Key factors in e-commerce: Insights into the fourth chapter!

Finally, the time has come! The 2nd edition of the successful “Key Factors in E-Commerce” is now available. Get a small foretaste here already and gain first insights. If you don’t know the first chapters yet, click here for the first, here for the second and here for the third.

Prof. Dr. Richard C. Geibel and Robin Kracht from the E-Commerce Institute have jointly revised and updated the work. Secure your copy now here as an eBook or softcover!

 

4. Platform growth through economies of scale

In addition to digital innovations, economies of scale are another key strategic factor in e-commerce. As a second key factor, economies of scale describe a central economic mechanism of digitization that is of great relevance to e-commerce in particular. This mechanism is crucial for long-term success and above all for financing innovations and customer centricity. Economies of scale ensure that digital and innovative platforms become larger and lead to sustainable corporate growth. This is already demonstrated by the currently most successful companies in digitization, all of which exhibit significant economies of scale (Vega et al. 2016, p. 166).

 

4.1 Entstehung von Skaleneffekten im E-Commerce

In the case of economies of scale, the cost structure is decisive for the growth process of a company. This is characterized by high fixed costs while variable costs are very low (Varian 2003). This leads to a typical course of the average cost curve, in which the average costs are initially very high and become lower and lower as the output quantity increases. As the average cost decreases with the output quantity, the unit profit of companies with economies of scale increases as the output quantity increases.

When researching companies with strong economies of scale, it quickly becomes clear that digital business processes in particular lead to high economies of scale due to the underlying technology. Digital platforms have a highly unbalanced cost structure, where the high fixed costs of programming and implementing the platform are offset by only very low costs of duplication and distribution. The reason for this is the lack of capacity limits, or limits that are only relevant in the case of very high user numbers, which make it possible for a platform to grow strongly without additional expense.

Digital platforms with strong economies of scale include online stores, digital marketplaces, social networks, content platforms, and search engines. But non-digital service processes also exhibit relevant economies of scale. Logistics, for example, as the second core process of e-commerce alongside online marketing, also exhibits considerable economies of scale: Logistics resources can handle fulfillment operations up to the capacity limit at generally low average costs. The greater the use of automation, the greater the reduction in average costs.

Economies of scale in e-commerce can be further enhanced if additional network effects occur. Whereas in the case of economies of scale only the cost side of a platform benefits from the growth of the platform, in the case of network effects there is also an expansive effect on the user side. A network effect exists when an increase in the number of users brings an advantage to all users. The network effect is typical for social networks, but also for digital marketplaces in e-commerce. There, the network effect is even two-sided: If the number of providers on a marketplace increases, the attractiveness for users and customers increases. If, in turn, the number of users and customers increases, more suppliers will come to the platform. Overall, an e-commerce marketplace with a scale and network effect tends toward monopolization (see Thiel and Masters 2015, p. 27 ff.).

4.2 Ausgangspunkte und Voraussetzungen für Skaleneffekte

Achieving economies of scale corresponds closely with the key factor of digital innovation. When companies increasingly use software to solve problems, they also have the opportunity to achieve economies of scale. As digital goods, software solutions have the cost structure typical for achieving economies of scale of very high fixed costs and low variable costs. Economies of scale can be achieved if software solutions are to be used for as many processes as possible, which subsequently lead to economies of scale through growth. The two core processes of e-commerce – online marketing and logistics – are predestined to be used as starting points for economies of scale. These two processes also represent the prerequisites for economies of scale: Lack of capacity limits and mass repetition of process steps.

 

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