# Static vs. Dynamic # Costs

The Market Simulation tools have three types of Product Costs:

1. Static Costs
2. Cost To Make (CTM)
3. Cost To Serve (CTS)

Static Costs are per-unit Product Costs that remain unchanged regardless of how much Quantity is sold. Static Costs are defined in the ‘Cost’ column within the ‘Input Product Array’ table upstream of many Market Simulation nodes, including the Simulate Market node and the Profit Engine node. Their total contribution to Cost of Good Sold (COGS) = Static Cost x Quantity Sold.

Cost To Serve (CTS) is a type of Dynamic Cost. The Cost To Serve is the additional Cost that must be incurred when a Product is sold to a particular Customer. This cost is dynamic as some Customers are cheaper to serve than others, and is only incurred if the Customer actually Purchases the Product. CTS is tracked within the WTP Matrix.

Cost To Make (CTM) is another type of Dynamic Cost. It depends not upon the individual Customer but upon the number of Customers who Purchase the Product. This Cost To Make can be used to simulate the Law of Diminishing Returns. CTM is also tracked within the WTP Matrix. Starting from the first row in the column, each Cost To Make row represents the incremental Cost of manufacturing each additional Product. If the Product is sold ten-times (Quantity = 10), then the total Dynamic Cost is the sum of the first 10 CTM rows.

Note that all three of these Product Costs are Variable Costs in the economic sense (as opposed to economic Fixed Costs). All three are used when calculating the economic Profitability of Products.

This Market Simulation provides a high-level overview of the workflow without detailed explanation. It assumes you are already somewhat familiar with KNIME and the Market Simulation nodes. If not, start by reviewing the Building Blocks and Community Nodes.

# Competitive Story

Cogswell Cogs and Jetson Gears manufacture and sell Products at a constant Static Cost to them of \$50 per unit regardless of how many Products they sell and to whom.

Spacely Sprockets, on the other hand, experiences both Static Costs and Dynamic Costs. Each unit they manufacture has a Static Cost of \$10 plus a diminishing Cost To Make (CTM). This diminishing CTM starts at \$20 per unit and would reach \$0 per unit if they sold to 100% of Customers. In addition, they experience a dynamic Cost To Serve (CTS) having a Mean = \$20 but varying randomly by Customer.

# Market Setup There are three Competitors in the Market:

1. Spacely Sprockets,
2. Cogswell Cogs, and
3. Jetson Gears.

Customers have a similar Willingness To Pay (WTP) for the Products sold by each of the Competitors. But Cogswell Cogs and Jetson Gears has high per-unit Static Costs, while the Static Cost for Spacely Sprockets is considerably lower. However, Spacely Sprockets additionally has two types of Dynamic Costs:

• Cost To Make (CTM), and
• Cost To Serve (CTS).

The total Cost of Goods Sold (COGS) for Spacely Sprockets depends upon the Static Cost per Product sold, the CTM manufacturing cost which depends upon the Quantity sold, and the CTS service cost for the individual Customers who buy the Product.

## Define Dynamic Costs

The CTM decreases exponentially, while the CTS varies randomly.

## WTP Matrix

Both CTM and CTS are tracked within the WTP Matrix.

## Plot Dynamic Costs

Decreasing CTM = red.
Random CTS = blue.

# Static Cost Spacely Sprockets total Cost of Goods Sold (COGS) is the sum of:

• Static Costs, plus
• Cost To Make (CTM), plus
• Cost To Serve (CTS).

The three parallel branches downstream of the Simulate Market node check the automatically calcuated COGS. This first branch calculates the sum of the Static Cost:

Total Static Cost = per-unit Static Cost x Quantity of Products sold

## Static Cost

Total = per-unit Static Cost
x Quantity Sold

## Total COGS

For Cogswell Cogs and Jetson Gears, COGS = Total Static Cost

# Cost To Make (CTM) Spacely Sprockets total Cost To Make (CTM) is calculated by extracting the first N-rows from the CTM column in the WTP Matrix, where N = Number of Spacely Sprocket Products sold. The marginal CTM found in each row is then summed together in a group.

## Quantity Sold

Extract the Quantity Sold and convert it into a Flow Variable.

## CTM Column

Filter the Top-N rows in the CTM column using the Flow Variable.

## Final Comparison

Take the filtered marginal CTM rows and sum them in a group.

# Cost To Serve (CTS) Spacely Sprockets total Cost To Serve (CTS) is calculated from the Customers who actually buy the Spacely Sprockets Product. Filter the Spacely Sprocket Customers from the WTP Matrix then sum the results as a group.

## Filter Customers

Filter the CTS column in the WTP Matrix by the Purchase column.

## CTS Column

Sum the CTS values for each individual Customer.

## Final Comparison

Verify the manually calculated COGS equals the automatic COGS.