Scale Economies Shared ?

[ValueMaven]

14 hours ago, schin said:

 

@ValueMaven - There's a good list of companies that the community offered. In a conversation I had with Nick, I asked what companies started as SES but eventually declined.

 

He gave two examples of when SES that eventually degraded.  Ford and Home Depot.

 

Again, Home Depot hasn't been doing that bad... and there is a connection with Sol Price and what HD did.... but, just putting it out there.. 

 

Where can I see this list that you mention?

[schin]

1 hour ago, ValueMaven said:

 

Where can I see this list that you mention?

@ValueMaven - The companies that are listed in this thread.

[Saluki]

Berkshire purchase Mclane, which is an example of this principle. The margins are razor thin, but although they eliminated most of the competition, they don't raise prices because they want to keep milking this forever, instead of trying to make more money and encouraging their customers to look for alternatives. 

 

In thinking about this, it's important to think about moats. Commodity businesses also reduce their prices as they get more efficient, but it's not because they are philanthropists, it's because they don't have a moat. If labor costs drop in a city, then Hilton and Hyatt both lower their prices. Not because scale economies shared, but because they can't charge more than their competitor because customers don't care about which they pick. Same for airlines, gas stations etc. 

[Longnose]

Another interesting view point I stumbled on while asking AI further about this and asking if certain companies i like have some of these dynamics. is "Scale Economies Captured" rather than "Scale Economies Shared."

 

"Scale Economies Captured." It leverages its scale and data for immense profitability and capital returns to shareholders while delivering a more effective service for its customers. This suggests that the SES model is not a monolithic concept but must be re-evaluated and re-contextualized for different industries, particularly the asset-light, data-driven digital economy.

Edited August 20, 2025 by Longnose

[KCLarkin]

6 minutes ago, Saluki said:

Berkshire purchase Mclane, which is an example of this principle. The margins are razor thin, but although they eliminated most of the competition, they don't raise prices because they want to keep milking this forever, instead of trying to make more money and encouraging their customers to look for alternatives. 

 

In thinking about this, it's important to think about moats. Commodity businesses also reduce their prices as they get more efficient, but it's not because they are philanthropists, it's because they don't have a moat. If labor costs drop in a city, then Hilton and Hyatt both lower their prices. Not because scale economies shared, but because they can't charge more than their competitor because customers don't care about which they pick. Same for airlines, gas stations etc. 

 

For this model to work, scale economies need to be real and significant. In most cases, scale economies are illusory. True scale economies are very rare, IMO

 

The flywheel is scale -> economies -> shared with customers -> more customers -> more scale…

 

The businesses you mentioned are pretty classic examples of businesses that don’t have scale economies.

[bizaro86]

59 minutes ago, KCLarkin said:

 

For this model to work, scale economies need to be real and significant. In most cases, scale economies are illusory. True scale economies are very rare, IMO

 

The flywheel is scale -> economies -> shared with customers -> more customers -> more scale…

 

The businesses you mentioned are pretty classic examples of businesses that don’t have scale economies.

 

Yeah. I think for identification purposes you should look for something that has either a high proportion of fixed costs that they can leverage or the ability to convert variable costs to fixed costs.

 

Eg Costco's giant warehouses are a huge fixed cost, they leverage them more than anyone else by moving huge $/square foot theough them.

 

IBKR famously has no customer service, which is a huge variable cost for most brokers, where as they add customers they need to hire more reps. But IBKR has built tech solutions to most problems (eg corporate actions are all automated) so the more customers they add they don't really need to add more reps.

[schin]

8 hours ago, Longnose said:

Another interesting view point I stumbled on while asking AI further about this and asking if certain companies i like have some of these dynamics. is "Scale Economies Captured" rather than "Scale Economies Shared."

 

"Scale Economies Captured." It leverages its scale and data for immense profitability and capital returns to shareholders while delivering a more effective service for its customers. This suggests that the SES model is not a monolithic concept but must be re-evaluated and re-contextualized for different industries, particularly the asset-light, data-driven digital economy.

