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Comment by PragmaticPulp | Hacker News Reader

> The cost of building a consumer audio product is generally no more than 30% of retail. 30% COGS (cost of goods sold) is virtually a maximum for items sold at mainstream retailers.

There’s nothing wrong with this. These are standard ratios, not some dirty secret.

The cost of goods sold is only a fraction of the costs that go into getting products all the way into the customers’ hands and supporting them (customer support, warranty replacements, lost shipments, fraudulent orders, etc.). That’s not even counting the R&D investment costs that go into making the product, as the post says.

Salaries, warehousing, shipping, insurance, and all of the others costs of doing business add up.

It’s not actually realistic to expect an entire company to be selling you a $300 product that costs them something like $250 to build. Every business in existence must build in enough margin to pay the people who do all of the work to make it happen and support it.

If this seems shocking, consider that the COGS of software as a service products are much lower by comparison. Doesn’t matter, though, because you have to pay all of those expensive salaries to make it happen.

View on HN

I used to be a naive DIY hobbyist who was outraged by how much more expensive commercial products were compared to the parts cost.

But of course what you say is true. Electronic and software design, physical design, productisation, marketing, distribution, packaging, support, business premises, logistics, and backup business services (payroll, accounting) all cost money. Even a nominal markup of 40% may not be enough to cover those expenses.

Selling at scale - even at small scale - is completely different to buying a bag full of bits and assembling them with a soldering iron.

Having said that - audio and music are particularly susceptible to snake oil. Never mind all the cable nonsense, you can literally buy magic pebbles and boxes full of rocks to "improve" your audio.

The people in those markets are either delusional or knowingly scamming their customers.

At some point branding and market positioning become the biggest driver of perceived value, and spending $$$$$$ just to prove you can - under the pretext of "purer sound" - becomes an exercise in consumer narcissism. In the classic Veblen mode, the product being sold isn't the item, it's the consumer's perception of themselves. And some people will pay huge sums for that.

Which is you can buy magic hifi rocks, magic watches that don't tell the time very well, magic handbags, and all manner of other trinkets, for very silly prices.

I think that response is natural especially for anyone who builds things, software or otherwise.

But my mindset completely changed after listening to a lot of economics stories on planet money. There was this dude who tried to make a simple toaster on his own, down to refining metal. None of us can make even the simplest consumer product, let alone an consumer electronic product economically.

https://www.npr.org/2014/09/12/342138931/how-do-you-build-a-...

This seems similar as the point made in the well known essay I, Pencil (1958)[1]. You can buy a box of pencils in Staples for something like $0.10 apiece. But no individual, and probaly no small businesses would be capable of making some pencils from raw material (skipping even the step of harvesting the raw material).

[1] https://en.wikipedia.org/wiki/I,_Pencil

Ironically a box of rocks will probably "improve" (well affect) your audio more than a cable will. As sounds does bounce off objects. That being said there are cheap, worthless cables as well. I'll pay a bit more for a cable where they connection won't fall off after two uses.

"Why are Fluke meters so expensive?":

https://www.youtube.com/watch?v=ay9wFQAW19Y

Dave Jones breaks it down, as usual, very informative.

Having not watched the video but having read the 8 reasons, I’ll throw #9 on the list: I have reasonably high confidence that if I screw up, it’s not likely to explode in my face. Maybe that’s just marketing, but I’ve seen more than one low cost multimeter get turned into a puddle of melted plastic.

> There’s nothing wrong with this. These are standard ratios, not some dirty secret.

Nowhere in the original post is the word “dirty” or any implication that there’s anything wrong with the ratios. The OP qualifies their post with:

> None of this is actually secret (it would be common knowledge for anyone employed in the industry) but isn't well-known outside of it. This audience has a lot of professionals in it so a lot of this might not be news to you.

And after going into many things that factor into the retail price concludes with:

> In that sense, a 3:1 retail to COGS price is arguably very fair or even low, especially for firms that do any R&D at all. I personally wouldn't say something is overpriced until you hit 10:1 or more.

The quotes around “secret” are there in the first place to imply these aren’t actually secrets, much less dirty secrets.

Nowwhere in the GP comment is the word “outraged”. That’s your word.

So, what, you wanted to be aghast or something and misrepresented the tone of the original comment with a selective quote and addition of the word “outrage”?

Shit HN says. Sheesh.

