Economies of scale are the cost savings that can be achieved when working with larger amounts of product. When product volumes are greater, the percentage of fixed costs per output is smaller, as they are spread out across more products.
Buying materials in bulk tends to result in a cheaper per-unit price, which, in turn, also helps maximize economies of scale.
It is still important to analyze economies of scale for SaaS, despite the lack of tangible product.
You can work out an average cost of service — i.e. the costs associated with each customer and each piece of work — and then analyze how scaling up customer numbers will impact on this average cost of service.
As with tangible product volumes, the fixed costs of a company will be spread out across a larger number of clients and services, usually resulting in a lower cost per service.
Accurately calculating economies of scale is important, as it can give you a firm idea of how, and when it is wise to scale up your organization.
This metric will also give you an idea of how far you need to go to see a cost-saving impact, and how far you can keep going before you stop saving money, or even start to have a detrimental effect.
These calculations are vital for any company to have before attempting to scale a business, and can, in truth, mark the difference between success and failure.