What it means
Most people assume that growth is always good, whether it is a larger economy or a larger company. Uneconomic growth challenges that by asking what the extra output costs.
If the cost of the next unit of growth is greater than its benefit, then growing further makes things worse, not better. In economics the focus is on wider costs.
Production can bring pollution, congestion, resource depletion and stress that are not captured in the usual measures of output. Daly argued that beyond a certain scale, the marginal cost of these side effects exceeds the marginal benefit of extra output, so growth becomes uneconomic.
The same logic applies inside a company. Marginal analysis says an activity is worth expanding while the extra revenue exceeds the extra cost.
A business that buys customers at a cost of $1,400 each, when each customer will contribute only $1,000 over their lifetime, is growing uneconomically even though revenue is rising. Common causes in business include discounting to win market share, expansion into low-margin segments, rapid hiring ahead of demand and over-investment in capacity that sits idle.
Growth that is funded by debt can be especially dangerous because interest costs continue even if the extra sales do not materialise. The remedy is to measure the right things.
Companies track contribution margin, customer lifetime value against acquisition cost, return on invested capital and cash conversion rather than revenue alone. At the national level, economists look at broader indicators that account for environmental and social costs.
Importantly, the term does not say that growth is bad. It says that growth has to be judged against what it costs, and that the point where the balance tips needs to be watched.
In practice
Real-world examples.
Example
A subscription software company offers a first year free to win market share. Revenue rises 40%, but each customer costs more to support than the company later earns, and cash falls by $3,000,000 over the year.
Example
A coastal town allows a series of large hotels to be built. Tourism income rises, but congestion, water shortages and higher living costs for residents eventually outweigh the gains.
Example
A manufacturer builds a second factory to supply a customer that pays low prices. The extra sales of $10,000,000 carry $11,000,000 of additional costs, so profit falls even though the order book looks healthier.
Formula
Calculation
Net benefit of growth = Marginal benefit - Marginal cost
Growth is uneconomic when marginal cost is greater than marginal benefit.
A regional economy expands output by $50,000,000. The extra pollution, congestion and resource depletion are estimated to cost $65,000,000.
Net benefit = $50,000,000 - $65,000,000 = -$15,000,000
The region's output rose, but overall well-being fell by $15,000,000.
In a business setting: a company spends $1,400 to win each new customer, and each customer is expected to deliver $1,000 of contribution over their lifetime.
Net value per customer = $1,000 - $1,400 = -$400
If it adds 5,000 customers, it destroys 5,000 x $400 = $2,000,000 of value while reporting higher sales.Case study
Seen in the real world.
Quickcart Delivery is an illustrative, fictional grocery delivery start-up that doubled the number of orders in a year by offering free delivery to every postcode, including remote areas. Its management reported a 100% increase in sales at every board meeting.
The finance team then calculated the cost of serving each area. In the most remote zones, each order generated about $3 of gross profit but cost $9 to deliver, so every extra order lost $6. Those zones represented 25% of the new orders.
The company ended free delivery outside its core zones and raised minimum order values, and its order count dropped by 15% while losses narrowed sharply. The illustrative story shows that growth only helps when each extra unit adds more than it costs.
Watch out
Common mistakes.
- Assuming that rising revenue or output always means the organisation is better off.
- Counting only direct costs and ignoring the capital, support, environmental or social costs that grow with scale.
- Reading the term as an argument against all growth, when it only says to compare marginal benefit with marginal cost.
Questions
People also ask.
Who introduced the idea of uneconomic growth?
It is most associated with ecological economist Herman Daly, who argued that beyond some scale growth costs more than it delivers.
How can a company tell if its growth is uneconomic?
Compare the lifetime contribution of each new customer or product with the cost of acquiring and serving it, and watch return on invested capital.
Is uneconomic growth the same as unprofitable growth?
In business the two overlap, but the economic term also covers social and environmental costs that do not show in the company's profit.
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