Low Cost vs Differentiation

Low-Cost Strategy

The low-cost strategy is based on the principle that profits can be maximized if the company is able to produce a product or service at a lower cost than any of its competitors. “Low-cost”, in this case, refers to the cost to produce the product or service, not the price it is offered to the consumer. While the low-cost producer often will offer the lowest price to the customer, it is not necessarily the case. This is extremely important to remember, as successfully implementing the low-cost strategy is not a matter of setting a low price; it involves maximizing cost savings in every possible area, in order to create the lowest possible cost of production, allowing the company to earn a profit at a lower price point.

One of the most important features of the low-cost strategy is the company’s ability to maintain low direct and indirect operating costs. To do so, a company must establish a culture that seeks to lower costs across all areas of operation, with an emphasis on the largest costs. Discount European air carrier Ryanair, for example, uses several strategies to maintain low operating costs. The most important involves the purchase of new airplanes, by far the greatest cost for any airline. Ryanair pursues an aggressive strategy of discount purchasing. They invest in new planes during periods in which the manufacturers are experiencing slow sales, and use this environment to push for maximum discounts. Because of the long useful life of such equipment, discounts pay dividends for years after the purchase.

Ryanair utilizes a similar strategy to control one of its other largest costs – airport fees. Instead of flying into busy major airports, Ryanair negotiates with smaller, regional airports that have a greater need for their business. Ryanair further controls costs by eliminating many of the “perks” associated with premium air travel, such as meals, free drinks, and first-class accommodations. Eliminating meals not only saves...