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Experience Curve

Use this framework to understand your future costs and how this could affect your pricing strategy

The experience curve framework was developed by the Boston Consulting Group in the mid-1960s. It postulates that the more experience a business has in producing a product, the lower will be its unit costs.

The experience curve which leads to lower unit costs happens for a number of reasons. Greater experience leads to more efficient and better skilled labour. Products can be standardised. Robots and automation can be applied to the greater volumes. Experience may also show how products can be redesigned for lower production costs and without losing performance. 

The experience curve leads to lower costs which in turn help a company lower its prices and achieve a competitive advantage (or pocket the price advantage in additional profits).

The experience curve theory confers an advantage on companies that produce and sell a lot of product. A high market share is therefore highly desirable. The experience curve supports other frameworks we have discussed. For example Michael Porter argues that low-cost is one of three important strategies that can be adopted by a company, the other two being a niche supplier or a supplier of differentiated products.

 

It should be pointed out that achieving a low cost advantage isn't simply about volume production. It is also associated with a company culture. A company wanting to benefit from the experience curve is likely to have very efficient distribution channels, spartan offices, and a workforce which isn't in the top quartile of remuneration. Complacency is a threat to companies following the experience curve.

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