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

Question

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

Answer 1

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.