Price/performance ratio

In economics and engineering, the price/performance ratio refers to a product's ability to deliver performance, of any sort, for its price. Generally speaking, products with a higher price/performance ratio are more desirable, excluding other factors.

Price/performance is often written as "price-performance" or "cost-performance". Even though this term would seem to be a straightforward ratio, when price performance is improved, better, or increased, it actually refers to the performance divided by the price, in other words exactly the opposite ratio to rank a product as having an increased Price/performance. To avoid such confusion, the word ratio is often dropped or the dash used instead. Technical and news publications are often sloppy in their coverage of changes in these matters.

Contents

Examples

Consumer and medical products

According to futurist Raymond Kurzweil, products start out as highly ineffective and highly expensive.[1] Gradually, products become more effective and cheaper until they are highly effective and almost free to purchase.[1] Some of the products that have followed this example include AIDS medications (which are currently unaffordable to the majority of AIDS sufferers), text-to-speech programs, and digital cameras.[1] However, products that rely primarily on paper (i.e., newspapers and toilet paper) and/or fossil fuels (i.e., electricity in most countries and petroleum gasoline for automobiles) have only increased in price. This directly contradicts the trend of electronic gadgets like netbooks, desktop computers, and laptop computers decreasing in price. In theory, this means that the rich people have access to highly inefficient technologies, medical treatments, and therapies (that are prototypical in nature) while the poor get access to these same products when they become more efficient and easier to manufacture several years down the road.[1]

Business world

During the latter 1990s, the cost-performance ratios of the larger mainframe systems fell tremendously in comparison to a number of smaller microcomputers handling the same load. As a result, many of the older computer companies were shut down and people were put out of work. However, most of them were able to be re-hired at the newer corporations after undergoing a series of re-training involving the newer technologies.

In the business world, there is usually a value associated with a typical cost-performance ratio analysis. This value can either be positive, neutral, or negative depending on the amount of money spent versus the results achieved by the spending of the available capital. A cost-performance ratio with a positive value (i.e. greater than 1) indicates that costs are running under budget.[2] A negative value (i.e. less than 1) indicates that costs are running over budget.[2] However, a neutral cost-performance ratio (between 1.0 and 1.9) could suggest a certain degree of stagnation in the budget. Business trips can also be factored into the cost-performance ratio because spending $50 to do a journey spanning 100 miles (160 km) in two hours is a better cost-performance ratio than spending $105 to do the journey in one hour.

Computer technology

The term tends to be used quite a bit when comparing computer hardware. During the latter 1990s, the price/performance ratios of midrange and large mainframe systems fell tremendously in comparison to a number of smaller microcomputers handling the same load. Many companies were forced out of the industry as this happened, including DEC, Data General and many multiprocessor vendors such as Sequent Computer Systems and Pyramid Technology.

References

  1. ^ a b c d Kurzweil, Raymond (2005). The Singularity is Near. Penguin Books. ISBN 0-14-303788-9. 
  2. ^ a b Performance Indicator "Cost-performance ratio indicator". Max Wideman. http://www.maxwideman.com/pmglossary/PMG_C11.htm#Cost Performance Indicator. Retrieved 2010-08-26. 

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • price-dividend ratio — UK US noun [C] (ABBREVIATION PDR, P/D ratio) ► ACCOUNTING, FINANCE, STOCK MARKET the relationship between the present price of a share and the dividend in the previous year, used to compare the performance of companies: »All of these stocks have… …   Financial and business terms

  • Price/sales ratio — Price to sales ratio, P/S ratio, or PSR, is a valuation metric for stocks. It is calculated by dividing the company s market cap by the company s revenue in the most recent fiscal year (or the most recent four fiscal quarters); or, equivalently,… …   Wikipedia

  • Ratio — This article is about the mathematical concept. For the Swedish institute, see Ratio Institute. For the academic journal, see Ratio (journal). For the philosophical concept, see Reason. For the legal concept, see Ratio decidendi. The ratio of… …   Wikipedia

  • ratio — the proportional relationship of one thing to another * * * ratio ra‧ti‧o [ˈreɪʆiəʊ ǁ ˈreɪʆoʊ] noun [countable] a relationship between two amounts that is represented by a pair of numbers showing how much greater one amount is than the other: •… …   Financial and business terms

  • Ratio Analysis — A tool used by individuals to conduct a quantitative analysis of information in a company s financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the… …   Investment dictionary

  • Performance improvement — is the concept of measuring the output of a particular process or procedure, then modifying the process or procedure in order to increase the output, increase efficiency, or increase the effectiveness of the process or procedure. The concept of… …   Wikipedia

  • Price-To-Sales Ratio - Price/Sales — A ratio for valuing a stock relative to its own past performance, other companies or the market itself. Price to sales is calculated by dividing a stock s current price by its revenue per share for the trailing 12 months: The ratio can also be… …   Investment dictionary

  • Price of anarchy — The price of anarchy is a concept from game theory that describes the difference in maximum social utility and the utility of an equilibrium point of the game.DefinitionGiven a game G=(N,A,u), it is natural to consider the social welfare , i.e.… …   Wikipedia

  • Performance-based advertising — With performance based advertising, the advertiser pays only for measurable results. With other forms of advertising they pay regardless of results. Performance based advertising is becoming more common with the spread of electronic media,… …   Wikipedia

  • Price-To-Innovation-Adjusted Earnings — A variation of the price to earnings ratio (P/E ratio) that takes a company s level of spending on research and development (R D) into account. It is calculated by adding any expenditure on R D back to earnings and then calculating the P/E ratio… …   Investment dictionary


Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”

We are using cookies for the best presentation of our site. Continuing to use this site, you agree with this.