What Is Cost Leadership?
I was recently in a conversation with a client and they asked me to define cost leadership. Because this topic comes up a lot with clients and participants at my seminars I thought I would write this brief article to give clarity about what cost leadership really means.
Let’s first look at how people buy. People love lower prices. People buy from the business that provides the same value or same result for the lowest cost. A company can’t just have low prices. They need to provide quality or a result for their buyers in addition to low prices.Lower prices tend to attract customers. But offering lower prices is just one piece of a puzzle on the business end. How can you offer lower prices than your competitors and still stay in business?
Before you can decide to be the lowest price business you have to know your operating costs and understand what your expenses are to deliver your products or services.
Cost leadership is how a company lowers their operating costs and therefore can afford to cut prices and be more competitive in their marketplace knowing that customers want to pay lower prices. Companies get ahead by lowering their operation costs beneath those of others in the same business. This means they try to find ways to reduce costs in their company so that they can offer a product at a lower price than their competitors. Because so many customers want to pay a lower price for goods and services, these companies can gain a wide audience and become the cost leader in the industry.
One of the examples I use to demonstrate cost leadership is Walmart. Their advertising is focused on being low priced. Walmart lowered its operating costs by being a very large company that can buy in bulk at reduced prices and then pass those price reductions on to its customers.
Take a look at your business and see where you can cut costs or buy things for less and how you can pass savings on to your customers and become the cost leader in your industry. You will gain a lot of market share as soon as you do this.
Questions? Comment below.