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Low Cost Strategy

Striving to be the industry’s overall low-cost provider is a powerful competitive approach in markets with many price-sensitive buyers. A company achieves low-cost leadership when it becomes the industry’s lowest-cost provider rather than just being one of perhaps several competitors with low costs. Successful low-cost providers boast meaningfully lower costs than rivals, but not necessarily the absolutely lowest possible cost. In striving for a cost advantage over rivals, managers must include features and services that buyers consider essential. A product offering that is too frills-free can be viewed by consumers as offering little value, regardless of its pricing. A low-cost leader’s basis for competitive advantage is lower overall costs than competitors’. Success in achieving a low-cost edge over rivals comes from eliminating and/or curbing “nonessential” activities and-or out managing rivals in performing essential activities. A company has two options for translating a low-cost advantage over rivals into attractive profit performance. Option 1 is to use the lower-cost edge to underprice competitors and attract price-sensitive buyers in great enough numbers to increase total profits. Option 2 is to maintain the present price, be content with the present market share, and use the lower-cost edge to earn a higher profit margin on each unit sold, thereby raising the firm’s total profits and overall return on investment. A low-cost provider strategy achieves lower overall costs than rivals and appealing to a broad spectrum of customers, usually by underpricing rivals.