Eli5: How can businesses like AWS and Visa that are largely based around data centers get more efficient/profitable as they grow? Meaning that every new user makes the company’s costs smaller while feeding into profits
In: Economics
Because they become mainstream.
If I create service (let’s call it ME) that cost 2€ per month to each user and 5€ per month to each company that uses my service.
If You create a service (let’s call it YOU) that cost 0.01€ per month for each user and 150€ per month for each company that uses your services.
Which service do you think users will take? The one that cost them the lowest. So YOU will have a large amount of people using it, while ME will be mostly empty. So if YOU is filled with opportunity while ME is basically worthless, even if it’s cheaper, which service should a company use? They’ll use YOU simply because ME is a waste of money even if it’s cheap, and because if YOU has so many people and they don’t have YOU the users won’t visit them. By using the cheap stuff, people are forcing the big companies to take it as well. But for them it is NOT cheap. It’s expensive.
But since VISA or AWS are so cheap, EVERYONE is on it. So if the companies don’t accept to pay the exorbitant prices, they lose customers. Basically, the more people use the cheap stuff, the more company HAVE to use it as well.
Consider it that way, the user that come onto AWS or VISA are not really the customers. They’re the merchandise. AWS and VISA are selling their userbase to the company. If the company doesn’t buy, the merchandise can go somewhere else. When you think that way, lowering price increase the amount of merchandise you sell.
There is a stairstep effect. Up to a number of users, the costs don’t change. Then there is a fairly substantial increase in costs. Buying new servers, adding additional cooling, expanding buildings, or the like, when this happens, your costs go up more than the income from new users covers. But, the vendor is then set to have little to no cost increases for some number of additional users.
The trick, like any business, is to balance current spending on infrastructure against future business. If you overestimate the number of new customers you can pull in over a given time, then you are stuck with the capacity you are paying for without the customers to support it. If you underestimate the number of new customers, you have unhappy customers because their service is bad due to you not having enough infrastructure to support the customer base. In this case, you will lose customers to other vendors that can give better support.
You’re thinking it incorrectly… the fixed costs are building the data center, marketing to land new customers, etc. the marginal cost to add a new customer is negligible. How much of their data center’s processing is a new merchant account using? .00001%? Amazon builds an entire datacenter filled with servers, then finds the customers to pay for their use so there is no real additional cost to adding a new customer.
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