(This comment was a copy of the one above before it was edited)

> Shit HN says. Sheesh

Indeed. I read the article, then I read these three comments. The first one reiterates points that the article made but seemingly doesn’t recognize the article made them. The second does recognize that but with a combative tone. The third is just combative.

Y’all can carry on as usual but none of that conflict was actually warranted.

Lest not forget the fourth comment, meta-hammering on HN comment quality

The third comment parodied the second word for word before the second was edited :-)

I don’t think that reflects better on the third comment :)

HN is so Tone Deaf

Opprobrium update urgently needed

Okay. I’ve edited my comment for tone and to stick to the facts. I still think the comment I replied to misrepresents the original piece by quoting very selectively and adding the word “dirty”.

Actually, that is what I learned over 20 years ago at the university while studying electrical engineering. Basic business class (and law) was part of the courses to get the diploma.

The general rule of thumb was, that a product in parts and production shall not be more 30% of the final price of the product. If its more, it will be a money looser. With that 30% you have 30% for marketing and distribution, and 30% for research and development. Then there you have about 10% of overhead costs for all over. Then you can play with the numbers. If, like in consumer products, marketing and distribution goes up, you have obviously less either for R&D, which means less innovation or less innovative products, or less for production, which means less quality.

That's what I learned for electronic products. Other industries maybe a little bit different. I think of these sometimes when I see a plastic box in the store for 10 bucks or so, and I know this plastics costs only a few cents in production in injection molding, of course not counting what the machine for the manufacturer had cost, what the production form cost and that it can only be used for a few 100 000 items before wearing out and so on.

*loser.

For most consumers I'm not sure COGS is something that they are aware of.

The big takeaway from understanding COGS is using that to understand fast moving and disposable goods and merchandise.

In the UK a recent (last decade) thing has been fast fashion, Primark and the like are leaders at this. It is possible to purchase a pair of straight leg jeans for GBP 12. Understanding COGS means you can quickly realise that the absolute maximum amount spent on materials and manufacturing is GBP 4.

An awareness of COGS reveals to buyers unethical manufacturing, low quality, and essentially planet damaging goods and merchandise.

On a more individual level, i.e. the Beats headphone example in the article, it can also reveal when you're being ripped off. Where what you're buying isn't the goods as much as it is the sticker on the side and the status.

COGS may not be a secret to most people on HN, but they're an unknown part of the magic of how global commerce works to the majority of people.

If you're on Windows, alt-0163 inserts the £ character on a US keyboard. 0164 is €.

I’m actually surprised it’s as high as 30%. Would’ve expected 10% tops.

Reminds me of that Planet Money special where they made their own tshirts from scratch, as “finding a cotton farmer to buy cotton” from scratch. The thing that added the most cost was the transport from the dock in NYC to the store.

Ah damn, I just commented about planet money. Seriously, it was totally perspective changing. Anyone who even has a modicum of interest in econ/business, especially as it pertains to the topic here, should listen to the t shirt saga. It's excellent storytelling even for those who aren't economics nerds. Still have my squirrel t-shirt I bought to this day :)

https://apps.npr.org/tshirt/#/title

I'm sure manufacturing costs is like 10% or even less, but between the factories in e.g. China and the US or Europe, there's container transport overseas, import taxes and fees, and other such transportation and logistics overhead.

I freqently find myself in a supermarket and think that the packaging for the products there was more expensive than the product itself. Plus the logistics.

Shipping over the ocean from China to the US is very cheap.

In contrast in 2021 Xiaomi's Cost of Sales (COGS?) was 82.3% of their annual revenue

Source: 2021 Annual report

https://ir.mi.com/static-files/b85f34c0-0010-4a8c-94b9-269d8...

Cost of sales includes marketing expenses. Possibly also operations cost.

Cost of Sales is not Cost of Goods Sold

In this accounting context, yes it is

edit: source here, since other people are making the same mistake https://www.investopedia.com/ask/answers/112614/whats-differ...

To be clear, the OP discusses COGS in an electronics/manufacturing context, which refers specifically to the cost of manufacturing the product, and excludes things like marketing, logistics, R&D, salaries etc.

It is not at all comparable to the Xiaomi Cost of Sales figure in GP which includes many things beyond the direct cost of manufacturing their devices.

COGS is completely company-dependent, there is no universal exact definition so long as it can be verified to be GAAP/IFRS compliant (which is more art than science).

