#5 Key Question: How do low-cost providers establish themselves in the market?

Low-cost providers establish their market position through price leadership over competitors of the same industry based on a superior cost structure. Despite their low-price strategy significant cost advantages allow these companies to achieve a higher profitability than competing high price positioned rivals in the same industry (e.g., airlines) . For this to happen the price advantage of low-cost products must provide a higher value to target customers than the offerings of higher-priced products, such as those from differentiated brand companies. The better the cost structure of low-price companies, the higher their value creation, in the perception of their customers and regarding their own profitability .

Cost leaders with strong value creation follow the rationale of highest efficiency at the lowest costs without compromising the impeccable quality of their offerings and the value perception of the market. In this regard the following success levers are systematically employed:

  1. Maximization of market penetration and market share for efficiency maximization
  2. Optimal utilization of resources and assets for cost structure and cash maximization
  3. Minimization of all non-operational complexity and associated costs to improve overall cost structure
  4. Elimination of all non-value-contributing elements of the offering
  5. Maximization of margin advantages through standardization
  6. Continuous cost management involving the external value chain
  7. Utilization of technology to reduce costs and increase productivity

The competitive position of cost/price leadership has the advantage of being able to stand out from the competition decisively with a single, always relevant characteristic: price. To achieve this, the afore mentioned success levers must consistently ensure cost and efficiency leadership, which may require significant investments in new technologies, manufacturing and sales models. If a low-cost provider can no longer maintain its cost leadership against the competition, the typical disadvantages of low cost positioning become a company risk: low customer loyalty, low barriers to entry, and limited potential for repositioning.

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