Intro
As the name suggests a cost leadership strategy revolves around the cost structure of a company. When a company is able to produce products that are not of poor quality compared to similar products on the market at the market’s cheapest cost the company is practicing a cost leadership strategy. To be able to practice this strategy the company has to cut down the costs of its operations. Unless you do that, you will not be able to make margins in a volume game.
Who is it for?
Have you ever shopped at Amazon and wondered how some of the offerings are so cheaply priced? Amazon offers an excellent example of an ecommerce company that practices cost leadership strategy. What enables Amazon to use cost leadership and gain competitive advantage by using it? The company has mastered the art of logistics from warehousing to transportation, not to mention the use of automated processes from packaging to office work. With the above factors combined Amazon is able cut down costs while being very effective operationally.
For a company to be able to successfully practice cost leadership strategy it has to have enough capital in order to access the needed technologies, access to efficient logistics, low cost in used material, labor, and employees and lastly, the company has to be able to reduce their costs more than the competition. Amazon is able to do all of the above mentioned and that is why the company acts as a prime example of being a cost leader.
Read the complete story on pricing strategies
Read the complete story on pricing strategies
Pros & Cons
The obvious perk of this strategy is the fact that you’re able to sell your products at a lower cost compared to competitors. Moreover, while practicing a cost leadership strategy the company is able to apply discounts more easily than competitors, this can lead to increased customer base and avoidance of price wars.
No pricing strategy is completely risk free. Cost leadership is no exception. Once competitors find out how you are cutting down your costs they can easily mimic your strategy and possibly cut down their costs in even more efficient way than you. Another thing to consider is the way us humans think, many of us can quickly connect a low product price to a poor quality even though the quality of the product would in reality be great.
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