In NYC, a kilgoram of cocaine goes for about $23,000, or $20,000 if you get a good price. This is about twice what it costs 25 years ago. As you can see, inflation hits the drug trade as well. Only serious drug dealers buy kilogram, for that's the amount you need to buy to gain real margins and economies of scale when moving product retail. This can add up to decent money! A gram of cocaine, which is what the retail user who regularly consumes buys, is about $60 in NYC (remember, prices vary by location and availability, just like any other commodity). Sixty dollars times 1,000 units (a kilo is 1,000 grams) is $60,000, or a 200% markup - or 66% profit margin. The ability to mark your product up 200% is common to very, very few industries. This is one of the major reasons why people sell drugs, the profits are.... damn near illegal.
Whether you are into drugs are not, let's face it... Drug dealers are in a high margin business which very, very few can match. The evidence supporting this premise is prevalant.
Of course, there are higher margin businesses and not all of them are as fraught with the frictions and risks of the cocaine trade. Here's some metrics from one of them...
| Cost to produce | $193 |
| Retail price on the street | $649 |
| Product markup | 336% |
| Gross margins | 70.2% |
So, what is this product?
Of course, those who follow me know that Apple's outsized margins will not last, and as a matter of fact have been trending down for well over a year - reference Right On Time, My Prediction Of Apple Margin Compression...
So, why is it that a $496 billion business such as Apple succumbs to margin compression over a relavitely short period of time, but cocaine dealers don't (cocaine prices nearly doubled over the last 25 years while portable tech fell by as much as half)? Well, the answer is that natural market forces have full access to Apple's business model. The cocaine industry is protected, in part, by government intervention. By outlawing cocaine, there's a guaranteed demand and a guaranteed limitation of supply. So, which business is more profitable? Why, it's health care silly?
I know you're saying... Healthcare???!!! WTF?!
You're damn skippy. Take a look at these margins. This is a Glidescope. It's used to view down a patient's trachea. It consists of a wired camera enlcosed in a curved plalstic probe and a low resolution screen. It doesn't have any other sensors that I can discern, no discreet processor, random access memory, CPU, memory or anything else that I can find that materially adds to the production price, save an onboard tutorial. What it does seem to feature is a well throught out design to the physical probe, which apparently has an anti-fogging feature and is low temperature to prevent burning of the surrounding tissue (very few modern mini and micro cameras/LEDs produce that level of heat nowadays anyway).
Now let's attempt to back into the cost of production. The screen would likely be one of the most expensive components. A cursory (as in not exhaustive) search yields a 7 inch screen available for between $1-$10! One could assuming we had to have it custom manufactured to include the hard buttons at the bottom, which would mean a minimum of about a 5,000 lot order, so let's add an extremely conservative 50% premium which puts us at about $10 to $15.
The camera would be the next expensive item to source. Although this is not the appropriate form factor for this application, the resolution should be about right. I'm confident that I could source the appropriate price for the same price as an iPhone 4 front camera, which is about $6 - or less. Including a low heat LED light, would add about $.11 - $2 on top of the price, as well as anti-fogging mechanism (another $2 or so) so let's put the whole price at the $9 peg. FYI, an 8 mp camera [4x the resolution] can be had for $19. The wire connecting the camera within plastic probe would have a negligible production cost, of let's say.... $1.
There's a rechargeable battery and a plastic housing. These costs are quite variable, so let's go in the middle of the road and choose a 2000 mah battery ($8 or so, about two to three hours of use - Glidescope currently only good for 90 minutes per charge) and injected molded housing ($10).
The only components left would be the tripod stand and the probe. The probe would cost about $2, and stand would cost about $17.20 (yes, it is expensive).
Adding this up at the midpoints, we get:
| Camera & assembly | $9 |
| Screen | $12 |
| Connecting wire | $1 |
| Probe | $2 (x24, # of probes in a package) |
| Battery | $8 |
| Housing | $10 |
| Stand | $17.20 |
| Total Part | $105.20 |
| Assembly/packaging | $8 |
| Total | $113.20 |
So, in a nutshell, I could put this device together for under $120. I'm fairly confident in these numbers, but let's assume that I'm off - significantly off - in my cost estimates. To err on the side of caution, let's put a 100% premium in EVERYTHING! That's right, assume everything was twice as expensive as I thought it was. That still puts the cost to manufacture at under $226.40. Using this new, inflated number, what do you think the markup on this device is? The key to cloning this product is to avoid patent infringement on the blade (probe), which has a specific curve. A curve that can be replicated sans a few degrees or better yet have user adjustable angles. This should avoid the patent and leave room for increased performance.
I will give you time to ponder this, considering how much drug dealers can get away with marking up their product, and how much Apple succeeded in marking up theirs, even through auntie economics is bringing the fruit company back in line with reality...
The Glidescope is available from Verathon for only a 4,361% markup. Yeah, you heard that right! The product retails for $9,825 and it has plenty of buyers. It's actually considered cutting edge tech. The profit margin on this product is literally 98%. That's almost PURE cash! I verily query thee, why in the world would anyone sell drugs when they can sell medical equipment to hospitals? This insane, damn near criminal level of profit puts Tony Montana to shame!
So, how is such a level of profit achievable in a capitalistic society where the forces of free market economics come into play? Who the hell knows? Free market economics likely do not have a heavy hand in this company's profit margins. Near guaranteed (if not indirect) revenues from insurance companies... A moral hazard economy from end users that do not bother to shop for price since they are totally insulated from pricing due to insurance company payments... A government that uses the health care industry as a job creation maintenance engine that ulitimately erodes economic activity instead of increasing it by making job redundancy and inefficiency more of a goal than an impediment.
I can go on for quite some time. Even more interesting is the fact that I believe I can break this cycle of inefficiencies. I'm actively experimenting with Glass as an interface to existing equipment that will both significantly extend the usefulness of said equipment while simultaneously cut the costs of siad equipment by negating the need to purchase/upgrade said equipment.
The possibilities are near endless. You should have seen my face as I walked through one of the biggest hospitals in NYC and was made abreast of the cost of some of the equipment widely used, ex. the Glidescope.
Stay tuned for a list of companies soon to be disintermediaried, as well as what I will be doing with Glass, specifically. Any healthcare professionals who feel they have value to add are welcome to reach out to me, reggie at boombustblog dot com.
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