ELi5: With the news of the new xbox and ps5 coming out soon, preorders have sold out everywhere. This happens every time a new console is released but with other electronics like new cell phones this doesn’t seem to be a problem. How come?
In: Technology
b/c they release without having ample stock for cover all demand. they don’t build up 100M units and then sell. they build 1M units (as as many are there are a batch size) and then sell, and then make more as fast as they can. so in the beginning when demand is super high, it’s going to take a while for production/inventory to catch up.
cell phones do sell out on day 1 as well. it’s happened many times for iphones/galaxies. maybe less so now, b/c phones are not getting as innovative as much. you’ve heard of people camping out in front of best buy/apple store for a week before a new phone release right?
Supply and demand. By keeping supply low relative to demand, you create a sense of scarcity and can increase demand in your product, so limited production runs can be beneficial initially.
Additionally, it makes sense to get to market earlier with a limited supply, since you can always make more later. Then you can limit your losses from overestimating demand and making too many consoles on your first production run.
They only made X number of consoles. More than X people wanted one, so they all got taken.
There is usually some amount, S, which is taken by people who want to make a quick buck reselling but generally X >> S.
The proportion of population that owns cell phones is pretty high and their behavior is fairly well predicted. There are many competing models of cell phones, the availability of alternatives and replacement rates allow for a better prediction of demand and proportionally smaller initial “bulge” of sales. But certain models and brands have been known to be sold out especially at their initial launches. The nature of the industry though, is that there is typically enough capacity (many models/brands and factories) that supply pretty rapidly catches up. Plus manufacturers know that many buyers won’t necessarily wait for an out of stock phone when alternatives are readily available – so out of stock means lost sales.
Consoles are quite different. New models aren’t released very often and there are few alternatives. Hence, it doesn’t make sense for the manufacturer to build huge factories just to cater for the initial “bulge” in sales. If a PS5 is out of stock, most people can wait a month or two to get one. The manufacturer just delays revenue but saves a lot of money in the process.
Oversimplification but:
Say you have a factory that can produce 10 widgets per day. You know that there are 500 people willing to buy your widgets at $5 of profit each. It costs you $0.1 per day per widget to store any widgets you produce but do not sell.
If you make 10 widgets and immediately sell them you make $50 in profit that day and incur no storage costs. Doing this will disappoint 490 of your customers on day 1 and 10 fewer every day after that.
Alternatively, you can store up your widgets in your warehouse until you have 500 to supply to everyone who wants one, you make $2500 all in one day, that’s great you say, but then your storage bill arrives and it’s $0.1(cost per day per widget) * 245(average number of widgets in storage) * 49(number of days widgets were in storage) = $1200.50 holy crap, almost half your profit just vanished into storage costs!
Obviously, there is a balance that is needed that is somewhere between disappointment for most of your customers and storage costs, that balance is basically why there are a limited number of *any* high demand item, whether it’s a console, phone, car, or anything else.
Edit: As for why it happens *more* with consoles: the profit margins are miniscule for consoles reletive to basically any other piece of tech.
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