 

@Longnose - In Scaled Economies Captured, they increase prices and the customer has to pay because they're captive to them. I would say AWS and Azure... and a lot of software brands are capturing these economies for themselves/shareholders. Whereas Scaled Economies Shared, is very customer loyalty/experience focused and thus, focuses on high switching cost from brand equity/loyalty.

[jfan]

The other aspect of scale economies shared is that ultimately it is a volume game. It is trying to entice existing customers to not churn away while simultaneously attracting new cost conscious customers. 

 

It only works up to the point that there are customers to capture aka reinvestment runway and industry volumes have muted economic cyclicality. 

[linus_md]

Funny no one mentioned ASOS

[schin]

8 hours ago, linus_md said:

Funny no one mentioned ASOS

 

The elephant in the room..... LOL... 

[Marco Van Basten]

13 minutes ago, schin said:

 

The elephant in the room..... LOL... 

Sorry, what company is this?  I cannot seem to find it on Bloomberg.  Thank you.

[schin]

12 hours ago, Marco Van Basten said:

Sorry, what company is this?  I cannot seem to find it on Bloomberg.  Thank you.

@Marco Van Basten - It's a British clothing company.  $ASOMY

[Spekulatius]

On 8/19/2025 at 8:06 PM, schin said:

@Spooky - Considering the margins and price increases... is Netflix really?  The content is hit or miss. It doesn't drive prices lower and lower like others.

There is plenty of good content on Netflix. You can keep you family entertained with Netflix only (includes kids). Current favorites that I am watching right now  are Wedneday and Sandman (Sandman’s  3 rd season is not as good the S1+2 , but still decent).

The big  advantage of Netflix is that everything that all the other ado eventually comes to them.

Edited August 24, 2025 by Spekulatius

[whiskybravo]

48 minutes ago, Spekulatius said:

There is plenty of good content on Netflix. You can keep you family entertained with Netflix only (includes kids). Current favorites that I am watching right now  are Wedneday and Sandman (Sandman’s  3 rd season is not as good the Thronfolger 2 , but still decent).

The big  advantage of Netflix is that everything that all the other ado eventually comes to them.

A lot of Netflix’s content seems to lean into a sophomoric vibe, playing to more basic or escapist desires without much substance.  We found Wednesday unwatchable.

[schin]

12 hours ago, Spekulatius said:

There is plenty of good content on Netflix. You can keep you family entertained with Netflix only (includes kids). Current favorites that I am watching right now  are Wedneday and Sandman (Sandman’s  3 rd season is not as good the S1+2 , but still decent).

The big  advantage of Netflix is that everything that all the other ado eventually comes to them.

 

@Spekulatius - Can you really say Netflix is that much better than Amazon Prime, Hulu, HBO, etc. I mean.. there's a lot of great content from other production houses and it's not like they have monopoly over Golden Globes and Emmys. 

 

I think their delivery/streamling was novel back in the day with Blockbuster, but their suggestion algo is nothing amazing. I wouldn't rank it over whatever TikTok and FB does. Again, Netflix is a good business.. but, the other streamers are comparable.

[nsx5200]

TSM.

 

In a sick way, Chinese factories have a lot of the Scale Economies Shared characteristics as well.  A lot of products are just rebranded goods with the same underlying factory.  I'm thinking of Midea, but just recently ran across Techtronic Industries (TTI), which owns Milwaukee, Ryobi, Dirt Devil, etc.

 

I also find Fidelity to have a lot of the Scaled Economies Shared characteristics as well with their zero funds, no PFOF, as well as execution enhancements that executed at much better price than I put in.  Unfortunately, they're not on the public market.

[ratiman]

You can grow profits either by increasing margins, increasing revenues, or both. Scale economies shared is just increasing profits by increasing revenues alone but scale economies shared is a misleading description because nothing is being shared. It's increasing revenues per dollar of fixed assets. It's hard to compete with because the unit profit is often negative. If you want to compete with Starbucks at the least you will make a profit on each cup of coffee. If you want to compete with CDW you will lose money on each computer at the beginning and for a long time. 