This is broadly correct but specifically incorrect: cost of sales includes ex. salaries and capital investments and cost of goods sold includes the literal cost of the raw materials for a good

It's quite jarring to see someone jump in with another misunderstanding, derailing the correction, especially given this is a "hoofbeats, think horses, not zebras" situation. Any argument they're kinda sorta the same thing or it's ambiguous, they could be the same thing, leaves open the Q of how exactly Xiaomi can possibly fund itself if 83% of it's costs are raw materials

Somebody is confidently wrong.

There is no standard definition for "cost of sales", or "cost of goods sold". No where in any GAAP or IFRS literate does it say that the term "cost of sales" have specific definitions other than a paragraph or two of ambiguous wording. Indeed, IAS is even careful to say "allocating costs to functions may require arbitrary allocations and involve considerable judgement".

The Xiaomi filing doesn't breakdown what it includes in cost of sales, so we're left guessing without a supplemental to fill in the details. You're welcome to make whatever wilder guesses you like, but they're still just guesses.

Like I said, you're broadly correct, and specifically correct.

It is unknowable, but, that's not helpful information.

It's sort of like if there was an accounting message board where they bickered about it's unknowable if memory usage meant RAM or L2 cache because L2 cache is also memory

I'm out, you're free to live in a world where you can't tell basic information about the health of a company because you're obsessive about ensuring anything you don't grok must be modelled as ambiguous by everyone else.

Cost of sales include wage and salary for the storefront.

yeah, it's quite typical that wholesale = 2x COGS and retail = 2x wholesale.

for high end stuff it's likely far higher. that $75 Intel AX210 WiFi 6e upgrade is likely a $5 part at wholesale in 10k quantities. upgraded op-amps for $100? probably $4 each on digikey or aliexpress (and thats already marked up from maybe $2 COGS)

Yeah, last time I worked retail, our prices by default were 2x our cost.

People gasp when they hear that, but 2x wholesale doesn’t mean we were making bank. We were spending all that money on wages, utilities, the property itself, taxes, equipment, etc.

If people think that charging $20 for a $10 widget is too much, they can fly to Shenzhen and buy it for $10.

You can buy those Intel cards (single quantities) for around 12-15 bucks at retailers.

> There’s nothing wrong with this. These are standard ratios, not some dirty secret.

Standard, absolutely, but I think many are surprised by how much of that is profit for the company that sells the product to the consumers. I worked for a company that had 40-45% margins on most consumer electronics. Less than 40% and the buyers didn't really want to deal with it.

*__exactly__*

If you have ever whore'd yourself out as a 1099 "consultant" <=== you're typically paid ~30% of bill rate... the company claimed all this "I have to pay insurance" bullshit - but if you are paid $50 an hour, the contract is likely $150 an hour... and the company's fat margins are within....

Revenue, not profit. They have pretty huge costs of doing business, too.

yeah the person who suggests that COGs (or even BOM) should be more than 30% of MSRP cannot be taken seriously on any other business-related statements. That is shows a gross misunderstanding of the fundamentals of unit economics and electronics business models.

For those who don't know the difference between COGS and BOM:

- BOM includes only the materials.

- COGS includes not only BOM, but also the variable costs to combine those materials into the final product (e.g. cost of manufacturing labor).

Just to be clear for the people reading the comments only, the author of this article is not that person.

Definitely agree. People who rail against this don't understand economics much further than my mom sold yard bird eggs for less than the corner store --corner stores are opportunist capitalists with no heart who take advantage of people. If they had to sustain a business I'm afraid they could not. Every wannabe post-capital economist should try to run a restaurant (profitably).

Can I ask what a "yard bird" is in this context? Does it mean home kept chickens?

I would think so, but M-W doesn’t list a fowl:

  Definition of yardbird
  1 : a soldier assigned to a menial task or restricted to a limited area as a disciplinary measure
  2 : an untrained or inept enlisted man

https://www.merriam-webster.com/dictionary/yardbird

The OED apparently agrees:

  *"Mil.* A recruit, a newly-  enlisted serviceman; also, a serviceman under
  discipline for a misdemeanour; one assigned to menial tasks. Also
  *transf."*First
  ex.: (late) 1941.

The person who made this citation claims that comic strip “Barney Google and Snuffy Smith” made reference earlier.

https://listserv.linguistlist.org/pipermail/ads-l/2014-June/...

https://en.wikipedia.org/wiki/Barney_Google_and_Snuffy_Smith

Yes: https://en.wikipedia.org/wiki/Yardbird (3rd one on the list).

