Cost leadership: Competing on the basis of price
It is important to remember that in cost-leadership, the key reason why customers are choosing your product is on the basis of its price. If you are able to achieve the lowest price in the industry, you are better placed to be able to offer the lowest price to your customers.
The difference between price and cost
When thinking about cost-leadership, it can be useful to consider the difference between price and costs: price is the amount that is charged to customers and cost is the amount it costs you to offer your goods or service.
Those who can manage cost ultimately best place to succeed
While the target audience of cost-leaders are making their purchase decisions based on the pricing of items sold, offering the lowest price goods is s only half of the story – achieving a low-cost position is just as, if not more important.
While companies may look to undercut one another to try and attract cost-conscious customers, the firms that are the best place to succeed in this approach are those that have a fundamentally lower cost-base. Offering the lowest price is only sustainable if you have a genuinely low-cost position. Having the lowest cost structure allows you to undercut others – you can sustain the lowest price because your underlying costs are lower than those of your competitors.
The need to be really dedication on eliminating costs
Achieving cost-leadership is not easy – it requires a fundamental focus on achieving reductions in cost throughout the firm. Some key opportunities for reducing cost in the organization include:
- Setting clear expectations on spending
- Requiring approval for all costs above a limit
- Zero-based budgeting – requiring all budgets to be re-justified each year (rather than just carried over from a previous year).
- Understanding where costs are incurred – and systematically reviewing all key costs
The litmus test: How does it impact your decision making
A good way of knowing whether you are genuinely geared up to be a cost-leader is how you make tradeoffs. If forefront at mind is a consideration for how a strategic change will impact your cost structure, you have the right organizational mindset to succeed at cost leadership. Succeeding at cost leadership is not easy – it requires a strong commitment to ensuring that all decisions are aligned around achieving the low-cost position.
Cost leadership is one of the primary bases for competing. By focusing on reducing the cost of your operations, you can charge a lower price for your goods or services, and in turn capture the most cost-conscious customers.
Practical approaches to help reduce costs from your operations, to increase your profit margins, or become a cost leader.
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