6 ms·

> And by cost I mean an $0.01 difference per unit is considered a significant savings. Could someone ELI5 this line of thinking? Exactly how is a $0.01 saving

> And by cost I mean an $0.01 difference per unit is considered a significant savings. Could someone ELI5 this line of thinking? Exactly how is a $0.01 saving so consequential? Is a better-performing $9.99 cable too expensive for some people but a $9.98 cable within their budget somehow? Is each manufacturer manufacturing 100 million cables and saving $1M here? What is the logic?

andrewstuart2 4y ago
The cost of these cables is sub-dollar. Like probably less than $0.50. Let's say $0.50 for argument's sake. Bringing the cost down a penny means 2% more sellable product for the same input materials. And when the margins are in the $10 range, that's a huge amount of leverage. They're not passing the $0.01 savings along to their customers. Or even if they are (and say, charge you $0.01 less), it's still a huge differential after you consider the 20x margin. Quick math: Let's say 1 million cables at $0.50. That costs you $500k. If you get the cost down to $0.49, you just enabled another 20k cables to be manufactured, and another $200k in profit.
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- midasuni 4y ago
  1 million for 500k and sold for 10m is a 9.5 million dollar profit 1 million for 490k and sold for 10 million is a 9.5 million profit. 10k is a rounding error.
  - andrewstuart2 4y ago
    That extra $200k you made by saving a cent literally bought you your next $4M profit if you reinvest it. Not a rounding error in any way when you're reinvesting at such a massive margin.
AlotOfReading 4y ago
There's two main groups of people. Cable manufacturers and device manufacturers. Cables are commodity and most of the value is consumed by retail. Manufacturers compete against each other by tiny optimizations and huge scale. Unless there's someone on the retail side who can actively sell more expensive cables despite consumers having very little ability to distinguish them, the factories will cost optimize to death and beyond. On the device side, the ability to get those few percent extra profitability is the difference between a failed product and a successful one to higher ups. If you give a TPM the option to choose between $0.05 off the BOM and theoretical improvement to reliability, they'll choose the former almost every time. I remember one product launch that turned into a disaster because it had been cost optimized so hard that the circuit would go slightly out of spec under physical strain and it turned into a yelling match over the few cents of additional plastic in the housing to mitigate the issue.
babel_ 4y ago
The $0.01 savings is for the maker, and not for the buyer. For a typical cable, it's probably around $0.30 to $0.50 to make, and they tend to sell between $5 and $15, depending on the spec. For simplicity's sake, we'll assume $0.50 cables that sell for $10. Now, if you save $0.01 in manufacturing, so the cost is now $0.49, and if you sell say 100k cables (feels like a believable amount) then you've saved a cool $1000 in making them. So your profits are $1000 larger now, and you can pat yourself on the back. Good job! The kicker then is how those profits can be used to make MORE cables. And $1000 of extra profits means $1000 of extra cables. Just over 2000 more, in fact, which you can also sell for $10 each. Those extra 2000 cables have now earned you a cool $20k of profit ALONE, from only $1000 saved dollars, which itself was from only a single saved cent! Amazing job! If you keep repeating this, you can probably start to see how this begins to run away: Even starting with only $1 to make $0.49 cables, you end up earning over $1M on your 19th batch, even if you were spending only 10% of your sales to make new batches of cables and pocketing the other 90%! You actually pocket $1.5M on that batch, and then only spend $167k on the next batch, which promises to earn you even more! Meanwhile, your competitor making $0.50 cables, starting with a similar $1 and 10% to new batches scheme, would only get to pocket $1.1M on their 19th batch! That $400k is a pretty tidy bonus you've earned. On your 20th batch, you're selling 80k cables, but your competitor can only afford to sell $60k. We've not even reached the 100k a batch mark, let alone a million cables, and you're already way ahead. And that's compound interest, folks! From $1, saving only a single cent, we can earn $400k more than we would have otherwise. Outstanding. EDIT: I took so long to write this that I see andrewstuart2 has summed up the first half of the story far more concisely than I. Nicely done! I feel that compound interest is important for seeing the bigger picture of profit over time, so I'll keep this comment as is.
- patrec 4y ago
  These numbers make no sense to me. If you typically have 1900% gross profit margins on USB cables, why isn't everyone making USB cables?
  - ac29 4y ago
    Thats a 95% gross margin, and in reality the manufacturer is not going to be selling at retail prices. A lot of the available margin is going to go to the retailer.
asdajksah2123 4y ago
They add up. A penny here, a penny there, and soon you're talking something like $0.15/cable. If you sell a million cables, that's $150k. But there's also the fact that people usually buy stuff based on price. If you go on Amazon, as a consumer, you're likely to buy the $3.99 cable over the $4.99 cable. And with the profit margins necessary that $0.15 cost savings can easily translate to a $1-$1.50 price difference for the end consumer.

