Companies use different strategies to connect with their customers faster. Have you ever wondered how products often drop their original price to more affordable ones which makes you skeptical about its quality because it seems too good to be true?
This practice is actually not a bad thing because this is one of the several strategies which companies use to compete in their industries. Deny it or not, customers love bargains.
In fact, this is the customer-centric strategy that one retail store chain and one snack food company utilized to grow their customer base and profits tenfold year over year.
So, if you want to get more sales, retain more customers, and grow your market share, then you’ll love this guide on cost leadership.
Let’s get down to business.
What is Cost Leadership?
Cost leadership establishes a competitive advantage in marketing by selling products at a lower price, but without compromising loss of revenue. A cost leadership strategy could be a company’s commitment to becoming a price leader in its class or market. This strategy is certainly beneficial as product prices are the number one factor in sales.
The primary objective of the company in cost leadership is to attain a competitive stance in the business by becoming the lowest-cost producer. It attracts more customers. This is sometimes achieved by giant-scale production that takes advantage of economies of scale or by innovating the production method.
Another goal of companies in cost leadership is by purchasing materials at a lower price. Furthermore, top-notch labor should also be considered to avoid compromising the quality of their products and services. The expenses spent from purchasing the raw materials into its introduction as a product/service into the market is called cost whilst the money paid by the customers is known as its price. Usually, the value of the price is higher than the value of the cost.
Cost Leadership vs Price Leadership
Cost Leadership and Price Leadership are often used by people interchangeably. But these are two distinct and different strategies.
Cost Leadership means having the lowest operational cost in purchasing raw materials and labor in turning them into products being sold in the market. Price Leadership, on the other hand, refers to having the lowest price in the market.
Cost leaders who are already proficient in the field no longer worry because they can already survive despite several market shifts, compared to other competitors who are not, especially those competing companies that are price-centered. And we should also bear in mind that not all companies with lower prices have lower costs.
Cost Leadership in Practice
Business leaders study cost leadership thoroughly as decisions made can affect their company. If they don’t plan business costs well, they risk the loss of revenue and other factors in company performance.
To start with cost leadership, business companies need to have a unique and more effective strategy compared to other competitors. A successful cost leader can sell more products at a lower cost. However, it isn’t a secret that there are no shortcuts in one’s success. Companies also have several things to sacrifice to perform this strategy well.
Here are the best cost leaders:
Amazon
The modern leader in customer-centric commerce is Amazon. Jeff Bezos’ brainchild operated with a focus on customer satisfaction and convenience. They aimed to be the company for everything one needs in life. With large warehouses (called fulfillment centers) and high processing capability through advanced computing and automation, they cut costs in operational efficiency. In fact, their famous “One-Day Shipping” came from analyzing consumer demands and market trends.
Aldi
Another successful retail company in cost leadership is Aldi. This German company eliminated all waste in production and marketing. They list a limited number of items instore, mostly of their own brands. They operate their stores through self-service wherein customers themselves get their quarter-carts and bag their own purchases. And they also limited store sizes and working hours to make sure that every inch, every working hour is profitable. This also contributes to their success because they offer a great shopping experience for budget-conscious shoppers.
IKEA
If you ask people what their furniture retail store is, most would say IKEA. This cost leader in the furniture industry has blended low cost with good quality. People loved their DIY designs – they were affordable but looked and worked well. And this was IKEA’s competitive edge.
Their cost leadership strategy includes product standardization, self-assembly, and outsourcing of manufacturing.
RyanAir
In the transportation industry, one of the famous cost leaders is RyanAir. This Irish budget airline company outperforms competitors by offering air travel at the lowest unit cost possible. They negotiated for low operating costs with suppliers, airport operators, and aircraft manufacturers.
McDonald’s
Looking at the fast-food industry, McDonald’s is considered a king in cost leadership. They focused on fast, streamlined food production and delivery. The processes of cooking food in their locations were made simple and easy to learn even by freshers, reducing costs by not requiring chefs for the job. They also own the facilities that processed the ingredients of their products so this maximized their assets to optimize cash flow.
Pros and Cons of Cost Leadership
Now let’s examine cost leadership in pro/con analysis:
Pros
- It allows companies to gain more while spending less on raw materials.
- It attracts customers.
- Once you establish this as your core company strategy, you will be hard to compete with.
- Cost leaders gain more profit than others.
Cons
- Risks can happen such as loss of revenue. And these will only happen if the quality of purchased cheap raw materials is compromised.
- Companies should also expand their sales to maintain their domain.
- Keeping the lower price might hinder the company from following the current trends in the economy. And it keeps them from moving quickly into adapting to the new trends.
- They require top sales volume.
When to Implement Cost Leadership
You should implement Cost Leadership when you know exactly your target customers. Because identifying your target customers helps the company is looking for potential suppliers of raw materials which can tick the boxes of what these target customers want. It’s not entirely about competing with other competitors. It’s also about maintaining a solid consumer base to keep the business going. It would also help you adapt your operations towards customer-centric trends.
How to Implement Cost Leadership
It may take some time to implement cost leadership as it will require intense research and operational recalibration, to cater to the consumer needs. But it is feasible.
Here are some actionable steps on implementing cost leadership in your business.
1. Analyze existing operations
Examine first the existing operations in the company to know the right measures that the company needs. This includes the labor, the materials used, software, and other activities in the company which involve the production of materials. Through this, the company will know what they need to improve and how and where their cost leadership must be implemented.
2. Know your competitors
This is known in business-speak as “competitor analysis”. You monitor competitors’ reputations, successes and check if you can do better than them. Assessing a competitor’s operations will facilitate a corporation to improve its prices or processes.
3. Identify strategies that will reduce costs
Once you know your existing business operations and your competitors’, you can start planning improvements. Identify methods that will facilitate to drive down prices and increase profits consistently.
A. Economies of Scale
The larger the business, the lower the costs. Hence, efficient production decreases the costs of production.
B. Advantages of Size – The size of the business helps in achieving this strategy. The more cash given to the suppliers, the greater the likelihood of extracting distinctive deals that become an edge of the company.
C. Utilize Technology – Take advantage of technology as it helps the future of your company. Having better use of technology in a business, the greater chance of maintaining cost leadership in the long run.
D. Focus – By keeping the focus on the goods produced by the company, the more chances it maintains being the cost leader in the chain.
E. Raw Materials – A company can save so much in purchasing raw materials at a lower cost. However, these raw materials should not compromise their quality despite their lower price. Thus, you have to be smart in purchasing raw materials to avoid greater costs in the long run. You need to do quality controls even as you recalibrate the supply chain.
F. Labor – The lesser the number of cash and time that an organization spends on obtaining a task done, the greater likelihood it will become a successful, cost-advantaged company.
4. Take note of progress
As company leaders implement cost leadership, they must regularly check and review progress. It’s not a set it and forget it method. It’s a regular commitment towards efficiency in business operations through little to no waste of resources and funds.
Is Cost Leadership Worth It?
Cost leadership is an efficient business strategy to the extent that a firm offers low costs, provides satisfactory quality, and attracts enough customers to be profitable. With that, it can be worth it in the long run as long as good strategies are used to actualize cost leadership. However, without proper guidance and intense research in this field, it can be unworthy and a waste of time and money for companies.
So before venturing into cost leadership, you need to conduct intense research, in market research and analysis of business data. From potential suppliers, target customers, competitors, and labor in the production of materials. These are all included in the considerations before jumping into cost leadership. And be prepared for risks and recalibrate, as necessary.
Datahyv can help your company become cost leaders in your industry. Check out our customizable data solutions here.