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What are the Benefits of Cost Leadership Strategy?

By Tanuja A Akkannavar

 

Cost Leadership is a method used by companies in which, the cost of products is reduced in order to gain a larger marketplace and profit. Every business requires a marketing strategy to obtain brand recognition in today’s competitive market. Cost Leadership is one of those strategies companies use to produce high quality and standard products and selling them for a lower price than its competitors. As the popularity of a product increases among consumers the profit margin of that company increases. For Example, D – Mart, the popularity of D – Mart is increasing with the years, a single store that was established in 2002, in Mumbai. Today, D – Mart has more than 160 stores across the country and is one of the most preferred supermarkets in India. The strategy of Cost Leadership is also a reason for the increase in popularity and high profitability, the high standard and quality products are sold at a price that is less and affordable.

Producing quality products and selling it at a lower cost to a large mass, increases the revenue and profits, also expands the business of a company. Following are some of the benefits of Cost Leadership Strategy:

1. Increases Market Size –

By implying Cost Leadership strategy a company will not only gain profit, eventually, the market size for that particular product will also increase. The nature of Indian consumers remains the same from the years, they prefer products with less price and high quality. If a standard product is available at an affordable price then, it becomes most preferred product among the consumers. For Example – Xiaomi, this company is now leading the cell phone industry across the globe.

2. Increases Business Sustainability –

When the costs of a business are low, it will reduce the financial threats for a company. If any market collapse occurs for a particular product, the companies following Cost Leadership will remain on the safer side as there are no high losses. This way Cost Leadership strategy will turn as an advantage for the companies and will help them sustain in the market for a longer duration.

3. Increases Profit Margin –

The Cost Leadership method is mainly implemented to increase the profitability of a company. When the recognition and popularity of a product increase due to its low pricing, a company will earn a revenue more than expected. This way cost of production for a product will also decrease because of the affordability of resources. All these factors will result in an increase in the profit margin of a company.

4. Reduces Competition –

The Cost Leadership strategy makes it difficult for the new entrants in the industry. The companies that follow Cost Leadership will create a successful market for its sustainability that cannot be disturbed by any new company in the market. The increase in consumers and profit will reduce competition for a company in the existing market place. A company following Cost Leadership enjoys the success and position gained in the market within an average period of time.

Implementing Cost Leadership Strategy creates a different market size for each product and each industry. Cost Leadership should be managed in an effective way that can bring in profits for a company and also a brand recognition in the market that will help in the long run of a company. Before implementing the Cost Leadership marketing strategy a company should understand the requirement and functions of the changing market trends.

 

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