How much can competition ACTUALLY drive down prices?

[MrPsych]

Everyone under the sun talks about how more competition and variety in a certain market will drive down prices because there will be more manufacturers and stuff.  However, at the end of the day, it still costs money to manufacture products like monitor panels or nand flash, etc.  The only reason I can come up with is that prices are driven down due to manufacturers having to lower their profit margins in order to continue selling their product.  How do manufacturers bring down the cost of producing thing?  More efficient machines?  Using techniques that dont take as many steps?  Maybe redesigning the product so they can use cheaper materials?

 

I know the answer will vary from product to product, but umm a general answer would be fine, im just pretty curious about how manufacturers can cut prices besides cutting profit their margins

[acidydragon]

Bulk.

 

Bulk is a massive way that product becomes cheaper with more competition, and more sales. As the demand goes up for a product, a manufacturer is able to order the materials required to make their item, in larger and larger quantities.

Now, if they're able to order more, they can get the individual units cheaper and cheaper, because profit margins can be lower per item, if they're selling a lot more of them.

 

If manufacturer A is selling item A with 30 dollars of profit margin per item, and sells 20 items, he gains 600 dollars.

If he then turns around and sells them in a bulk order of 60, but for only 20 dollars of profit, he gains 1200 dollars.

 

So, this bulk allows them to make the individual item cheaper, because they sell more. (And make more efficient ways of making mass amounts).

So the BOM cost is now less, so they can make the item for less, and take the same, or less profit margin because of the mass amounts being sold. So now, the savings, are passed on to the consumer.

 

Now, that's how an individual manufacturer will bring their costs down in respects to profit margins.

 

Now because manufacturer A was able to drop this price, manufacturer B, will now have to figure out how to make their item cheaper, or give it a compelling edge, or everyone will just buy manufacturer A's item.

So Manufacturer B will either add something to his product that enhances it, he will bring his prices down, or he'll go out of business.

 

It becomes less of a "What can we do with what we have" and more of a, "How can we improve what we have to make it cheaper, or better".

 

I hope this explains

[ShadowCaptain]

Everyone under the sun talks about how more competition and variety in a certain market will drive down prices because there will be more manufacturers and stuff.  However, at the end of the day, it still costs money to manufacture products like monitor panels or nand flash, etc.  The only reason I can come up with is that prices are driven down due to manufacturers having to lower their profit margins in order to continue selling their product.  How do manufacturers bring down the cost of producing thing?  More efficient machines?  Using techniques that dont take as many steps?  Maybe redesigning the product so they can use cheaper materials?

 

I know the answer will vary from product to product, but umm a general answer would be fine, im just pretty curious about how manufacturers can cut prices besides cutting profit their margins

 

Probably the cheapest way is to manufacture using cheaper processes, cheaper materials, less packaging and small packaging. 

So for example making the phone out of cheap abs plastic that is screwed together in pieces is WAY cheaper than an aluminium unibody. Look at modern packaging it is very minimal as it means they can fit more units on a plane/shipping container

 

That means the goods cost less in the first place and also cost less to ship which is a major cost of distribution. 

 

Also bulk manufacturing is cheaper thus cheaper for a company to order in bulk they get preferential costs. You will notice big companies almost always are cheaper then small boutiques. 

[I_Got_Lost]

Just estimates and its apple, but still.

[acidydragon]

To note: BOM cost, and profit is not everything that goes into the pricing of an item.

There's also R&D, Returns, Employees, expenses, ect.

 

So they can't bring the price very close to BOM costs, in most circumstances. 

[I_Got_Lost]

To note: BOM cost, and profit is not everything that goes into the pricing of an item.

There's also R&D, Returns, Employees, expenses, ect.

 

So they can't bring the price very close to BOM costs, in most circumstances. 

Eww that's the boring side of business. However it must be factored in and if your shipping millions of units there definitely could be factored in as considerable expenses.

[Noctus]

To note: BOM cost, and profit is not everything that goes into the pricing of an item.

There's also R&D, Returns, Employees, expenses, ect.

 

So they can't bring the price very close to BOM costs, in most circumstances. 

Yeah but (going by that apple example) 4/5ths of an increase is beyond retarded lol. no wonder they have a disposable bank account of 50billion+. Blind sheep ftw.

[acidydragon]

Yeah but (going by that apple example) 4/5ths of an increase is beyond retarded lol. no wonder they have a disposable bank account of 50billion+. Blind sheep ftw.

Wait just a second. Do you think for even a moment, that other phone manufacturers aren't making quite the buck on their devices?

 

We're all the blind sheep, because we allow ourselves to be it. If you get a smart phone that's 600 dollars, then you're not helping the cause no matter what.

It doesn't matter if it's apple doing this, or android, or whomever, they're all pulling the wool over our heads about things like this.

 

Also, Apple does spend a pretty penny in research and development, they spend a lot on advertisement, a lot on Apple Stores, and a lot on everything in between.

 

Attacking apple for not having a high BOM cost in comparison for their phones retail value, is ignoring that everyone else does it too, and that IT'S HOW YOU GET MONEY WHICH IS WHAT A BUSINESS DOES.

 

 

Apple might do it to a bigger extent than others, but that's because they're a bigger company.

[Cookie Monster]

More competition generally drives the cost down toward the minimum required to sustain production; reducing and eventually eliminating economic rent.

[daemonowner]

For example: SSDs are being sold at almost no margin. Due to the competition. If Samsung was the only SSD manufacturer in town, the tale would be very very different.

 

The low end/budget Corsair and Cooler Master power supplies (and probably some other brands) are sold for almost no profit, or even a loss. Whatever it takes to maintain your brand and position in the market. The money is made back in other ways, like the higher end power supplies with far more margin.

