Being a low-cost provider is a basic business strategy. It is the straightforward strategy of selling at a lower price than your competitors. But even such a basic strategy comes in two different types -- the low-cost-provider strategy and the focus low-cost strategy. These two strategies are appropriate for differently sized businesses.
Low-Cost Provider Strategy
The objective of a company using a low-cost provider strategy is to sell its products at the lowest possible price to attract customers. This is known as a price advantage. Companies using this strategy will typically earn low margins but achieve high sales volumes. Low-cost providers aim their products at the broad market, making them appeal to as many consumers as possible to achieve high sales volume.
Focused Low-Cost
The focused low-cost strategy also aims to create a price advantage for the company. Where the focused low-cost strategy differs from the low-cost provider strategy is in the company's focus. A company using this strategy focuses on a specific market niche, offering products to a narrow market segment instead of a broad one. The company then aims to be the cheapest supplier in this niche but not necessarily in the overall market.
Which to Use
The low-cost provider strategy is typically only used by large corporations that have the economies of scale to produce or purchase goods cheaply. Small businesses typically cannot achieve the necessary economies of scale and therefore cannot use the low-cost provider strategy. The focused low-cost strategy is better suited to small businesses, because small businesses with limited resources can focus their resources on a narrow market segment.
Economies of scale explained:
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