What Is Cost Leadership Strategy? (+ Brand Top Examples) (2024)

It’s a strategy used by brands to gain a reputation as the provider of the cheapest goods or services in a given market.

Thecost leadership strategyis one of theGeneric Strategiesintroduced by renowned authorMichael Porterand it can be applied to all products and services, industries and organizations of all sizes.

Brands that arecost leadersin their industry offer top-qualityproductsand services at the lowest possible prices. This strategy helps them to remain competitive, profitable and to stimulate growth.

Practices like reducingprofit marginor cutting revenue are not cost-based strategies.

The strategy is about reducing the cost of production so that you can end up with aunit costof a product or service that is much less than theunit costsof your competitors’ similar products or services.

In other words, your products cost less to produce than your competitors’.

That’s the only way to be acost leaderin your category or industry.

For a brand, the reduction in cost should apply to all the products or services associated with that brand.

You can’t be a reputed brand forlow-costquality items when it’s only one or a few of your products that are offered at a cheaper rate. The affordability should be seen across all spectrum of products and services that your brand offers.

Cost leadership andprice leadershipare often used interchangeably though there is a difference.

Price leadershipmeans your products have the reputation of being the cheapest in their category (i.e. the price to purchase is the lowest).

Cost leadership refers to the cost of production being the lowest.

Of course, brands leading on a cost basis have the ability to be the price leader by reducing their prices below that of their competitors.

A brand can be the price leader and not the cost leader with an aggressive pricing strategy but if you are the cost leader then you always have the ability to undercut your competitors.

Some companies, in a bid to win the price war lower prices at the detriment of revenue. This is not sustainable and might lead to incurring significant losses. In contrast, if you can develop a business-level strategy that will help you lower operating costs, you can achieve lower prices and still remain profitable.

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Cost leaderseasily win and attract a large customer base by giving them higher value for lower fees.

No one wants to spend an extra dollar when they can get the same quality for a lesser fee so most people stick with a brand that offers them more for less.

As the customer base grows, the company’s revenue increases and that means

Companies won’t have to run at a loss to remain competitive. Unlikeprice leadershipwhere businesses tend to reduce theirprofit margins, the cuts are on the business processes, not revenue.

The implementation of the strategy will often mean increasing production output by a large purchase ofraw materials.

When things are scaled up this way, competitors will find it more difficult to outperform whatever you are doing, and in many cases, you’ll remain the undisputed leader in the category just likeAmazonandWalmart.

Cost leadership is not easy to attain, it involves making an analysis of your current processes and identifying unique ways to reduce costs. Here are some effective strategies that have been used by businesses to achieve reducedunit costsof their products and services.

By implementing theeconomies of scale, that is increasing thescale of production, you can get large amounts ofraw materialsfor a cheaper price than when they are ordering limited amounts.

Also, by scaling higher, you can stock upraw materialsto meet up the demands of a larger market segment.

Keeping competitors from gaining ground on you means having access to the working capital required to meet up with your scale of productionand market demand.

You need to be able to secure capital for expansion and keep your operations running as demand grows.

By automating all or part of your production and distribution process,you can increase production output and cut costs.

Technology helps to streamline the process and reduce the number of hands needed to get the work done.

This also means you’ll be spending less on wages.

One of the things that increase cost is using contractors and third-party companies to sourceraw materialsfor production.

Sourcing directlydecreasesproduction costs significantly…

Based in Sweden, the renowned international furniture retailer operates in 52 countries with 433 stores. To remain competitive,IKEAproduces standardized products that can be easily assembled by the end-users.

This enables them to apply theeconomies of scaleand produce in large quantities in ways smaller competitors are unable to match up with.

By producing furniture that can be self-assembled, IKEA eliminates the furniture assembly line, saving costs by reducing employees.

This is why their products are cheap. IKEA also cut costs by manufacturing its products in low-wage countries.

Walmartis a multinational retail leader based in the US. The company’scompetitive strategyis based on the sales of branded products at cheaper prices.

How do they do it?

Walmart pays considerably low wages to reduce costs. Only people who can accept such wages are welcome to work there.

Besides, there’s a lot of automation in their process. They manage their own distribution chain and own fleet of trucks and trailers in their thousands, cutting costs that would have been spent on third party companies.

