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Bad Thinking About Cost Savings

discussing bikes:

Compacts are made to save the manufacturer money. Personally, if I dole out big bucks for a frame I don't care to have the manufacturer try to shave costs; it's an insult. I want the correct size down to the centimeter.

Besides, compacts are fugly.
this is wrong. apart from "i'm used to the appearance of the old design" being dumb. people should be more open to change than that, and more interested in functionality.

compacts being cheaper to make (cuz fewer sizes) doesn’t imply they have higher profit margins

those bikes could be sold with higher, equal or lower profit margins.

if we assume equal as a kinda default, it means the bike would get better other features at the same price point

he doesn’t seem to understand that cheaper to make is efficient and he can share in that benefit

ppl call it a “cost saving measure” and think that’s bad

u know what else is a cost saving measure?

12oz coke cans

want an 11oz can? 13oz? 12.3oz? too fucking bad

making fewer sizes is a cost cutting measure which benefits everyone involved. not just coke and the stores that stock coke inventory. it benefits coke buyers too. cuz they do charge lower prices as a result.

long term the trend is for approximately 100% of the savings from cost cutting measures to be passed on to the consumer.

actually more in a way.

say it sells for $20 and they are making $10 profit per unit before their fixed costs.

then they cut the costs by $5. suppose they now sell it for $15 and make $10 profit. their profit margins went way up.

in some ways a more realistic scenario is they sell it for $10 now, and keep the same 50% profit margin as before.

but halving the price would have to more than double demand to be appealing to the company. that or it'd have to be necessary b/c the competition halved their price.

this stuff does depend on a lot of things like whether there's any competition. but in the long run, big profit margins without ongoing innovation does attract competition b/c it's more attractive to compete there than to do alternative businesses, investments, etc

anyway just think about any old industry or old product. think about what it cost in 1800. think about the cost savings from technology since then, and the current pricing.

like food and books are cheaper. and illumination. why? cuz most cost savings ends up getting passed on to buyers.

this reminds me of confusion about the fungibility of money. some people don't understand that if you give someone $200 for only food, then he's spending $200 less no-strings-attached money on food, which he can then spend on an iPod Touch. you can hand him cash and he can spend that money as you instruct, and the actual difference in his life can come out the same as if he spent it all on an iPod. people don't understand the way money and budgets are flexible, and adding money only to someone's budget for a specific thing will often just end up freeing up that much money for anything.

with cost savings, people don't understand how they are flexible too. that cost savings can go into higher quality somewhere else, more profits, lower price, lots of stuff. and really, if companies wanted to sell things with higher profit margins, they would. the reason they don't is because of supply and demand. which still apply if they figure out a cost cutting measure.

Elliot Temple on September 30, 2014


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