Economics 101 for designers

Unfortunately, business literacy has been neglected in design education. We come to work unprepared for the realities of the new business world, where design matters. It matters so much that we finally have a say even in strategic matters.

Design-driven companies such as Apple, Tesla, Airbnb, and Google have shown that design can drive business results. And this opened the doors for all of us. We just need to know how to walk through these doors with some business confidence.

“If you haven’t thought about the business then you haven’t designed the idea properly.”
– Trent Huon, ex-Business Design Director at IDEO

Here are some of the most fundamental economics concepts, which govern how the business world works and how business decisions are made.

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Economies of scale

The advantage of producing bigger quantities. When companies produce more, they want each additional unit to cost less than the one before.

Why is it this important? Because economies of scale give you a competitive advantage.

Larger companies can produce more efficiently, negotiate better prices, achieve higher profit margins, and hence invest more in future growth.

Economies of scale work particularly well for technology companies with no physical products.

For Facebook, adding one more user is virtually free. There is no human labour involved in onboarding a new user and the hosting costs of an additional user are negligible.

How is this relevant for designers?

The way a product or service is designed is usually the thing that makes or breaks whether a company will be able to achieve positive economies of scale or not. How can our product design remove obstacles to achieving that?

Diseconomies of scale

At a certain scale, our marginal gains don’t just slow down but actually start going back up.

For example, let’s assume that we are organizing a dinner party and that we need to prepare food for 40 people…

We immediately realize that we won’t be able to prepare food alone. So, we get three more friends to help us out.

But because our kitchen is so small, we get in each other’s way and we need to take turns using the oven and stovetop - “Too many cooks in the kitchen.”

How is this relevant for designers?

Be aware of trigger points that push your design into the diseconomies scale. The usual suspects are organizational, technical, and supply factors.

Opportunity costs

Potential benefits that we miss out on because we decided to do something else.

Let’s say you decided to do an MBA. It is a two-year program at a renowned business school, which costs $150,000 in total without living expenses.

So, when we add living expenses due to moving to a more expensive city, total outlay costs (i.e. actual costs) come closer to $200,000. Most people would stop here and conclude that taking an MBA costs $200,000.

But in reality, it costs much more.

During these two years, you won’t be working. This means that you are also giving up your income.

For example, if you make $75,000 per year, that is another $150,000 in lost income over two years.

Opportunity costs are important because we humans have a hard time seeing things that are not immediately apparent. It is a concept we use decision-making process to surface all available options.

How is this relevant for designers?

By clearly outlining various options and hence opportunity costs (when presenting design options), we can gain more impact in the company by helping everyone make better decisions.

Sunk costs

Costs that can’t be recovered.

For example, a plane ticket that we bought for our upcoming vacation is a sunk cost.

Sunk costs are extremely important for good decision-making.

An especially important concept here is called the sunk cost trap. This is a tendency for us to continue with an activity or investment that is not meeting our objectives because we have already invested so much.

What if after you have already booked your flights, an even better opportunity comes across?

Your friends are inviting you to join them on a sailing trip, which is something you’ve always wanted to do.

Should you join them and ignore the plane ticket sunk cost?

How is this relevant for designers?

This is relevant for everyone. Ignore sunk costs when making your decisions.

Time value of money

Imagine that you just won the lottery.

Now, lottery officials give you two options. You can either get $1 million right away or you can get $1.8 million in ten years.

Which option is better?

The basic rule is that one dollar today is always worth more than one dollar tomorrow.

If we have one dollar right now, we can invest in something and let it grow. On the other hand, if we keep it in a bank account or under our mattress, it will be worth less due to inflation.

To calculate what makes more sense, we need to look at opportunity costs.

If we get $1 million right now, what could we do with it?

One option is to invest all of it in stocks. Historical data shows that in the long run, stocks have a yearly return (or growth) of 8%.

8% compounded (i.e. reinvested) for 10 years results in 216% growth.

So, if we took $1 million right now and invested all of it in a stock market, our 1 million would grow to $2,16 million in 10 years. Wow!

Under these assumptions, it does seem that taking $1 million right away makes more sense than taking $1.8 million in ten years because we can make more on the stock market.

How is this relevant for designers?

It helps us understand the investment decisions of decision-makers. What alternative investments and opportunities are they considering? Do they need to beat the stock market (8%)? Do they need to satisfy VC investors (100% yearly growth)?

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