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I was interested in cost leaders and cost leadership. A cost leader is a company that sells at a very competitive price and is known as the "leader" in best pricing for consumers. An example of a cost leader is Walmart. One of Walmart's slogans according to the text is, "Save More, Live Better". Walmart operates and advertises itself as one of the places to find the lowest prices on everyday items. I was interested in cost leadership for a few reasons. Firstly, because my own rental business is not a cost leader. I do not charge the lowest rent in the market, and that is mainly because I put a lot of work and material costs into renovating my home. My tenants benefit from a higher standard of living and in return I need to charge higher rent costs. I was curious about the differences between a cost leader and a business like my own that does not seek to undercut the competition. I was also interested in this kind of business because I wanted to see the business model and how these kinds of retailers operate, because although low prices seem like they would make the business less profitable that is clearly not the case with examples like Walmart.
Cost leadership is largely a marketing strategy. By presenting the business as the best and lowest priced option, it is quite an effective strategy and winning business and gaining market share. Implementing this plan however, is far from easy. The problem presented by this strategy is explained by the Economic Times, "Although, it is highly effective in gaining market share as well as drawing the customers' attention, it is difficult to deploy. The management team of the company has to constantly work towards reducing the cost of not just one product, but the entire range of products in the company's portfolio" (What is 'Cost Leaderhip'). The issues posed by employing a cost leadership strategy are that you have to maintain competitive pricing across a wide range of products, services and continually optimize your cost structure to ensure profitability. In order to do this, lean production or merchandising is required.
Another issue of cost leadership is maintaining the lead. In order to be an effective and consistent leader of costs, you need to evaluate your pricing strategy as it relates to competition across broad categories. To maintain competitive advantage, you may need to undercut your previous prices to beat a competitors pricing, this can cause an issue when the adjusted competitive price is less than the cost of goods sold. Sometimes there are items that actually drive business but as a unit sell at a loss. These units are called loss leaders. A perfect example of a loss leader are the rotisserie chickens at Costco. Despite being only $5, they bring a lot of profitable business to Costco. By having the lowest price on rotisserie chickens, Costco pushes people in the door, and once you are in the door it is highly likely that you will buy more items on your trip than just the chicken.
According to MasterClass, cost leadership is most effective for large businesses that have the ability to lower costs through large purchasing capacity, loss leaders, and bargaining power. Conversely, cost leadership is harder to pull off as a smaller business. This would explain my own personal circumstance and why cost leadership would not work for me. Perhaps if I had 100 units I could cost myself slightly lower than the competition to maintain 100% occupancy. Cost leadership is a strategy that requires the business to demonstrate control over the value chain in order to keep prices competitive.
Cost leadership is an effective marketing tool and business strategy and allows the business to market themselves to win market share. There are challenges to doing so, including needing to have significant control over costs and prices, a need to innovate continuously to lead the industry in pricing and the need to not be seen as an inferior product. This strategy is most effectively executed by a large company that can withstand losses on some products to round out the profits on a large product catalogue, who has large collective bargaining power, and who has resources to be nimble.
MasterClass. “Cost Leadership Strategy: Pros and Cons of Cost Leadership – 2022.” MasterClass, MasterClass, 2 Dec. 2021, https://www.masterclass.com/articles/cost-leadership-strategy#3-competitive-strategies-for-cost-leaders.
“What Is Cost Leadership? Definition of Cost Leadership, Cost Leadership Meaning.” The Economic Times, https://economictimes.indiatimes.com/definition/cost-leadership.
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