only help a business win even more customers and differentiate itself from its competitors (allowing it to charge its customers / advertisers more), it will also mean it will be very difficult for new competitors, starting from ‘ground zero’, with no users in their network (no matter how good their technology is or how well funded they are) to come into the market and attempt to eat away at the business’s market share.

Facebook’s continued dominance in its particular brand of social networking is not as the result of its technology (as clever as it is) or in its level of financing (as great as it might be), but because it already has so many users in its network. The same is true for Twitter.

A couple of decades ago demand side economies of scale was commonly overlooked as a potential source of competitive advantage because, prior to the internet being adopted en masse, products / services that relied networks of users were difficult to create and therefore were rare. However, it has now become central to the strategies of the many of the most exciting businesses around today.

Therefore, if your business can find a way of creating a unique product / service (see Video 2.4of the Stratology.com MBA Toolkit) that would benefit from having a wide network of users, then this strategy can help your business obtain an unassailable competitive advantage. Demand Side Economies of Scale is explained in more depth in Video 1.4 of the Stratology.com MBA Toolkit. In addition, Videos 2.1 - 2.7 of the Stratology.com MBA Toolkit explain how to select and execute the best strategies for your business.