6 Examples of Cost Strategy
John Spacey, May 20, 2021
Cost strategy is a business approach to cost. This is conventionally described as a strategy to either try to achieve the best costs in your industry or to differentiate your products to achieve higher perceived quality than the competition. This traditional model is arguably a false dichotomy that assumes it isn't possible to achieve both the lowest cost and highest quality. The following are common types of cost strategy.
Cost LeadershipCost leadership, also known as best-cost strategy, is an attempt to achieve the lowest costs in an industry at some minimum or standard level of quality. This typically requires significant economies of scale. Cost leadership is the only strategy that makes sense where consumers see your goods as commodities. For example, a solar panel company that seeks the lowest cost and greatest economies of scale because most consumers are disinterested in innovative models such that differentiation is unlikely to influence their purchases.
DifferentiationCost leadership is a significant advantage because it allows a firm to be more profitable at all pricing levels. The basic way to compete with this is to offer higher perceived quality or something else that consumers value such as convenience and variety. This strategy is known as differentiation. For example, a convenience store that has much higher costs for its fresh food than supermarkets but has more convenient hours and locations.
Cost FocusCost focus is when a niche producer goes for the best cost for their customers. Due to limited scale, it is unlikely a niche producer will ever beat the cost of a cost leader in an industry but they may achieve the lowest cost in their niche. For example, a company that tries to produce the lowest cost pure organic coconut milk. This may cost more than other beverages in the market but the firm may achieve the lowest cost for this exact product type.
Differentiation FocusDifferentiation focus is when a niche producer foregoes cost leadership to focus on perceived quality such as functions, features, materials, build quality, customer experience, brand recognition and design. For example, a hotel on a famous beach that goes for the best overall luxury customer experience without much regard to cost.
PremiumizationPremiumization is a product design strategy that intentionally seeks to make a product inherently more expensive. For example, a hamburger restaurant at a luxury hotel that adds gold leaf to their dishes.
Cost Leadership + DifferentiationIn a world of intangible value, it is certainly possible to have both differentiated products that customers prefer and the lowest cost. This has always been true but has long ignored by conventional models. For example, you could write a song on the back of an envelop in a cafe that ends up outselling a song with high production and marketing costs. In any industry where creative intangibles influence quality, it is possible for a firm to achieve both cost leadership and market leading differentiation.
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ReferencesPorter, Michael E., "Competitive Advantage". 1985, Ch. 1, pp 11-15. The Free Press. New York.
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