Understanding the cost-leadership strategy
The cost leadership strategy is to develop the product or service at the lowest possible cost to in turn be able to sell it at the lowest price. Customers who buy from cost leaders are primarily interested in the price that they are paying, rather than any additional features.
Understanding the differentiation strategy
The differentiation strategy, in comparison, involves identifying value drivers that will increase the customer’s willingness to pay. By identifying additional features, services, or attributes that customers are willing to pay for, firms pursuing a differentiation strategy can charge a higher price for the item.
How the cost-leadership and the differentiation strategy compare with one another
Some of the key differences between cost-leadership and differentiation strategy are the keys to success and the customers targetted.
Key to success
In the differentiation strategy, the key to success is identifying dimensions that can increase a customer’s willingness to pay. By creating additional value for the customers, firms pursuing a differentiation strategy are able to increase a customer’s willingness to pay or attract customers from a competitor.
In comparison, the key to success in a cost-leadership strategy is identifying an approach that lowers the cost of operations. While ultimately customers choose a cost leader due to the lower price point, unless the firm is able to achieve a lower cost of operations, it risks being undercut by another firm able to achieve a lower cost.
The target customers are also different. While differentiations attract customers that are willing and able to pay an elevated amount for the items, cost leaders instead concentrate on customers who potentially don’t have the purchasing ability or desire to pay an elevated price.
Final thoughts: Recognizing there are profit opportunities with cost leadership and differentiation strategies
It is easy to assume that differentiators are able to achieve higher profits due to their higher prices and often higher margins. This is not necessarily the case, however – both differentiators and cost leaders can be very profitable positions. The key however is to know what your approach is, and to ensure that your entire operations are geared to achieving that objective.