Experience curve and economies of scale: growth arguments that convince investors
Experience curve and economies of scale: growth arguments that convince investors
There are two magical concepts that VCs and family offices love: experience curve and economies of scale. Understanding how these work will help you build much more compelling pitch decks.
The BCG experience curve: The basis
The Experience Curve was invented by BCG in the 1960s. The concept: Every time your cumulative production doubles, the (real) costs fall by 20-30%.
Why? Four mechanisms:
- Learning: Your teams become more efficient
- Standardization: Processes are reproduced, not re-invented
- Automation: Manual steps are automated
- Supply chain: You have better leverage with suppliers
The formula: Cost = Initial Cost × (Cumulative Volume)-b
Where b is typically 0.2-0.3 (20-30% cost reduction per doubling).
Practical example: SaaS
Imagine your SaaS initially had a customer acquisition cost (CAC) of €1,000. After 1,000 customers (first doubling) you can acquire with €800 CAC. After 10,000 customers: €400 CAC. After 100,000: €100 CAC.
This is Scale Effect in action. Investors love this because it means that the more we grow, the more profitable we become without new innovation – only through Scale.
Economies of Scale: The Broader Concept
Economies of scale are broader than the experience curve. They can be:
- Production economies of scale: Larger factories are cheaper per unit
- Marketing economies of scale: Bigger ad spend has better ROI
- Network effects: Every new user makes the product valuable for everyone else
- Data economies of scale: More data → better ML model → better product
In a good pitch deck you show how your unit economics can be improved with Scale:
€10K CAC → €5K → €2K
This is extremely attractive for investors because it means: Your financing efficiency increases with every euro you invest.
Winner-takes-all dynamics
In certain markets, economies of scale lead to extreme concentration: the largest player becomes 10x more profitable than #2, which in turn becomes 10x better than #3.
Examples: Uber in ridesharing, Amazon in e-commerce, Google in search.
If you can convincingly argue that your market is a winner-takes-most market - AND that you can be the winner - you will get much more valuation.
Classic sources
- BCG (1970s): Perspectives on Experience
- Henderson, Bruce (1968): The Experience Curve – Reviewed. Perspectives on Strategy.
Read also Experience curve and Balanced Scorecard for more in-depth details about unit economics.
Your path to more capital
Let's analyze together which financing strategy is optimal for your company.
Book a free conversation