In your restaurant experiment, are we allowed to use robots to make and sell food to the customer? Or will they walk out?

Yes, please! Anyone who hasn't run a business should definitely try to run one with Robots to appreciate that human factor isn't going anywhere.

Doesn’t matter. Make food people want to go in enjoy and pay for, pay the bills (ingredients, rent, insurance, marketing, labor, management, equipment, etc.) and remain profitable. No dipping into moms coffers.

That’ll put an end to “I can make myself a Reuben with store bought stuff for $3!!!, $13 at the deli is goddamned capitalist pig ripoff”

Do you mean will the robots walk out?

It is good to know the failure modes of your AI.

Also the cost to develop, deploy, and maintain your robots.

BTW, most fast food does use robots as far as possible; these are highly automated processes. The robot might not look like you'd expect, but that aint a problem with the robot.

Well I mean people won't order from a 100% automated fast food shop. The customers expect human hands to touch and labour over the food, even if it's financially unviable.

Corner stores also have their own expenses to deal with. They rarely have the same access to suppliers as grocery stores, nor do they have the access to the same prices for their goods. They may be paying the same for labour, but they are typically dealing with much lower volumes. I don't have a clue on how the cost of their leases compares, but it is going to affect the price consumers pay. If it really was as simple as them being opportunist capitalists yaking advantage of people, we would see far more corner stores in this world.

Absolutely. One cannot compare one’s own subsidized hobby with an enterprise that must maintain itself to survive. As my other example of making your own sandwich vs getting one at a deli. One cannot compare the naive costs vs the reality the delikatessen deals with.

> Every wannabe post-capital economist should try to run a restaurant (profitably)

I would guess most people don’t start a restaurant to be financially profitable, instead they start it for ego and status. A failed restaurant is both an example of capitalism, but also some very uncapitalist incentives.

Used to work for a hardware manufacture that did small runs of professional AV products (runs in the thousands, costs in the hundred to thousands of dollars).

The standard in the industry at this scale was and is 8x COG. That was what was required to pencil things out.

At that ratio we were initially 5x cheaper than competing products in an niche that had a de facto duopoly. Which we disrupted.

For a while.

> If this seems shocking, consider that the COGS of software as a service products are much lower by comparison. Doesn’t matter, though, because you have to pay all of those expensive salaries to make it happen.

By definition, in a successful business, a significant amount of that markup goes to profit, not anything that's actually productive like salary.

Some businesses have very little profit margin; their strategy is to make up for it in volume. In fact, some of the most successful businesses (walmart) work this way.

How is profit any less 'productive' than any other expense?

Money that a business spends on salary, or on other products and services, continues to circulate in the economy; either the employees then spend a large portion of it on housing, food, etc, or the service providers use it to pay their employees, pay for their own services, etc.

Some profit is later spent on other things, but most of it goes is comparatively unproductive in the broader economy.

This is one reason that worker co-ops and employee profit sharing are so good for the economy; when profit is shared among workers, that profit is more likely to go back into the economy and circulate among other businesses and workers.

Removing any other expense will be detrimental to the business, that is, make it work less well. Nothing will happen to the business if the owners don't get any dividends.

>Removing any other expense will be detrimental to the business, that is, make it work less well. Nothing will happen to the business if the owners don't get any dividends.

I'd say two things.

1. A listed business wouldn't exist in the first place (or in its present form) if owners hadn't been enticed to put up capital in the hope of getting dividends.

2. The purpose of a listed business is to pay the owners, not to produce goods or services - producing goods or services is just a means through which to pay the owners.

Amazon has never paid any dividends.

Further, you are just plain wrong about both of your points. At least as general statements.

1. Of course there are some businesses that are created to be able to pay the owners of the capital dividends (or more common, to be able to sell the business later to someone who hopes to be able to collect dividends). But a lot of businesses are created to for people to just being able to do their job. Say a gardener who wants to work with tending gardens. Their main purpose of the business is not to collect dividends, and they may never do.

2. That a business sole purpose only is to pay the owners is a quite recent (popularised in the eighties) neoliberal idea and far from any universal truth. The purposes of any single business can be whatever the business owner wants, which range from the obvious, become rich, to serving the community with some particular goods or service, providing employment and security to the local workforce or creating opportunity for people work with some craft they love.

