While researching for my articles about fleet management, I came across a business strategy that could be extremely beneficial for your future ventures – the cost leadership strategy.
When choosing a strategy, keep your business, your product offering, and your business objective in mind. Next, you should implement the strategy the right way. Make sure there are no hiccups while implementing the strategy and that it is helping your business.
A lot of companies follow the cost leadership strategy. In this article, I will explain why and how you can apply it in your way.
First, let me inspire you with this short YouTube message for you to open shop:
Definition of cost leadership
The main idea of this strategy centers on setting an example for its future competitors to reduce prices for its consumers. It will help the business sell its products and services while fulfilling customers’ needs without asking too much from them.
If done right, this strategy can help you stay on top of your target market. Make sure that your target audience is the one who is sensitive to price.
However, keep in mind that it is not the same as aiming to sell your products at a lower price. Cost in this aspect is referred to the resources used to put your product or service on the market. Here the price is referred to as how much the customer has to pay for it.
Benefits of applying cost leadership
I will explore why it is a good idea to center your business on this strategy. This list will help convince you to apply it in your way:
- This strategy, if used correctly, will help your business cover even the smallest development and production costs. With this in effect, you can increase your higher profit margins by the day.
- Aside from higher profit margins, you can keep your customers coming back to your store. This means that they trust the value they can get due to the quality of your products and services at a lower price than your competitors.
- During an emergency that can hinder businesses around the area, keeping your costs low will help you have extra funds to prepare yourself against it.
- Speaking of having additional funds, this also applies to have more money to invest in more products and services or expand your ease of doing business.
- Intimidate your competitors as they would have to invest time, energy, and money to match you in cost and quality.
Downsides of applying cost leadership
As with all strategies, do take note that you can also experience the following if you do not apply this strategy the right way to your business:
- Don’t skimp on customer service and R&D. Reducing your resources in this aspect will reduce your chances of keeping your potential customer base. Decreasing research and development will slow down your growth due to old products and new technologies.
- Once your competitors see you apply this strategy, you only have a short window to keep yourself on top. This means you have to put in enough effort to stay competitive towards them while providing a cheaper alternative to your customers.
- You need to sell tons of your products and services to your customers. The strategy dictates that you would have to have lots of avenues where anyone can get them, thus having one branch will not be enough.
After learning why you should or shouldn’t apply this strategy, let’s take a look at companies that implemented this strategy.
Home to the McSpaghetti and McBurger, McDonald’s has over 37,000 locations across more than 120 countries. Aside from being one of the quickest ways to get a bite to eat, they were able to harness this massive market to earn a 20% profit margin in 2016.
Most of its profit can be attributed to its franchising business model. How this idea works is that they let a franchisee operate the branch they are working in. In return, the company earns through royalty fees and rental fees.
With this, they were able to save in operating costs from maintaining buildings to renovations. Aside from that, it forced their competitors, such as Burger King and Taco Bell, to reevaluate their expansion strategies.
This German discount supermarket chain is a combination of ALDI Nord and ALDI Süd. Aside from providing goods to other European countries, Nord is seen in northern Germany while Süd is in the south.
How they were able to apply this strategy includes stocking non-perishable products and removing slow sellers from the shelves. Alongside year-round discounts, they limit their opening hours and encourage their customers to bring reusable shopping bags to put their items.
With this, they are one of Walmart’s strongest competitors. On the downside, they are still neck-in-neck due to their range of products.
Known as one of the biggest online retailers today, they were able to capture around half of the total online sales in the U.S. last year. With this, they were able to earn over $200 billion from their global customers.
Expanding thoroughly into the online retail market after starting as a small brick-and-mortar store was their strategy. They were able to keep their operating income low by spending their income on operating expenses and sales.
Aside from selling products such as the Amazon Echo and Amazon Web Services, they also put up a paid service for third-party sellers to post their products. This way, they were able to save costs in putting up products and be concerned with warehousing and distribution.
Their efforts increased online competition amongst online retail stores. Aside from that, this increased the number of options a customer can get a quality product at the lowest price possible.
Tips for implementing cost leadership strategy
As you can see from the previous section, many companies have succeeded in bringing this strategy into their own hands. I will now share with you how you can apply it to your own business.
Determine the most efficient procurement strategy
Procurement is a formal term for the process of getting items or services from someone in the name of a business. This means that you should monitor from the list of possible sources of materials to produce your product to how it will be delivered to you.