[skywake]

Forget the complexities, think of it like a collection of orchards near each other selling Apples. At the start there's a cost to establish the trees and a cost to buy the equipment. That cost is upfront and so the cost per-Apple early on is higher than it is once you've got running. This is like how a product costs more early on to cover all the R&D or how with some products a new company will sell with a lower margin early on to get going. 

 

Once you've got going it's to your advantage as an Apple seller to sell at a lower cost than your competitors. If there's enough competition there will be a collection of sellers doing that and so in theory the cost will approach the cost to produce. If they're really aggressive it might cause some less efficient sellers to go under.

 

In that scenario maybe their neighbouring orchards buy their farm and so they become more efficient because they have less "Apple machines" per Apple sold. However, in theory, if the number of producers drops there's less competition. Less competition means they can push the margins up again. Which is bad for the end user but at the same time higher margins open up the door for a new competitor who can push the prices down again.

 

There's a floor to the cost though, they can only push prices down as far as the floor. The only way to reduce the price further is to come up with a new idea to drop the price which you're encouraged to do because you'll get a competitive advantage. So there's competition at every level pushing the price down assuming there are multiple players competing for the same resource/consumer.

[Misanthrope]

I think it's not as simple as supply and demand, there's more that goes into it. For example let's say there's a new market for a product Linus has been asking for a while, USB butt plugs. Now we can have several small companies like my personal favorite Bob's hardware start producing this units. Bill's technologies however also enters the market and they start undercutting each other like described here: bulk orders for all the sex shops around the world as well as amazon prime deals, lower margins and efficient smaller teams of people working on it, etc.

 

Under those circumstances they can only push the price so low before they can't make money, they're smaller companies with not that much capital. Then in come Asus looking to break into the USB butt plug business. Now they are not only more resilient to lower margins cause of their other lines of business but they also have enough money to dump more into more Research and Development than their competition. This might seem counter intuitive at first since they margins would be even worst but eventually, that extra research would allow them to produce better butt plugs that are cheaper to produce and because of this, they can dramatically undercut the lower tech butt plugs and still make equal or better margins than Bob's and Bill's.
 

[0s4x]

-USB butt plug story-

Wow, someone give this guy a cookie. Or the highest quality USB butt plug money can buy.

[Noctus]

Wait just a second. Do you think for even a moment, that other phone manufacturers aren't making quite the buck on their devices?

 

We're all the blind sheep, because we allow ourselves to be it. If you get a smart phone that's 600 dollars, then you're not helping the cause no matter what.

It doesn't matter if it's apple doing this, or android, or whomever, they're all pulling the wool over our heads about things like this.

 

Also, Apple does spend a pretty penny in research and development, they spend a lot on advertisement, a lot on Apple Stores, and a lot on everything in between.

 

Attacking apple for not having a high BOM cost in comparison for their phones retail value, is ignoring that everyone else does it too, and that IT'S HOW YOU GET MONEY WHICH IS WHAT A BUSINESS DOES.

 

 

Apple might do it to a bigger extent than others, but that's because they're a bigger company.

I know there is a price hike compared to what's spent making to what it's sold @, but when implied margin's are nearly 4/5ths.. that's just retarded. Perfect reflection of this is their computer's, average joe smith can build a Pc for quite a bit less than what their toting their mac's for and still do the same thing + more.

 

And saying "its bigger" isnt a valid excuse lol.

[jaggysnake57]

Yeah but (going by that apple example) 4/5ths of an increase is beyond retarded lol. no wonder they have a disposable bank account of 50billion+. Blind sheep ftw.

its not only apple that do this, shit its not only the phone makers that do this, you want to see the mark up on food and drink in the service indusrty.  i used to work in a family pub with a play centre attached (restraunt for you americans) our food, after all other running costs including wages was taken into consideration 60% of the total price was pure profit...and that was a low profit meal...highest was 90% coke eg £2.50 sale price £0.20 to make......and we were not exspensive.....it is what it is 

[Guest]

Like you said:

-More efficient machines
-Better techniques

-Cheaper materials

 

And:
-Laying off staff and replacing them with machines
-Dumbing down the things that need to be done by humans in order to be able to hire unspecialized and therefore cheaper staff. Read up on Fordism and Taylorism.

-Removing "storage" from the equation as much as possible because storage is expensive. In other words, products come in the door when you need them and they leave out the other door right when they're finished. Read up on the "Just in time (JIT)" production strategy. Toyota had something to do with this general principle.
-Cutting in quality control and safety
-Lowering wages or services

-Overworking the employees, enforcing harsh quotas OR rewarding better employees with bonuses or BS like employee of the month, or a tap on the shoulder from the boss. People like that.

-Buying in bulk when possible, which will increase margins or allow to cut prices and beat the competition.
-Bigger factories cost less by square foot, so expanding allows for more expansion down the line.

-Outsource some things that can be done better and for cheaper by companies which have the correct installations for it.

-Etc.

 

 

ALTERNATIVELY DO WHAT MEMORY MANUFACTURERS DO AND ESTABLISH A CARTEL, SAVES TIME AND EFFORT RIGHT god damnit.

[Umair]

it totally depends on the industry in question.  In the case of technology, the price can reduce to an extent beyond the cost of sales if a company partakes in predatory pricing (though highly unlikely).  But as time goes on, manufacturing techniques get better, production costs get lower, R&D and other overheads are no longer a major concern and, if competition increases, these cost savings may be passed onto the customer which lead to lower prices.

 

But in some industries, namely infrastructure, less is better due to economies of scale driving down costs - but this would need regulating to prevent a monopoly from exploiting, which rarely happens.