The stakeholders in a business are far from only the people that invested capital in it. They also include the local community, the employees and the family, and of course the customers.

Most of the people criticising my points are glossing over the key word of my post, which is listed. Not every business is listed, and those can be run for all sorts of reasons, but a listed business is a stock first and a business second. The stock is meant to enhance the owners' wealth (whether by going up, paying dividends, or both), and the business is just the means to that end. At least in theory, when that happens in a well regulated society, it turns out that the best way to make the owners richer is to give people what they want, and to allocate capital in the most efficient and productive way. Obviously reality may differ.

Amazon has bought back stocks, which is economically equivalent to paying dividends.

Not in all regards. The owners don't get any cash without selling stock.

To spell it out, ignoring transaction costs and taxes the following two are economically equivalent:

- You own some stock. The company pays dividends. You reinvest the dividends into buying more stock.

- You own some stock. The company buys back stock.

A different equivalence:

- You own some stock. The company pays dividends.

- You own some stock. The company buys back stock. You sell stock until your percentage share in the company is the same as before.

The ultimate goal and purpose of any economic system is to serve whole society - those people own anything because we as a society recognize that we are not able at present moment to build better system without their rent seeking behaviour. But this does not mean that they have some god given right to unlimited dividends from work of others. It all seems backwards (as in tail wagging the dog).

And don't get me wrong - I know that their behaviour is just part of human nature, that our culture tries somehow to tame and this behaviour is no different from monarchs and aristocrats of old days, but it does not mean that this is the ultimate system and there is no metaphorical guillotine waiting for them all somewhere in the future.

> The ultimate goal and purpose of any economic system is to serve whole society [...]

Sure. But that's not in contradiction to individual parts of the system having individual (and different) purposes.

Btw, not all companies have to make a profit. That's just a pretty common goal. (And if you want your business to stay afloat in the long run, you have to at least break even.)

> But this does not mean that they have some god given right to unlimited dividends from work of others.

Duh, obviously you only get dividends from businesses you own.

>> Sure. But that's not in contradiction to individual parts of the system having individual (and different) purposes.

But those purposes are only allowed because they serve greater purpose. On their own they are meaningless.

>>Btw, not all companies have to make a profit. That's just a pretty common goal. (And if you want your business to stay afloat in the long run, you have to at least break even.)

Maybe if You mean non profits like charitable fundations that holds water, but those are mostly not real businesses. I do not think is feasible to break event for normal companies. Its like with birthrate - if You naive You could believe that with birthrate equal to 2 (one children for each parent) to preserve status quo. But in real life minimal rate is around 2.1 to prevent population collapse. The same is with profits - You need some to account for future risks.

>> Duh, obviously you only get dividends from businesses you own.

It's only obvious if You ignore platform effects (amazon anyone?) and monopolies, but that's besides the point. The point is that owners collectively as a class are able to extract too much from the system. And by owners I do not mean the hatted guy from monopoly, or rather not only him, but also german pensioner with ever increasing life expectancy crashing his hundred thousand euro camper around Europe. Even here in Poland I personally know people that are retired for decades and their work life was mostly sitting around doing nothing (my own grandma was retired for almost 50 year and before that was a housewife and got pension from my grandpa work). Meanwhile most of younger generation will probably never be able to afford to buy own house (unless someone old dies and leaves them inheritance).

> But those purposes are only allowed because they serve greater purpose. On their own they are meaningless.

This gets it backwards. In most places, we haven't arranged society as "everything is banned except for this list of allowed activities," more as "everything is allowed except for this list of banned activities."

We're not necessarily good at divining utility of actions when deciding what should be banned, either.

That any individual activity serves some greater good is a happy accident, there's no natural law that individuals will take actions that are net positive when you zoom out.

I was trying to build value framework, not legal one - it does not matters what is allowed or banned if we cannot assess its value in context of sth (I used society in this case).

The free for all strategy (libertarianizm?) may be a great diacovery strategy but it does very little for building and preservin things that works (that were discovered by it). I sincerlly believe that real freedom ends with strongest psyhopaths stomping down on week that are on their way to fullfill their desires.

So even if its all happy accident on the lowest level there is a meta game of rules far above it that prevents our world from collapsing (at least for now)

> 2. The purpose of a listed business is to pay the owners, not to produce goods or services - producing goods or services is just a means through which to pay the owners.

