Why every small business needs the cost leadership strategy

The biggest concern of most small businesseses is making money without spending a lot on production of cost of service. However small businesses do not exactly start outright with revenue so how do they go about growing a business that is yet to make an impact. Here is where Cost leadership strategy comes in.

The Cost Leadership Strategy

Cost leadership is a term used when a company projects itself as the cheapest manufacturer or provider of a particular product or commodity in a competition.

Cost leadership strategy is difficult to pull off because the business must constantly work on reducing cost at every level to remain competitive. However, it might work for small businesses that want to penetrate the market and at the same time reduce costs

Business Strategies always center around gaining competitive advantage — in other words, developing the “edge” that gets you the sale and takes it away from your competitors. There are two main ways of achieving this within a Cost Leadership strategy:

  • Increasing profits by reducing costs, while charging industry-average prices.
  • Increasing market share by charging lower prices, while still making a reasonable profit on each sale because you’ve reduced costs.

Remember that Cost Leadership is about minimizing the cost to the organization of delivering products and services which is different from the cost or price paid by the customer.

Having an open eye

Whilst Cost leadership involves being the leader in terms of cost in your industry or market. Simply being amongst the lowest-cost producers is not good enough, as you leave yourself wide open to attack by other low-cost producers who may undercut your prices and therefore block your attempts to increase market share. You must be confident about providing your products or service and maintaining it in a stable way. This strategy is also used by Large companies after they build their reputation into a household brand. So on the high side, Large companies have access to funding, efficient logistics, and a low-cost base ( and a way of sustainably cutting costs compared to competitors )

How Small Businesses can take advantage

For small businesses, Using this strategy requires that you operate within an almost seamless process that would require fewer logistics, make your service or product offering stress-free, and also enable a low-cost base. Access to funding might be a plus. Controlling costs by creating your own production of service cost materials is a plus especially if you already have a skill in the industry. Eg: building an order system tracker for your food business, because you have skills in app development, or building your own website because you have skills with WordPress for example.

Hence it will be wise to start out with a low capital business with high-profit margins. For example, a food business that delivers, or a website company that outsources or builds websites for people. For small businesses, this strategy will be useful for market penetration, and when prices are ready to be increased, be sure to create a product offer or service offer for your various sects of clients with various budgets.

The Risk of Cost Leadership Strategy

The greatest risk in pursuing a Cost Leadership strategy is that these sources of cost reduction are not unique to you and that other competitors copy your cost reduction strategies. This is why it’s important to continuously find ways of reducing every cost. Always improve your offer, but not at the expense of your business running at a loss. Explore options that best suit your audience and are unique to them. Always listen to what will benefit your audience.

Advantages of Cost leadership strategy

  1. It provides better profits for the team and organization.

Cost leadership styles are focused on creating low-cost operations within their market and industry. By reducing development and production costs, it becomes possible for higher profit margins to appear because you are providing a unique value proposition that is strong to your audience.

2. It creates more capital that can be used for growth.

Cost leadership strategy also enables more capital. Even though the retail cost of goods or services is low, the higher margins make it possible to retain capital from each transaction. Over time, this creates a nest egg of resources that can be used for multiple purposes.

3. It reduces competition from the marketplace.

Companies that are able to implement their cost leadership strategy successfully give themselves a future advantage as well. Because they are able to offer a superior pricing model to their consumers, new competition in the market is limited because competitors may struggle to achieve the same price. For a small business, The advantage to this is larger companies would easily overlook the unique proposition because it is a small business, and would mistake your strategy as a mere way to get bought due to the inability to produce or offer services on a larger scale. while this might be true, it gives your business room to grow freely and gain customers' attention without much pressure.

While it is difficult to pull off, it might be critical for market penetration. Other strategies can be adopted, and not all businesses can afford to drastically reduce cost hence this strategy might not work. Look for methods that best suit your business. If you have tried this before, please feel free to share your experience

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Unlearning & relearning⚡️ I write about: productivity, life hacks, business strategy, branding, and leadership. Hire Me: cdkumordzie@gmail.com

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Deladem Kumordzie

Deladem Kumordzie

Unlearning & relearning⚡️ I write about: productivity, life hacks, business strategy, branding, and leadership. Hire Me: cdkumordzie@gmail.com

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