Technology and productivity

Technology can reduce a business's costs by helping it work more efficiently and raising its productivity. Efficiency means getting more from the resources used, with less waste. Productivity is the amount produced per worker, or per hour; for example, the number of customers served by one member of staff in an hour. With better technology, a business can produce more, or serve more customers, using the same resources.

How average costs fall

Average cost is total cost divided by output, such as the cost per meal or per customer. Some costs, like rent, equipment and salaries, do not rise just because output rises. If technology lets the same team serve 150 customers instead of 100, those fixed costs are spread over more sales, so the average cost per customer falls.

Technology can also cut waste. A gardening business with two vans that uses route-planning software may travel fewer miles between jobs. Fuel and time are saved while the same number of gardens is still tended, so each job costs less to deliver.

Worked example

A bakery pays £900 a day in fixed costs and employs three people. A new dough divider lets it make 600 loaves a day instead of 400, with no extra staff. Fixed cost per loaf falls from £2.25 (£900 ÷ 400) to £1.50 (£900 ÷ 600). The bakery has produced more with the same resources, so its average fixed cost per loaf is lower. If the machine's own cost is less than these savings, its average total cost per loaf will also fall.

The saving depends on using the technology well and on the task suiting it; simply buying new equipment does not guarantee lower costs.