This is true only in the simplest of world views. Let's take this idea to the real world. Let's say all food producer would say today to stop and instead start producing toilet wipes(or insert anything here) or whatever because the can make more money that way. Now suddenly we won't have any food producers tomorrow and billions will starve. Clearly food productions companies only purpose wasn't to make money for owners, it was also shockingly to keep people from starving.

Food prices would go up, as producers leave that market.

over time yes. But that assumes not every producer leaves the market in a short time frame. The bounce back effect would be devastating. In fact food production is already a pretty non-profitable endeavor and yet the companies don't stop doing it.

> Removing any other expense will be detrimental to the business, [...]

If you put it like that: just don't pay any interest on your debt.

The only thing that will happen is that the old owners will be wiped out in bankruptcy, and the older creditors will be the new owners.

Since you don't care about the owners, and only about the 'business', this is means 'nothing will happen'.

This is a strawman in the sense that such a change of ownership can be highly disruptive to the business

A company that makes zero profit for a while would likely see a change of ownership, too.

Profit is the cost of capital.

Good luck trying to make anything without the capital to buy the materials and hire the people to make it.

Yes it will. Not wanting to scale up or bail out and invest their capital in something more profitable. Like SF or London real estate.

> Nothing will happen to the business if the owners don't get any dividends.

This was the theory of communism.

Empirically, we can see that things will happen to the business if the owners don't get any dividends.

Amazon has never paid any dividends.

I don't think anything more needs to be said.

What is that supposed to prove?

Btw, Amazon has done stock buybacks. Which are economically equivalent to dividends, but get different tax treatment.

That the two things that the comment I answered too claimed are wrong:

1. Not paying dividends is communistic. Few people would accuse Jeff Bezos of being a communist.

2. Bad things will happen if no dividends are paid. No, nothing bad has happened to Amazon because they didn't pay dividends. Another example is Apple that didn't pay any dividends between 1995 and 2012.

I'm afraid you are arguing against a strawman.

Obviously, the commenter meant any returns to shareholders, whether that be dividends or stock buybacks or anything else.

Second, the commenter was obviously also talking about the economy in general. Individual companies being run in peculiar ways won't bring down the economy.

As an analogy: some companies give away some products for free. But it wouldn't be a good idea for companies in general to give everything away for free.

Of course, you can still disagree with the points that the commenter made about no returns to shareholders leading to communism (and whether that's bad or not). But please show some charity in interpretation, if you want to have a productive discussion.

You are the one that taking liberties with interpretation. The exact quote thaumasiotes argued against was "Nothing will happen to the business if the owners don't get any dividends." My italics. So, they was clearly not talking about the economy in general.

And if you go back in the thread, it was not a general argument about society. If thaumasiotes wanted to do it about that, that would be the straw man, because no one argued for prohibiting companies for paying dividends, and no one argued that society would be fine if no company ever were allowed to pay dividends.

Finally, if I show some lack of patience with thaumasiotes, it is because they are shouting "Communism!" instead of actually presenting any coherent argument. And that in discussions about economy is the reminiscence of Godwin's law.

They said none of this is a secret in the 3rd paragraph of the article.

There's nothing wrong with it, per se, but surely if you're at all a proponent of a market economy for the typical reasons, you would like to see prices as close as possible to marginal cost.

This is as close as possible because all the stuff that's not included in COGS also has marginal cost.

Yeah... the COGS here is really not dissimilar to what it is across all consumer products, for the nerds out there who like to find out about these things. That's a pretty good indicator that this is the equilibrium.

Profit isn’t controversial either way

It doesnt need to be rationalized

To consumers, anyway

SaaS is a different subscription model, not a one-off product sale.

Odd comparison, unless I missed something.

From my own reading and experience, paying salaries still has less overhead.

By contrast products on Amazon have COGS closer to 10%

> There’s nothing wrong with this. These are standard ratios, not some dirty secret.

There's a lot wrong with this, but not in a moral sense.

For all his faults, Elon Musk made a good point about the space industry near the beginning of SpaceX. He asked a team of "rocket scientists" how much a rocket cost. They said something like $100M. Then he asked them to sum up the material costs. Sheetmetal, tubing, rivets, etc... They said something like $500K.

