TLDR:
Economies of scale refer to the cost advantages a company gains as it increases production, where the cost per unit decreases as the volume of output increases, improving profitability at scale.
Economies of Scale in Technology
Technology businesses exhibit particularly strong economies of scale because their marginal cost of serving additional customers approaches zero. A SaaS platform built for 1,000 customers can serve 100,000 customers with minimal incremental infrastructure cost. This creates extraordinarily powerful unit economics as scale increases: gross margins expand toward 80-90%, and R&D costs are spread across a larger revenue base. This economic structure explains why technology companies attract premium valuations relative to traditional industries.
Diseconomies of scale — where unit costs increase as scale grows — are a real phenomenon. As companies scale, coordination costs, management complexity, and organizational bureaucracy can offset the operational leverage benefits. The most common diseconomy of scale in startups is customer success and support cost — adding new customers in new segments may require specialized onboarding and support resources that don’t scale as efficiently as the core product.