Low cost strategy

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Low cost strategy
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Low-cost strategy(also Low-cost price) is a pricing strategy characterized by low prices of goods and services using various saving methods. The company skillfully reduces real costs, which contributes to more customers and thus increases its sales.For example, two companies produce the same product, sell at the same price, but a company with lower costs will earn more because it has a greater profit on sales [1].

These companies don't pay attention to the quality but the number of goods and services sold. This is how the market of "cheap companies" is shaped. The strategy is hassle-free, because the only tool it uses is to minimize costs. It is important to have large capital, high technical capacity and invest in the latest technologies that save costs [2].

By focusing on reducing costs, we become a low-cost provider. It has a strong competitive approach that displaces companies sensitive to price changes. The cost advantage over rivals is the basis for applying this strategy. Companies choosing the assortment suggest products that the buyer considers necessary. To implement the strategy and become a low cost provider, you need to achieve its maximum effectiveness. The strategy introduced should be difficult to kick or match with rivals [3].

Variants of implementing the low-cost strategy

The company has two options to implement a low-cost strategy[4]:

  • Using a lower price to attract sensitive price buyers and thus force price reductions among competitors, to increase total profits
  • Maintaining the current price comparable to other low-priced rivals by using lower costs and thereby increase the profit margin on each unit sold and return on investment

Risk of low-cost strategy

Companies that strive for low-cost as cheap manufacturers or service providers are becoming a heavy burden for the company. Low-cost strategy is vulnerable to risks such as [5]:

  • Constantly introduced technological changes are a big problem for earlier investments because they cease to be valid
  • Risks associated with imitation by later companies that use the cheap learning method
  • By minimizing costs, companies don't pay attention to individual needs and preferences of customers
  • Companies due to unforeseen cost inflation, which negatively affects the company's tendency to offset product differentiation through cost leadership

Porter's theory

It is worth mentioning Porter's theory. He distinguished two strategies to increase long-term competition on the market. The first model is characterized by minimizing costs at a level lower than that of the competition, thus increasing the profit margin. Costs are reduced most often when using economies of scale. Companies offer a standard product, without any additions. It is worth adding that there is only one place on the market for one company that applies this strategy, and then I become a cost leader. The rest of the competition most often loses market share or changes strategy. Another model concerns the reduction of costs for research and development as well as advertising and marketing. The second strategy Porter mentioned was to create unique products. The strategy is aimed at loyal brand customers, offering them a unique design and best quality products [6].

Footnotes

  1. Diaconu L., (2009), p.81
  2. Diaconu L., (2009) p.82-84
  3. Diaconu L., (2009) p. 82-84
  4. Baldwin D., (2014)
  5. Tanwar R., (2013), p.17
  6. Porter M.E., 1998, p.11-14

References

Author: Natalia Woźniczka