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What Is the Cost-Performance Ratio?
The cost-performance ratio is an equation used to balance the cost of an item against its effectiveness. This process can help buyers with making purchasing decisions by assigning rankings to a series of items based on a variety of factors. Cost-performance can also be used to analyze trends in production. It is also known as price/performance ratio.
There are essentially four major outcomes possible when determining cost-performance ratio. The most desirable outcome is that the item is low cost, but high performance. In the middle of the scale are products that are either high performance and high cost, or low performance and low cost. The least desirable ranking tends to be for a product that is high cost, but low performance.
These cost-performance ratio outcomes can be charted for increased clarity as to where each product falls in relation to the others. A chart with four quadrants, with the high performance products in the top two sections, the low performance products in the lower sections and the low and high costs on the left and right sides respectively tends to be the most effective. By charting each item it is possible to both find the most desirable product and to analyze trends in quality and price.
While the cost-performance ratio can be a useful tool for finding the best quality for the price, items with high ratios are not necessarily the best to purchase. Particularly with more complex products, there can be elements outside of basic performance or price that may be more important. For this reason, cost-performance can be helpful in reaching a decision, but may not be the only factor considered.
The cost-performance ratio can be used to analyze changes in production as well. It can track variances in cost and quality for specific products, industries or even the whole economy. Some products go through dramatic changes as they develop and are assimilated by the public, while others remain essentially static.
Some products, such as computers, tend to have a highly fluctuating cost-performance ratio. For example, the first computers were extremely expensive, but had limited processing power. As technology has advanced, computers have become more powerful and increasingly more accessible to consumers. Even home computers that were once a significant investment can now be purchased for a fraction of their original cost. Products which are made of limited resources, such as paper and fossil fuels, tend to have static performance and a steady increase in price.
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Discussion Comments
@NathanG - One of the most depressing experiences for any consumer has got to be getting stuck with a product that is high cost, low performance.
You kick yourself a thousand times after doing something like that. One of the best ways that I’ve found in guarding against that trap is in subscribing to a consumer product review magazine or at least reading as many reviews as possible online.
There’s usually enough information out there nowadays that you can confidently make a good cost-performance decision, at least most of the time.
@Charred - My dad bought one of the first personal computers that came out. It was an IBM machine, did practically nothing at the time, and cost $6,000.
Yet it was state of the art. Was it worth $6,000? Well, I suppose for its day it was, because there was nothing like it, and computers weren’t mass produced yet.
Once they were, and technology improved, costs started tumbling. I think computers and personal electronics is really one of the few areas where you’ll find good performance for low to middle of the line costs.
It’s always been true that you get what you pay for. Rarely have I found an exception to this rule. Even in the case of personal computers, where they have come down in price and yet still deliver good value, I have found this to be true.
Some of the $300 desktop machines that are sold mainly for Internet surfing and basic office productivity applications have proven to be very unreliable. I’ve heard stories of those computers breaking down within six months.
That doesn’t mean you need to buy a $1,000 computer, but you should at least expect to pay $500 for a decent system.
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