The Bigger the Better
October 07, 2019 | BY Simcha Felder
For a long time, the focus on economies of scale led us to believe that bigger is better. The foremost advantage in many industries are the discounts vendors provide to companies purchasing in large quantities. In fact, the greater the quantity, the steeper the discount, and because large companies typically sell in high volume, they can undercut the prices of small businesses. This advantage allows large companies to reduce the cost of doing business, while also maximizing profit margins.
However, evidence suggests that bigger does not necessarily mean better. In service industries, bigger often means less personal and therefore less attractive to today’s customers. In larger companies, it is often more difficult to communicate, coordinate and co-operate effectively. When companies grow too large, they can grow complacent, or bureaucratic. New firms are constantly entering the market and nearly always start small. Many succeed by taking business away from larger, more established firms that are slower to respond to changing tastes, needs and market conditions.
A recent report in the Wall Street Journal effectively highlighted these risks. Amazon Has Ceded Control of It’s Site, it proclaimed in a 4-page spread that was critical of Amazon’s ability to maintain and address vital quality control issues. Stating their “investigation found 4, 152 items for sale on Amazon.com Inc’s site that have been declared unsafe by federal agencies, are deceptively labeled or are banned by federal regulators.” Repeated efforts to first notify the company and subsequent additional attempts to have the products removed from the site did not yield satisfactory results. “More than 100 items that Amazon claimed to have banned are still for sale,” WSJ reported, citing children’s products that failed federal safety standard tests and customer dissatisfaction.
There is no debate about the positive correlation between product quality and profitability. Numerous studies have shown that quality builds customer trust and loyalty, contributes to brand development and increases ROI. But, what exactly quality means to your customer is open for discussion. Some consumers view price point as a quality, others value service or sustainable products. Will Amazon’s customers continue to value low cost and convenience above all else, including trust and safety?
Small tends to be more adaptable and quicker to change. Today’s small businesses have the tools to perfect the marketing and delivery of both products and customer experience, carving out a sizable niche for themselves and perhaps even changing industry standards.
The average American consumer (with a median salary of $74,000) spends approximately $19,000 per year on consumer goods, according to the U.S. Bureau of Labor Statistics current data. Among these consumers there has been a recent noticeable shift in consumer expectations and behavior. Forward-thinking entrepreneurs will capitalize on Amazon’s dissatisfied clientele and capture their share of this market.
Is bigger really better? While there can be economies of scale when a new firm is growing, there seems to be a tipping point after which diseconomies of scale outweigh the advantages of size.