andrewstuart2 4y ago

The cost of these cables is sub-dollar. Like probably less than $0.50. Let's say $0.50 for argument's sake. Bringing the cost down a penny means 2% more sellable product for the same input materials. And when the margins are in the $10 range, that's a huge amount of leverage. They're not passing the $0.01 savings along to their customers. Or even if they are (and say, charge you $0.01 less), it's still a huge differential after you consider the 20x margin. Quick math: Let's say 1 million cables at $0.50. That costs you $500k. If you get the cost down to $0.49, you just enabled another 20k cables to be manufactured, and another $200k in profit.

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midasuni 4y ago
1 million for 500k and sold for 10m is a 9.5 million dollar profit 1 million for 490k and sold for 10 million is a 9.5 million profit. 10k is a rounding error.
- andrewstuart2 4y ago
  That extra $200k you made by saving a cent literally bought you your next $4M profit if you reinvest it. Not a rounding error in any way when you're reinvesting at such a massive margin.

AlotOfReading 4y ago

There's two main groups of people. Cable manufacturers and device manufacturers. Cables are commodity and most of the value is consumed by retail. Manufacturers compete against each other by tiny optimizations and huge scale. Unless there's someone on the retail side who can actively sell more expensive cables despite consumers having very little ability to distinguish them, the factories will cost optimize to death and beyond. On the device side, the ability to get those few percent extra profitability is the difference between a failed product and a successful one to higher ups. If you give a TPM the option to choose between $0.05 off the BOM and theoretical improvement to reliability, they'll choose the former almost every time. I remember one product launch that turned into a disaster because it had been cost optimized so hard that the circuit would go slightly out of spec under physical strain and it turned into a yelling match over the few cents of additional plastic in the housing to mitigate the issue.

babel_ 4y ago

The $0.01 savings is for the maker, and not for the buyer. For a typical cable, it's probably around $0.30 to $0.50 to make, and they tend to sell between $5 and $15, depending on the spec. For simplicity's sake, we'll assume $0.50 cables that sell for $10. Now, if you save $0.01 in manufacturing, so the cost is now $0.49, and if you sell say 100k cables (feels like a believable amount) then you've saved a cool $1000 in making them. So your profits are $1000 larger now, and you can pat yourself on the back. Good job! The kicker then is how those profits can be used to make MORE cables. And $1000 of extra profits means $1000 of extra cables. Just over 2000 more, in fact, which you can also sell for $10 each. Those extra 2000 cables have now earned you a cool $20k of profit ALONE, from only $1000 saved dollars, which itself was from only a single saved cent! Amazing job! If you keep repeating this, you can probably start to see how this begins to run away: Even starting with only $1 to make $0.49 cables, you end up earning over $1M on your 19th batch, even if you were spending only 10% of your sales to make new batches of cables and pocketing the other 90%! You actually pocket $1.5M on that batch, and then only spend $167k on the next batch, which promises to earn you even more! Meanwhile, your competitor making $0.50 cables, starting with a similar $1 and 10% to new batches scheme, would only get to pocket $1.1M on their 19th batch! That $400k is a pretty tidy bonus you've earned. On your 20th batch, you're selling 80k cables, but your competitor can only afford to sell $60k. We've not even reached the 100k a batch mark, let alone a million cables, and you're already way ahead. And that's compound interest, folks! From $1, saving only a single cent, we can earn $400k more than we would have otherwise. Outstanding. EDIT: I took so long to write this that I see andrewstuart2 has summed up the first half of the story far more concisely than I. Nicely done! I feel that compound interest is important for seeing the bigger picture of profit over time, so I'll keep this comment as is.

patrec 4y ago
These numbers make no sense to me. If you typically have 1900% gross profit margins on USB cables, why isn't everyone making USB cables?
- ac29 4y ago
  Thats a 95% gross margin, and in reality the manufacturer is not going to be selling at retail prices. A lot of the available margin is going to go to the retailer.

asdajksah2123 4y ago

They add up. A penny here, a penny there, and soon you're talking something like $0.15/cable. If you sell a million cables, that's $150k. But there's also the fact that people usually buy stuff based on price. If you go on Amazon, as a consumer, you're likely to buy the $3.99 cable over the $4.99 cable. And with the profit margins necessary that $0.15 cost savings can easily translate to a $1-$1.50 price difference for the end consumer.