Spacely Sprockets buys sprockets at about $9.50 and sells them at $10.
Cogswell Cogs makes cogs from scratch for $5 and sells them at $10.
If these companies are "the same size" meaning they generate roughly the same profit, then SS is selling 10x the volume of CC. If they can both cut costs by 10%, then SS's profit almost triples, while CC's only increases by 20%.
This cuts the other way too -- if you are operating at thin margins, a small change can push you into unprofitable. If you have fat margins, your profits just decline.
Can anyone give an argument for why the cost to reduce costs by 1% should be a function of profits rather than of revenue or assets?
For example, Microsoft (software) is a high-margin business. Their cost of raw materials is low, so 77% of revenues goes to pay for R&D, other expenses, and then profit.
Apple is a lower, but still a high-margin business with healthy 37% of revenues remaining after paying for the cost of materials and assembly. Apple can charge significantly more for their devices than they pay in raw material costs. But it may change, so Apple investors are generally watching its gross margins. For example, last year Apple's margin was 47%, i.e. it declined quite a bit since then.
Amazon (as any retailer) is a low-margin business. They move a lot of products, but 89% of the revenue goes to pay for those product. So only 11% of the total revenue is available for R&D costs and profit.
However, it's very rare for there to be fundamental, physical limits to the internal cost of doing business. Which means that if you can do that better (through manufacturing improvements, supply-chain improvements, what-have-you) then you can undercut your competition only slightly while reaping significant profits.
And, because your competition is running on such low margins they can't easily compete with you. So, from a pure price perspective, you either get to retain your higher profit margin while being price competitive or you simply eat the majority of the market before it has a chance to settle to a lower price-point, which is win-win.
It does, however, mean that you need to put in a lot of hard work.
No, it usually means it's a commodity business. Innovation can be a defensible competitive advantage. As mentioned in the article, because of operating leverage, a fairly small innovation can yield significant profit growth.
http://hexayurt.com gives some notion of how radical that shift could be when it arises. Industrial panels (of whatever kind) directly into owner-build housing. Free Hardware. You may laugh, but half the world lives in cinderblock-and-tin-roof shacks and worse.
Nobody said the innovation had to start here, or look like what we do now.
Apparently it takes only a couple weeks for one man to build a house, but the labor involved in general contracting to get the subcontractors to do their thing exceeds the time spent swinging a hammer. He sub'd out to dig and pour the foundation, some electrical, gas, some plumbing...
For those of a certain generation it was how you proved to the employer that you could complete long complicated projects, basically the equivalent of completing your college degree (which was hard to complete during WWII)
This is still done on a regular-ish basis for large garden sheds and garages. Home Depot and others will dump a pile of wood at your location with some plans and bulk pack of nails and other hardware and a weekend or two later you'll have a garden shed.
The permitting and inspection process is more about revenue generation than safety.
That's interesting stuff, but all we really need to get the ball rolling is to remove the financial and regulatory speed bumps that prevent people from buying prefab homes. It's not like it is some kind of mystery how to reduce the cost of building a home...
EDIT: I was thinking more in terms of the way lending and building ordinances very strongly favor building a house on site vs. trucking it in, as opposed to the really... insightful... stuff you guys have mentioned.
Agreed! Just remove all those pesky restrictions about fire safety, earthquake safety, tornado safety, electrical safety, and you can put that house up for real cheap :)
Yeah... but a lot of that is we don't /want/ housing to get cheaper. Most voters will vote to keep housing more expensive.
Compare the £3500 I paid to have a new boiler fitted[1][2] to what £3500 would buy you in technology these days.
[1] Can't DIY it: I'm legally required to have a Gas Safe fitter to touch anything related to the gas supply.
[2] Replacement of open vented system with combi. Replacing like-for-like would be much cheaper, I know.
* Pre-fabricate everything
* Assemble onsite using non-union labor
* Move away from "Cost-Plus" pricing structures
Construction has Razor Thin Margins for a number of reasons, not the least of them being the incentives associated with Cost-Plus bidding. Non-Union labor and Pre-fab would literally upend the industry.
The problem, as with most mature industries, is policy-based and not technical in nature.
Construction is as ripe for Innovation as Medicine, and an equally difficult water to navigate.
One-story modular houses in trailer parks have a stigma, perhaps for a reason. Can you think of any other type of modular construction that has a PR problem?
I work for Ekotrope[1], we're looking to make those margins bigger and help build green at the same time. Believe it or not, they're not mutually exclusive and we know how to make it happen.