You would have to consider the following:
- How close is the source from your business
- Manufacturing capabilities of the source
- Supply chain capabilities of the source
- Relationship between you and the source
- Payment schedules between you and the source
When deciding which products or services to offer, limit it to only one when starting. Doing it this way will help you establish yourself above the rest.
Businesses are successful if they can deliver their niche with the best customer experience. This includes how you get the raw materials to manufacture it to how fast you can provide the final product to your customer.
After mastering one product, this is when you can expand your offering to your current customer base. Make sure to be as thorough as you have been with your first product and service when introducing a new product in the market. This will help your business keep its momentum.
Continually lower your operations cost
Remember that the overall goal for you to make a profit is to increase the cost-price ratio. With that in mind, think about the factors that will help keep it high. Make sure to think of an efficient way to produce your products and provide your services.
Also, remember that the bigger your company grows, you should make sure the costs are low. This way, you can expand your customer reach while creating more chances to make a profit.
Increase Production Scale
For this tip, you should think about how to extend the limit where you can produce your product or service. This starts with the first customer need you want to satisfy.
Doing this will help you gain an excellent reputation around your company and your brand. Aside from that, you can also learn the foundation of how you should develop, produce, and sell your present and future products.
Another advantage of continuously upgrading your company in this aspect can also be a strong defense against possible competitors. This increases the share you can get from your potential market at the same time.
There are three steps to fulfill this goal. It composes of managing the technology, raw materials, and operating efficiency.
Step # 1. Implementing advanced tools
Technology, in this sense, involves two things. First, it is the tools you would have to invest in producing your product or service. Second, tracking technology.
Before manufacturing, make sure that the equipment used is provided by a trustworthy local supplier. Doing this will help lower maintenance and replacement costs at the same time.
Finally, put a robust quality control system in place. This includes having a local database of information to a supply management system. Doing this will help increase customer satisfaction while attracting more markets.
You can also opt to support a local supplier of your business equipment by buying their technology or taking the entire company under your wing. This way, you can stay at the forefront of your industry while letting their efforts be recognized.
Creating a patent for the technology you use in your manufacturing process can also be an option in this step. Doing this may involve investing heavily in custom-made tools. However, it will be rewarded to a broader market range in the end.
Step # 2. Sourcing raw materials
Remember that I mentioned earlier about choosing the right supplier? Choosing your list of suppliers fulfills the goal to get as many raw materials as possible within a specific timeframe.
After learning which ones you should partner up with to sustain your business strategy, come to an agreement on the production timeline. This way, both sides can stay prepared for any unforeseen circumstances that may occur.
Take note that you should also focus on lowering delivery costs, especially if your item will cost more due to the local supplier you have chosen. Doing this will also spur your competitors into action, thus setting your own pace of growth and avoiding any obstacle.
Step # 3. Improving efficiency
As a way of keeping your cost leadership strategy stable, you must always be on your toes when it comes to improving business operations. This happens every moment your business is open to the public.
Designing a product can be efficient by investing properly in your research and development plans. This tip includes answering the following questions:
- Who will manufacture the product?
- What is the product?
- When can you manufacture the product?
- Where is the manufacturing facility for the product?
- Why should your customers buy your product?
- How will the product be manufactured?
Next, focus on how you want your customers to learn about your product. Whether it would be word-of-mouth or having a large advertisement plastered in the heart of the city, the marketing strategy will help you sell it to the masses.
While you are selling the product, think about the quality of the service you provide to your customers. This includes the format of how you answer their questions about your product. Handling this well and in an efficient manner will help boost your presence at the same time.
A critical factor in maintaining your strategy as systematic is through regular reporting mechanisms. Risk analysis, projections, and cost tracking are some of the many reports you would have to make and review. This will also help strengthen your business strategy too.
Relevant: Marketing stories you should read
This article helped you learn about cost leadership that current and future businesses can apply as a strategy. It centers around efficiency and cost reduction at a constant rate.
Even if you would mean a higher profit ratio and a decreased risk of competition, you could lose if you slowed down or did not sell as much as you did. Take care when applying any of these tips, and it will all work out.
Is this article helpful for your business? If so, do read my other articles about establishing a business:
- Twitter marketing for your business
- 2020 growth hacking stories
- Use Anticipatory Design to Wow Your Customers
Comment below on your thoughts on how you tried any of my tips!