Consumer Products

The cost of a consumer products is the result of the cost of four things that go into providing that product:

• Marketing begins the process of creating a new product by figuring out what product consumers wish to buy and then finishes the process by getting the word out to consumers through advertising. Marketing costs are generally independent of the quantity of a product sold. Marketing costs over the life of a consumer product tend to be dominated by advertising costs, which are usually highest during the initial release of a new product but then continue to accumulate over the life of the product.
• Distribution is the process of getting a the right quantity of the product to the right retail stores at the right time in order to meet demand and maximize sales. This involves arranging warehousing and shipping logistics. Distribution costs depend mostly on the number and locations of retail stores and depend a little bit on the quantity of products sold. If a product is sold at a retail store then a truck must deliver the product to the store. It costs little more to ship a large quantity than it costs to ship a small quantity to the retail store.
• Manufacturing requires procuring all of the components in sufficient quantities from suppliers on appropriate schedules and processing those components in order to assemble them into finished products. This will often be performed in a factory using an assembly line and automated machines. Manufacturing cost is incurred per product and the is approximately constant per product. As production volume increases manufacturing cost per product naturally decreases gradually as the factory is able to take advantage of economies of scale. Furthermore, particularly in high-technology products, component costs decrease over time leading to lower per product manufacturing cost as time progresses.
• Engineering involves the inventing and scientific research and development as well as the design work required to create the product in the first place. Engineering costs are predominantly incurred one time while the product is being developed, after which the engineers may move on to other designs or be released from their duties. It is these significant up-front costs, before a single product is sold, that require companies to seek money from investors in order to create their initial product.

The total cost of a product is made up of the four components of marketing, distribution, manufacturing, and engineering, but the percentage of the total product cost contributed by each category can vary greatly from one product to another. For example, ...

To do well in a competitive market it is important to sell consumer products for a low price by keeping each constituent cost as low as possible. Engineering costs can be minimized by creating simple designs and reusing parts of designs that are common to other products. The intellectual property business is one of selling parts of product designs. Manufacturing costs can be minimized by automating the factory, hiring the lowest-paid workers capable of creating the product, and by marketing and engineering a product for a large low-cost market that can enable economies of scale in the factory. Distribution costs can be minimized by retailing online rather than in shops in order to avoid the shipping and storage real estate costs required for consumer retail stores. If stores are justified in order to reach a profitable number of potential customers, then distribution costs can be minimized by selling only through a small number of large retailers, such as Wal*Mart. Marketing costs can be minimized by careful demographic analysis of the most likely and most profitable customers and narrowly targeting that key demographic's viewing world thereby avoiding the greater expense of widely advertising. Marketing costs can also be reduced by the good engineering and manufacturing of a product that people talk about with others, providing free word-of-mouth advertising. The component of a consumer product price that must be added for profit can be minimized by boot-strapping the product development with a minimum of up-front investment money as well as keeping head-counts low within each organization involved in providing the product.

Sony: Blu-ray, PlayStation 3, and Betamax

Sony made a similar mistake in defining the Blu-ray standard as in designing the PlayStation 3 and the Betamax standard. They put too much priority on advanced technology and not enough on low cost. Because of specifying blue wavelength lasers, Blu-ray can store more than twice the data as would have been possible with HD-DVD. However, the component cost of manufacturing Blu-ray players is higher than it would have been for red laser based HD-DVD players. Furthermore, because of the new size of disc features, disc press operators need to buy new expensive equipment to support making Blu-ray discs. As a result, whereas HD-DVD discs could have been manufactured cheaply enough to be given away in cereal boxes and magazine advertisements, Blu-ray discs manufacturing costs make them useful only for serious movie fans. As a result, Blu-ray will lose in competition to HD video over broadband services before realizing anything close to the market penetration that DVD achieved.

Apple: Different... for the sake of short-term business advantage

Apple has twice, with the Macintosh and the iPod, created amazingly successful products that are different from what earlier competitors offered. However, Macintosh nearly faded away. It's recent resurrection is only an effect of the success of the iPod. Both will fade away in the future unless Apple changes its internal culture / attitude.

The culture of design at Apple shuns adoption of widely used industry standards. This hinders third parties from using Apple machines as platforms for their own profitable applications. Example: Apple only supported AppleTalk and Firewire until long after ethernet and USB had become widely used standards.

More recently, Apple maintains tight control and censorship of the availability of iPhone apps. This will likely lead to a world of limited software choices for iPhones and more useful, creative, and lower cost shareware apps attracting more users to competing platforms after the iPhone fashion craze wears off. That is what caused the Macintosh to fade.