Cost curves tell you whether (and how fast) a product is getting cheaper to make. ‘Pushing down the cost curve’ means that something’s becoming much more affordable thanks to innovation and market forces.
Cookie Cost Curve
Say you want to get good at baking chocolate chip cookies, because you have a big party coming up, and need to be able to make lots of them quickly.
You must push down the ‘cookie cost curve,’ where your ‘cost’ is your time (let’s assume the ingredients are really cheap).
The cost curve is a diagram that shows how many cookies you can make per hour (time per cookie). The horizontal axis shows the number of cookies you’re making and the vertical axis shows time per cookie. Each cookie batch is a new point on the curve, and as you get faster the curve should drop down to the right.
Your first batch is a disaster. You mix the batter and shape a dozen cookies by hand, then leave them in the oven too long. Half burn. You’ve just spent an hour making six cookies! (ten minutes per cookie)
Over the next week you make lots more batches, each time making process improvements. You try using an electric mixer and cookie cutters. You set up bigger batches for the oven. You get more disciplined about using timers.
Congratulations – you’ve pushed down the cookie cost curve. By the time of your party, you can make twelve dozen per hour… 24 times faster (‘cheaper’) than your first batch!
In business, cost reductions happen because of massive investments of money and talent to develop innovations.
Renewable energy, for example, has gone from being more expensive than fossil fuels, to being far cheaper – which means the world can now economically build wind and solar instead of coal and gas power plants. But it took many decades, billions of dollars, and lots of persistence around the world to make this happen.
If something’s important enough to enough people, businesses usually figure out a way to make it cheaper and cheaper. Like renewable energy… and cookies.