Question

When is scaling a product no longer considered to be profitable? Under what conditions?

Answer 1

with the scaling of a product, the organisation is benefited by the economies of scale. While the variable costs increase proportionally, the fixed cost remains fixed to the business and hence the average cost per unit comes down, leading to yield higher profit margin.

When the average margin of the product does not improve or rather go down, it does not make sense to scale up the product in market. There may be various conditions like:

1. The inputs are scarce and availability is limited. The inputs could be in the form of raw material, traded product, human talent or capital.

2. The manufacturing facility/business is operating at optimum utilization level and any increase in demand will lead to incur another set of fixed expenses, taking the average unit cost higher.