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usrevenge t1_j2c2xwg wrote

You sell computers for $300.

You spend $200 on the computer.

So you make $100 per computer.

You sell 10. So you made $1000.

You drop price to $250.

You sell 30 computers now.

You made $1500 this time.

Companies find the point where their product maximizes profit. You can't sell for less than $200 or you make $0. But if you sell more than $300 almost no one buys any so you make no money.

Some companies will try a loss leader which is a product sold for a loss but you end up buying other stuff when there. Like if McDonald's sold a 8 piece nuggets for $.50. They might lose money but they are getting most people get fries and a drink while there as well so they make money.

For computers and computer parts most items are way cheaper at the OEM level. Dell pays significantly less for parts than you will pay. Things like windows 11 will cost almost nothing to them compared to retail purchasers.


sterexx t1_j2cm1f2 wrote

I can visualize the econ 101 graphs right now!

And this is almost too obvious to mention, but those computers aren’t exactly the same. They’re generally differentiated in at least some way, even if it’s just aesthetically.

But if we’re talking about precisely equivalent products, yeah economies of scale can get so interesting. My favorite is that Amazon can sell items at cost and still come out ahead.

Because they’re such a big (and reliable) customer to their vendors, they can get great terms on their invoices where they don’t have to pay for like a couple months after receiving their inventory.

So Amazon gets this $1000 TV in inventory but doesn’t have to pay yet. They sell it to me for $1000. They now have $1000 they can invest and earn interest on (or otherwise do whatever they want with) and don’t have to pay it back for a while

I don’t know exactly what scale they’re doing that at these days but it’s still amazing to me


sundays_sun t1_j2cln1i wrote

They can also value engineer their product "upgrades" by improving a few important specs, while installing cheaper parts elsewhere - allowing them to lower the retail price. They lower the cost of production in order to make the same profit margin despite selling the product a lower price.


blipsman t1_j2c84y6 wrote

Let’s say 4 competitors all have 25% of market, selling laptops for $500 that cost them $300 to make. Now one cuts price to $460 so they’re making $160 instead of $200 per unit. But if they can boost their share to 32% of sales instead of the 25% they had, they’ll make more money overall.

Or even better, they’ve developed some sort of manufacturing advantage (efficient custom made to order rather than prebuilt configs, for example) that allow them to build each computer for only $270 instead of $300 so they’re not even losing per-unit margins.


Volcanos_man t1_j2c6gz7 wrote

Love the explanation so far, but you seem to forget about one thing: labor exploitation. If they sell cheap, you can be sure the workers making that object make close to nothing. Not paying a livable wage can makes things extremely cheap.


Jf2611 t1_j2c28h8 wrote

A few things at play here. Number one is buying power. These large manufacturers buy some many components that they pay much less than the average wholesale price. They also have "proprietary" components that may use a lesser material to make it more affordable. An example would be motherboards in a Dell or HP - they are notoriously difficult to upgrade because they are proprietary and don't have room for much else.

The second thing they have going for them is volume of sales. They sell such a large number of products that they are able to take less margin and still turn a profit. Walmart is a perfect example of this.

Lastly, you should see a theme here, is scale of production. They produce so many of the same or similar things that they can take advantage of efficiencies in mass production. Think of a smaller boutique manufacturer, their price is usually a little higher because they are hand made to order products - a feature they try to sell you on. Someone like Dell or HP has thousands of the same laptop sitting in a box ready to be shipped out.


ProveISaidIt t1_j2c5l6k wrote

The other thing to consider is loss leaders. They may take a small loss on say a desktop computer, but they are counting on selling you a monitor, maybe you upgrade to a wireless mouse and back-lit wireless keyboard. They make money on those.

Sticking with the laptop example your going to want a cooling pad, a carrying case, an external hard drive to back it up. Even if you don't think you want those a good salesman will convince you that you do. You also need an extended warranty, maybe you want in home service for 3 years for an additional $500 (yes, oddly specific. I received a Dell laptop for my birthday with 3 year in-home service).


VirajShah t1_j2d179s wrote

Companies cannot just lower the price of their products. They will determine how much profit they would like to make per sale. If Walmart and Costco are selling the same product, If Walmart is charging $5 more than Costco, everybody will go to Costco. So now a Costco has two options: lower the price of the product and take less profit or find an efficiency.

Efficiencies are ways to lower cost or time to move a product. This includes manufacturing costs, labor and taxes and fees. This way companies can compete against each other, incentivizing each other to find efficiencies in the market.