Economies of Scale in Marketing

Please join me in a high level conversation about marketing topics, myths, fallacies and solutions. Many colleagues inquire about the topic of reaching "economies of scale" in the marketing function, and also the old adage of "diminishing returns". Lets set out to respond to this question as a first of many to come, and lets do it together.

Economies of scale in Marketing arise from the ability to spread advertising and marketing costs over a larger output. This means that as production increases, or your number of stores in one location increase, companies can spread fixed costs of marketing over that larger output or store count, which reduces per-unit costs. The formula is simple; when you produce or have more stores at a larger scale, you have less costs spent per product or store and hence have achieved economies of scale.

That said, the issue comes when your company isn't really scaling so as to create economies of scale, and there is an expectation by the executive team that there will be some sort of reduction in marketing budgets with increased acquisition. In most cases, that simply isn't the case.

As it relates to products, there is a point at which companies can see a quick return on economies of scale as the cost of marketing is spread around per unit of production. The easy equation is that if one more unit were produced, and it costs you $1 to advertise them both, now you have economies of scale with a cost of only $0.50 on that next item.

The challenge in the equation is store counts. We can try to use the classic economies of scale dividing overall marketing costs by the number of stores in a market, however, this doesn't have the same effect unless your advertising has a broad reach such as exposure through outdoor advertising.

The fact that most companies try to spread their store locations across a geography so they do not cannibalize each other. In franchise systems, as an example, this is some imaginary ring around each unit and then, based on population density, a radius that creates a buffer of 0.5 miles in high density areas to 3 miles in lower density geographies.

In addition, the fact that digital media is the most used tool for marketing today adds yet another layer of complexity, nullifying the economies of scale chatter. Today, a store or location bids against its competitors in a given area or zip code on Google or other social or OTT channels. So now, you have stores within miles of each other who do not benefit from ads on digital media in another area. Your cost is determined by your competitive set, and does not provide the economies of scale you're looking for. Costs don't come down based on the number of stores unless you target them in the same geographic area - which, as we just discussed, doesn't happen so that you avoid cannibalization.

How you might overcome this and reach economies of scale in marketing is to shift some of your budget dollars to traditional marketing where you can reach a broader population covering a larger geography. Yes, a billboard covering 10 locations to get out your brand awareness, or bus benches. The downfall of this is that you can't honestly detect the real impact these tools may have on acquisition and acquisition costs aside from asking and some form of Google can detect sales from billboards if you track the before the billboard was placed and after the billboard was placed data. Let's not forget that outdoor is directed to passive consumers, and while it may feel like you have achieved some sort of economies of scale by spreading the costs of the billboards between stores, the billboards target passive consumers - unlike Google which targets people searching for your product or service when the consumer searches for a product they are in the market to buy.

I suggest that for economies of scale, you look at your internal CRM and ESPs and shift your dollars to those. Problem is we all know that takes a lot of time and analysis, and it is just easier go back to the old playbook. But remember, the windshield is much larger than the rearview mirror and as marketers we must keep our fingers on the pulse of consumer, trends, and on the overall landscape we learned in Business School - social, political cultural, economic, geographic changes.

Your true economies of scale come from understanding your customer, continuously looking for innovation (everywhere including operations, flows, product design, your supplier ecosystem), etc.

Please add your feedback, I have not added all details about the topic, but instead am seeking contribution from my colleagues.