Low cost is what customers today want. What happens behind the scenes is not the customers concern. If it is not offered at the lowest price, a business is very vulnerable to phase out as today a customer has a million ways of finding the best price available in the marketplace, thanks to e-commerce. The sole reason why me as a buyer crosses all local nearby stores and heads to CostCo to buy my monthly grocery is because of the price advantage that CostCo provides. Variety and quantity are other driving factors that grab my attention. Most importantly it is the unique strategy that CostCo implements to get this sort of competitive advantage. By offering the lowest prices for grocery, etc. in North America, CostCo always wins customers and provides enhanced satisfaction to drive back to the store the next month.
While pricing a product, the company should analyze how much a customer is willing to pay vs the cost being incurred by the company. Two types of products here include substitutes and complements. If a customer cannot do without milk (i.e. it cannot be substituted for anything else) their willingness to pay is generally higher and so a store must price it smartly. On the other hand, products that can be substituted for a cheaper option (bread, salt for example) must be priced in such a way that gives a company maximum profit. This smart pricing ultimately drives profits higher leading to the best and most competitive strategy. In the article on “Types of Strategy: Which fits your business” the author with the help of a diagram clearly depicts how a company should pull the cost line lower and use operational efficiency, pressurize suppliers for lower prices, constrain budgets and eliminate redundant costs, just like the business model Walmart employs and enjoys serving its customers more than 200 million times per week at more than 11,000 retail units in 27 countries. [i]
A good example of low cost strategy implementation in the information goods space is using the bundling theory which aims to group a very large number of unrelated information goods together to gain maximum profitability. Law of large numbers implies that it is easier to determine consumers' valuation (predictive value of bundling) for a set of information goods (bundle) than the valuation for each information good separately because the valuation for bundled goods has a lower variance per good. This model is particularly dominant in the subscription based service industry such as Netflix. Why does Netflix charge only $7.99 per month even after being one of the most dominant players in the online movie streaming business? Customers have different willingness to pay and while Netflix cannot lose revenues by charging exorbitant fees it also cannot afford to lost customers. Therefore, these factors need to be considered before pricing subscription services. This is what differentiates these big companies and helps them achieve competitive advantage.
So, what method can you use to drive strategic advantage for your business ??