[dwy000]

11 minutes ago, ratiman said:

You can grow profits either by increasing margins, increasing revenues, or both. Scale economies shared is just increasing profits by increasing revenues alone but scale economies shared is a misleading description because nothing is being shared. It's increasing revenues per dollar of fixed assets. It's hard to compete with because the unit profit is often negative. If you want to compete with Starbucks at the least you will make a profit on each cup of coffee. If you want to compete with CDW you will lose money on each computer at the beginning and for a long time. 

I'm not sure that's entirely true. The idea of scaled economics shared (as i understand it) is that the reduced cost per unit benefit from increasing scale is shared with customers.  For Costco (Sleeps favorite) the whole idea was the massive buying benefits were passed to consumers with lower prices thereby driving more scale - a flywheel.  The increased profits come not only from the increased sales but also through the scaled cost savings (hence the "shared" part).

[ratiman]

I don't know what "scaled cost savings" means. I don't know what a "cost saving" is and I don't know how it can be scaled. I am completely out of my depth because the whole thing complicates something that is very simple. Nothing is being shared and "cost savings" is nonsense. Cost is expense. You can reduce expense but you can't save it or share it. Not trying to be difficult, just my view. 

[oscarazocar]

7 minutes ago, ratiman said:

I don't know what "scaled cost savings" means. I don't know what a "cost saving" is and I don't know how it can be scaled. I am completely out of my depth because the whole thing complicates something that is very simple. Nothing is being shared and "cost savings" is nonsense. Cost is expense. You can reduce expense but you can't save it or share it. Not trying to be difficult, just my view. 

 

People like to make this all much more complicated than it is by dressing it up in these terms like "scaled economies shared", or Tren Griffin goes on about "wholesale transfer pricing" like it's some new thing he discovered.  https://25iq.com/2013/06/12/wholesale-transfer-pricing-and-the-free-parking-business-model/

 

"Scaled economies shared" means you have a structural low cost position and you maintain a constant margin/relative price in order to grow faster and reinforce the advantage.  Buffett has talked about this, I think somewhere he made the comment that if you have a 10% cost advantage to your competitors, it's like putting your competitors through a meat grinder.  Over time, you grow steadily and maintain reasonably constant ROE and margins (maybe you show a little margin growth over time).  This is GEICO, Progressive, Costco, Nebraska Furniture Mart.  A nice thing about finding these companies is that, depending on the specific nature of the competitive advantage, it can stay in place for a long time and you can grow for decades as you take share from competitors who have a higher cost position and can't compete with you.  You see this clearly with GEICO and Progressive going from low single digit market share to teens market share over last several decades.  It's why Costco limits gross margin on products to 14% on third party products and 15% on private label products.

 

"Wholesale transfer pricing" is nothing more than gold old fashioned pricing power, exercising power over your suppliers to either pay them less or demand other benefits because you have a strong market position.

[bizaro86]

27 minutes ago, ratiman said:

I don't know what "scaled cost savings" means. I don't know what a "cost saving" is and I don't know how it can be scaled. I am completely out of my depth because the whole thing complicates something that is very simple. Nothing is being shared and "cost savings" is nonsense. Cost is expense. You can reduce expense but you can't save it or share it. Not trying to be difficult, just my view. 

 

Maybe I'm biased here because this immediately made sense to me when I first read it and I scaled up my IBKR position dramatically, and its a multibagger in a few years since then, so having read this has made a meaningful difference to my net worth. 

 

"Scaled cost savings" refers to leveraging fixed costs across a larger base of customers with scale. Keeping with my IBKR example, most brokers have significant variable costs for customer service for each customer. IBKR has automated basically all of that, which cost a bunch of money up front, but doesn't cost much for each incremental customer. That reduces their marginal cost per customer. They "share" that cost savings with the customers in the form of lower prices. They could easily charge higher prices and they'd keep many customers (I'd pay IBKR 5X what I pay now and not switch, the other options in Canada suck) but many would leave and their growth would stop. Because they have lower prices they keep growing, which adds more scale to their fixed cost lowering their marginal costs even further. 

