The experience curve: How companies can reduce their costs through repetition

In today's environment, it is more crucial than ever to not only be innovative, but also to operate efficiently. One of the most important strategies for optimizing cost structures is to leverage the experience curve. But what exactly is the experience curve, and how can companies use it to strengthen their competitive position?

What is the experience curve?

Cost reduction potential 20-30%

The experience curve is a strategic tool for proactively managing costs, production volumes, and market positioning. Through systematic integration into the product life cycle, it not only enables cost reductions but also other competitive advantages.

This tool is based on the phenomenon that the value-added costs per unit of a product or service decrease as the cumulative production volume increases. Each time the cumulative production volume doubles in the product life cycle, there is an opportunity to reduce the value-added costs per unit by between 20% and 30%.

This effect is not just a theoretical concept, but a practical phenomenon that can be observed in many industries. The more a company manufactures a product or provides a service, the better it becomes at optimizing processes, avoiding errors, and using resources more efficiently. The experience curve shows that repetition is not only boring, but also cost-effective.

However, this is not an automatic effect; rather, the experience curve must be actively generated.

How does the experience curve work?

Experience curve

Imagine you manufacture screwdrivers. In the first year, you produce 1,000 screwdrivers with a value-added cost of $10 per unit. In the second year, you produce 2,000 screwdrivers. Due to economies of scale and the experience you have gained during production, the value-added costs per unit fall by, say, 25% to €7.50. In the third year, you produce 4,000 screwdrivers and the value-added costs fall again by 25% to €5.63 per unit. In the fourth year, you produce 8,000 units, and the value-added costs fall again by 25%, and so on. This effect is known as the experience curve effect and is a decisive factor in a company's competitiveness.

Why is the experience curve so important?

The experience curve effect makes it possible to either lower prices in order to gain more customers and thus market share, or to achieve higher margins. The following benefits are noteworthy:

1. Competitive advantage

Companies that use the experience curve can offer lower prices or achieve higher margins. This is a decisive advantage, especially in industries with high cost structures. But even when launching new products, the effect can be anticipated, allowing companies to act with competitive pricing, thereby overcoming market entry barriers and deterring imitators.

2. Strategic planning

The experience curve helps companies plan their production strategies. Companies planning to increase their production volume can predict cost reductions and make strategic decisions about when to enter new markets or launch new products.

 How can companies use the experience curve?

The key areas of benefit are:

1. Analysis of the amount of untapped cost reduction potential

Calculate how the target value-added costs of a product or service develop according to the experience curve and compare these values with the actual costs. The difference between these two figures shows you the unrealized cost reduction potential.

2. Process standardization & resource allocation

• Standardize production processes (e.g., automation of assembly lines) to accelerate the learning curve and achieve cost reductions more quickly.

• Increase production volume in a targeted manner by focusing on and scaling core products rather than through marketing campaigns. However, demand must still show corresponding growth rates so that sufficient market share can be captured. Also, no high fixed costs should be incurred.

• Prioritize key measures with high cost reduction potential (e.g., process optimization instead of marketing campaigns).

3. Strategic cost forecasting, pricing strategy, and portfolio optimization

• Use the experience curve to predict declining value-added costs per unit.

• Develop prices that incorporate expected cost reductions (e.g., lower prices in the growth phase to accelerate demand).

• Focus on a few core products where the experience curve effect has already been realized (cash cows) and eliminate products with low cost reduction potential.

4. Pricing strategy for market entry

• Use the experience curve effect to plan, control, and optimize the strategic market launch of new products.

• By integrating knowledge about the experience curve right at the start of the product life cycle, companies can pursue a strategic-tactical pricing strategy that allows them to quickly gain market share and prevent competitors from entering the market.

• This strategy assumes that the expected market demand will actually materialize and that the break-even point will be reached as planned.

5. Cross-market exploitation & continuous monitoring

• Use the experience curve for new country markets: Transfer proven processes and cost reductions to new markets in order to establish yourself more quickly (e.g., same production technology for global expansion).

5. Cross-Market Exploitation & kontinuierliches Monitoring 

• Use the experience curve for new country markets: Transfer proven processes and cost reductions to new markets in order to establish yourself more quickly (e.g., same production technology for global expansion).

• Monitor actual cost developments against forecasts and adjust strategies in case of deviations – e.g., by adjusting production volumes at an early stage.

Experience curve in the context of other strategies

The experience curve should not be viewed in isolation, as it is closely linked to other strategic concepts, such as:

• Product life cycle: Realizing costs along the experience curve plays an important role in the mature phase of a market, as prices fall due to the competitive situation. The aim here is to strengthen the competitive position through cost advantages rather than weakening it through cost-intensive marketing campaigns.

• BCG matrix: In the market growth/market share portfolio, it is the cash cows that are in the mature phase and have therefore already gone through the doubling effect several times. These should therefore have a comparative cost advantage over competitor products, which have achieved less market share in comparison.

• Product range streamlining: If it makes sense in the overall context, companies that reduce their product diversity could leverage the experience curve effect even more with fewer products.

Conclusion: The experience curve is a decisive factor for success

The experience curve is a fundamental concept that every company should use to optimize its cost structure. By understanding the experience curve and making targeted use of its potential, companies can increase their competitiveness, boost their margins, and achieve long-term success. Remember: the experience curve is not just a theoretical concept—it is a practical tool that can help you reduce your costs and strengthen your position in the market. Use the experience curve to plan your next steps in business.

The experience curve is a long-term concept. It requires patience and strategic planning to reap the full benefits. Start by analyzing your production processes and consider how you can use the experience curve for your core products. I would be happy to assist you with my experience.

Image credits

Image 1: factory-shixugang_pixabay.

Image 2: Eigendarstellung.