Impact of Time, volume and commodification on Cost and Price

Cost, Price and their Trends

In the past 15 years, the use of technology improvements to achieve lower cost, as well as increased performance, has been a major theme in the computer industry.

• Price is what you sell a finished good for,
• Cost is the amount spent to produce it, including overhead.                                                         

The Impact of Time, Volume, Commodification, and Packaging
The cost of a manufactured computer component decreases over time even without major improvements in the basic implementation technology. The underlying principle that drives costs down is the learning curve manufacturing costs decrease over time. As an example of the learning curve in action, the price per megabyte of DRAM drops over the long term by 40% per year. Figure 1.5 plots the price of a new DRAM chip over its lifetime.

The Microprocessor prices also drop over time, but because they are less standardized than DRAMs, the relationship between price and cost is more complex. In a period of significant competition, price tends to track cost closely. Figure 1.6 shows processor price trends for the Pentium III.

The Volume is a second key factor in determining cost. Increasing volumes affect cost in several ways.

• First, they decrease the time needed to get down the learning curve, which is partly proportional to the number of systems (or chips) manufactured.

• Second, volume decreases cost, since it increases purchasing and manufacturing efficiency.

As a rule of thumb, some designers have estimated that cost decreases about 10% for each doubling of volume.

The Commodities are products that are sold by multiple vendors in large volumes and are essentially identical. Virtually all the products sold on the shelves of grocery stores are commodities, as are standard DRAMs, disks, monitors, and keyboards. In the past 10 years, much of the low end of the computer business has become a commodity business focused on building IBM-compatible PCs. There are a variety of vendors that ship virtually identical products and are highly competitive. Of course, this competition decreases the gap between cost and selling price, but it also decreases cost.