 

You could describe it as "using fixed cost leverage to reduce prices to consumers and grow market share providing further fixed cost leverage" which is maybe more accurate but less pithy. 

 

Looking at it another way - any company which is voluntarily not tapping its pricing power is probably more valuable than it seems - by giving customers a good deal it will probably get more customers, and worst case it can always raise prices later, which increases profits dramatically if you keep your customers. 

 

Edited November 14, 2025 by bizaro86

[nsx5200]

Google seems to output an apt description, with my TLDR highlight:

""Economies of scale" refers to the cost advantages a single company gains from increasing its production volume, while "scale economies shared" is a specific business strategy where a company passes those savings on to customers through lower prices. The former is a general economic principle, whereas the latter is a deliberate tactic to build market share. 

 

Economies of scale

Definition: A firm's average cost per unit decreases as its output increases.
Mechanism: This is achieved by spreading fixed costs (like rent or machinery) over more units, but also through bulk purchasing, specialization, and greater efficiency as the scale of operations grows.
Benefit: The primary beneficiary is the individual firm itself, which becomes more profitable and competitive. 

Scale economies shared (SES)
Definition: A business model where a company strategically uses its economies of scale to lower prices for its customers.
Mechanism: After achieving cost efficiencies, instead of just increasing its own profit margin, the company passes the savings to consumers in the form of lower prices or better service.
Benefit: This creates a virtuous cycle: lower prices attract more customers, which increases sales volume and scale, leading to further cost reductions and deeper competitive advantage."

 

These AI tools are like your personal tutor that never gets impatient, or a tutor that never finds your questions too dumb or too off-tangent to answer.  The responses are near instantaneous to speed up the QA learning loop.  IMHO, it's worth spending some time to learn to use these tools to the limits of these tools.  Because in the world, you'll be competing against others that will have access to this tool.  To compete without it is like the guy that brings a knife to a gun fight.

[dwy000]

1 hour ago, ratiman said:

I don't know what "scaled cost savings" means. I don't know what a "cost saving" is and I don't know how it can be scaled. I am completely out of my depth because the whole thing complicates something that is very simple. Nothing is being shared and "cost savings" is nonsense. Cost is expense. You can reduce expense but you can't save it or share it. Not trying to be difficult, just my view. 

Scaled cost savings is primarily 2 things:  a) volume savings - discounts from large purchases, negotiated price reductions from guaranteed volumes, etc;  and b) spreading fixed costs over larger volumes. 

[dwy000]

In my view, when Nick Sleep talked about it he used the term "shared cost savings" but it goes beyond that. Its basically thrilling your customers - and that means when you save costs instead of letting it drop to the bottom line, you share it with customers even tho you dont have to.  

 

Costco could easily raise the price of chickens or hotdogs and nobody would flinch - and it would drop immediately to the bottom line. Its the fact that they dont that brings in customers. You just know that Costco doesn't see you as a wallet but as a long term partner they need to keep pleasing. 

 

You can see companies that lost their way on this like Disney and Las Vegas. They used to be all about absolutely blowing away visitors with the experience and then charging what was necessary to profit off that.  Then they switched gears to how much profit can I pull from visitors and whats the bare minimum I need to offer to get them to spend more. Short term gain but harms the brand. 

[tnathan]

1 hour ago, dwy000 said:

Scaled cost savings is primarily 2 things:  a) volume savings - discounts from large purchases, negotiated price reductions from guaranteed volumes, etc;  and b) spreading fixed costs over larger volumes. 

This is true but it can also be structurally lower variable costs to serve as well. For example, moving from offline to online can improve unit economics, which combined with scale on OpEx creates a moat that's very hard to compete with. Carvana is knocking it out of the park with this model.