Also, the company has a well-coordinated network of stores, distribution centres and suppliers that make it possible for them to order goods in larger quantities and at reduced prices.

McDonald’sis a household name when it comes to global fast-food chains.McDonald’shardly hires chefs. Rather what they do is to develop an optimized food preparation process, recruit people and train them to become part of their workforce.

That helps them to save the cost they should have spent hiring experts.

The company also own facilities where they produce ingredients mixes that are used in their meals.

That means they are also saving costs in theraw materialsvalue chain.

Amazon, the indisputable king of eCommerce leverageseconomies of scale,advanced technology, and process automation to maintain a competitive edge.

By increasing processing capabilities and warehouse storage, they are able to get more products out to customers.

By automating the purchase and delivery processes, they also increasedoperational efficiency.

That’s the reasonAmazoncan save costs and offer products at cheaper prices.

Primarkis a fashion retailer for men, women, kids, and babies. The brand has 370 outlets in 12 countries and boasts the cheapest prices in comparison to other brands in their category.

They achieve this by keeping their operational costs to the lowest.

Primark’s clothes are manufactured indeveloping countries where labour is cheaper. Also, the company saves costs by adopting a conservative approach to advertising, noelaborate brandingcampaign, just social media and referrals.

Primark also applies theeconomies of scaleto gain acompetitive advantageby stocking in large quantities to cut costs.

They also have a digitized custom clearance and distribution network which significantly reduces the time goods spend to get to warehouses and customers.

RyanAirhas been around for almost four decades with 450+ airplanes. It is not only popular as a budget-based airline but it’s also theairline that flies the highest number of routesglobally. In past years, it had been reputed as thelargest carrier of international passengers.

RyanAir’s strategy of cost leadership is in the provision of air travel at thelowest prices.

One of the ways they achieve this is by flying to small, remote and less congested airports which helps them to keep operating costs low.

By avoiding main airports, they are able to pay low landing and handling fees.

Another thing RyanAir does is that it doesn’t apply adifferentiation strategy.

No services that will have their cost passed to the customer are included. No free food, in-flight entertainment, airport lounges, and premium cabins. This helps them tokeep a flat rate for everyone.

Another area RyanAir saves cost is in spare parts purchase. Because they keep limited brands and types of aircraft, they are able to procure spare parts in large quantities to save costs.

Audit your entireproduction processand analyze the costs of everything that goes into production.

Whether they are the cost ofraw materialsand/or software, labour cost, administration, or marketing costs. Whatever expense is incurred to create a product or service should be reflected in its sales price.

When you have the numbers, you can identify where it’s possible to reduce costs to achieve certain prices.

Try to find out what your competitors’ operations processes look like.

Remember, you are not trying to be the price leader but thecost leader, by being thelowest-cost producer.

By understanding your competitors’ operations, you can improve your own process and reduce costs.

Look for ways to reduce human contact in your business so that you’d only need fewer employees and reduce wage bills.

You can introduce intuitive self-service kiosks instead of mounting people on counters.

Make the most of your assets for a given period of time.

Do more with what you already have while offering products or services at a cheaper rate.

If you are a service-based company, you can create a strategy where you make maximum use of your service within a time frame. You cancharge per hour instead of a flat rate. That way, you can get more people to buy or use your service in a day and offer them cheaper rates.

For production-based companies, increase thescale of productionso that you can use your existing facility, machinery and employees to mass-produce.

You can cut down on wages or reduce staff strength and introduce new technologies instead. In this age of remote working, some of your workers can work remotely.

That way you won’t have to pay for office rents, electricity or telephone bills, or at least cut down on such costs.

You can also rent warehouses in low-rent areas and outsource some of your operations and production if that helps you to save costs.

Cost leadership is not easy to attain in any market. You will often need to apply rigorous cost minimization techniques such as scaling, improvedoperational efficiencies, getting privileged access toraw materials, or introducing proprietary technology.

It’s not a one-off thing, therefore you should continue to evaluate your process and track your progress. Don’t be tempted to change all your processes at once. You can start by sourcing yourraw materialsdirectly and see how that affects costs, then see if introducingnew technologywill make a difference.

If one thing is not effective, you canrevert to the status quo and change another factor.

When you have tested enough and see the difference, you can then begin to implement long-term changes while you also track the results all along.

Once the market reacts, and things begin to level up again, you can go back to the drawing board and see what other changes