Where did the other $99.5M get spent on, you ask? Inefficiencies such as having PhDs doing welding and riveting instead of hiring contractors with more experience. Even if you say you need aerospace-grade rivets, Boeing and co hire thousands of people with those skills at a much lower cost.

Similarly, if you look at retail prices, the majority disappears into having staff stand around the store while there are no customers, lighting, cooling, retail shopfront rents, etc, etc...

You're not paying for an "HiFi amplifier model X", you're paying for a "storefront in a shopping centre with a HiFi amplifier model X thrown in almost for free."

This issue is most obvious when in some industries, returned items are simply discarded, because they're not even remotely the majority of the total cost! Repackaging and restocking the item would cost more than manufacturing it half way around the world and shipping it across an ocean. That's nuts.

Even EBay and Amazon have only just started chipping away at this problem. There is still enormous inertia.

For example, I recently purchased a flagship TV that costs $5,995 retail. Nobody had it for more than a $500 discount, including online stores that are just warehouses! The actual TV probably cost about $800 to $1000 to manufacture and ship internationally.[1] Where did the other $3500-$4000 go!?

What's happened here is that traditional retail has forced the prices up, and then Amazon -- a near monopoly -- doesn't feel the need to compete on price because they win sales even if they're just a little bit cheaper.

True competition would be if I could buy the TV for manufacturing cost +30%, not manufacturing cost x3.

This won't happen while traditional retail is propping up prices and has no real competition. We need a "SpaceX" to shake things up. Unfortunately, Amazon wasn't it.

[1] This isn't the cost of running the machines in a factory. It's everything up to the point of getting the goods into a cardboard box and on a ship. Design, profit, staff costs, material costs, energy costs, capital, etc...

That other 3500 - 4000 is definitely not majority profit. If they could make better profit on your purchase they would, they really don't want to leave money on the table. MFG, shipping, handling, warranty, returns, accidents, fraud, R&D, operations staff, etc. It's not getting done by volunteers.

> ... how much a rocket cost....

The "rocket" example is as silly as the "Moore's Law applied to vehicles" arguments that used to crop up on Slashdot decades ago.

"If cars improved according to Moore's law, they'd get XXXX miles per gallon and go YYYY miles per hour". Yes, and they'd also be smaller than matchboxes while seating thousands of people.

Exceptional situations are exceptional. Good on Elon Musk for realising that there was a large latent demand for launch-to-orbit services. Well done, that chap. But you can't generalize from that to everything else. Or anything else, really.[1]

With respect to the rest of your argument, I understood that Amazon makes most of its profit from AWS, while stories about its ruthless exploitation of its warehouse staff are legion. Those factoids don't square with your argument that Amazon is making excess profits.

1. Take luxury yachts for example, which are about as expensive as rockets. The bill of materials would be a slightly larger fraction of the final cost than for rockets, but the same reasoning would seem to apply. Why has no-one "Musked" luxury yachts?

> With respect to the rest of your argument, I understood that Amazon makes most of its profit from AWS, while stories about its ruthless exploitation of its warehouse staff are legion.

Sure, but from what I understand, businesses generally list goods on Amazon for close to MSRP, possibly for contractual reasons. Some of that certainly pays for Amzazon fees, but where does the rest of the difference from wholesale price go?

> Why has no-one "Musked" luxury yachts?

Well, for one thing, a luxury yacht is a status symbol. If it became less expensive, more people would be able to afford them, and the wealthy would feel less special about being able to own one. Certainly not the only reason, but I'm sure it's a contributing factor.

part of the reason is that the point of a luxury yacht is to be expensive.

The real insight I'm gettimg here is just to curb our consumption to a great extent. The fact that shipping new products is cheaper than reinventoring used ones is an indication that we are on a death spiral. Having the move fast and break things crowd come up with a solution to consumer electronic prices is just going to accelerate pollution that much more. And I am aware of the sweet irony of typing all this on a phone whose low price depends on complex supply chains.

What Elon saw, was that the rocket companies was multiplying BOM with 200, when it could have been a smaller number.

There is nothing wrong to multiply BOM with 10. It’s almost as low as you can get it when operating a business.

But when you find a market which is marking up with 200, you have found yourself an opportunity for a competing business.

It’s not so simple. Many manufacturers set a minimum advertised price which would require legislation to change.

Additionally advertising a certain price and actually selling at a different price is a surefire way to get delisted from google for example. This is why the whole promotion codes/voucher concept is popular.

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