What does the experience curve effect indicate?

The experience curve effect indicates that as a company produces more of a product or service, it gains experience in the manufacturing process, leading to efficiencies that generally result in decreased costs per unit. This phenomenon occurs because with increased production, companies often discover ways to streamline operations, improve labor productivity, and leverage economies of scale. Additionally, firms may gain insights into better sourcing of materials and enhanced operational techniques, contributing to cost reductions.

As production increases and companies become more efficient, this typically aligns with increased sales as well, since lowering costs can enable a business to lower prices, enhance competitiveness, and potentially capture more market share. This interrelationship between growing sales and decreasing costs is a fundamental principle in business strategy and helps explain why many companies strive to scale their operations.