Focusing on Cost, Adding Benefits

The cost of providing the extras must be less than the price premium they are prepared to pay.

Cost-leadership strategy positions an organization as the lowest-cost producer in a particular industry. Everything about the firm is designed to be low cost--labor, premises, materials, capital, and so on.

The firms products or services are comparable in quality and price to the rest of the market: profit comes from the difference between the low costs and the market price. A subdivision of the cost-leadership strategy is the “no-frills” strategy, where low-cost production is still sought but the products or services are acknowledged to be of more basic quality.

Differentiation strategy is a near opposite approach to cost leadership. A firm employing this strategy adds additional features to its products or services to make them above average in the market.

For example, where a no-frills airline may offer little airport support (or make passengers pay extra for it), a differentiating airline may include a limo to the airport and a private lounge in the price of its tickets. Key factors for success with a differentiation strategy are that customers must desire the extra features and be willing to pay a price premium for them. The cost of providing the extras must be less than the price premium they are prepared to pay.

ACTION POINT: Identify the features and benefits that customers are willing to pay extra for.