Experience curve was first noticed by Bruce Henderson in 1960 at BCG (Boston Consulting group). This is a curve which is actually experiences when the unit cost declines due to an increment in the production volume. This is actually done due to increased knowledge or due to the familiarity about the process. Any firm can gain the cost advantage if its experience curve is bigger, thus facing the huge production volume. Apart from the learning curve, experience curve effect is broader in scope. According to the experience curve effects, the more often any task is performed; cost of the performance will decrease. In this effect, each time the cumulative volume doubles along with this the value added costs including marketing, administration, distribution, as well as manufacturing cost decreases by a predictable percentage. With the help of the research by BCG in the year 1970, experience curve effects were well observed for various industries that usually ranged from 10 to 25 percent. These effects on the other side are expressed graphically too. The curve is plotted by adding the cumulative units produced on the X axis whereas the unit cost on the Y axis. For instance, a curve that tells a 15% cost reduction by doubling of output is known as 85% experience curve. Along with this, it indicates that unit cost is drop to 85% of their original level.
The above graph depicts that how original cost declines and what are the effects on the graph. With the help of the graph, any company or industry can work according to their curves and can know easily where they are going, either to the positive side or to the negative side. Thus, this is one of the way that can help in making any firm or company the best one. These curves are actually designed to know about the level of production and to know how and in what ways any company can generate effective outcomes.
Geoffrey Lancaster, Lester Massingham (2010), “Essentials of Marketing Management”, pg 560