February 15, 2018  
 
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Low-Cost Provider Strategy

Does a low-cost provider strategy make sense? Selling cheaper than competitors can be a good way to gain market share. But is it smart? You may gain market share but only at the expense of profitability.

Is being the low cost provider the best strategy?
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Conventional wisdom says that a sure way to increase demand for a product is to slash its price. But is that really true? Is being the lowest cost provider the best strategy for increasing sales and bumping the bottom line?

On the first day of Econ 101, your professor explained a fundamental economic concept: Lower the price and demand will increase. In a perfect world, that would always be true. The problem is that we don't live in a perfect world. Price is only one factor in determining demand for products and services. Other factors (e.g. marketing strategy) also play a significant role in attracting customers. In fact, sometimes being the lowest priced product on the market can even have a negative effect on demand.

Low Pricing = Low Product Perception

A low-priced product is often perceived to be inferior to its higher priced counterparts, regardless of its actual quality. Think about it: If given the choice between a $10 hamburger and a $1 hamburger, chances are you will assume the $10 burger is larger, tastes better, and contains better ingredients based on nothing other than price. By choosing to compete on price, you run the risk of inviting a similar perception from your customer base. In some industries the risk may be minimal, but in others it may be a formidable obstacle to overcome.

Low Pricing = Brand Inferiority

Another common perception that can be caused by low pricing is that your company and your brand occupy a mediocre standing within the industry. Consumers are typically willing to pay more for a brand name product. New consumers will inevitably assume lower priced products are offered by a brand that is less established or less capable of delivering quality merchandise.

Low Pricing = Poor Service

In the mind of a typical consumer, the cost of a product doesn't just include the cost of the merchandise inside the box. It also includes the cost of back-end products such as customer service and product warranties. If your product is priced lower than everyone else's, consumers will naturally assume that it doesn't come with the same assurance of support as products that are priced higher. This perception might not be far from reality since a lower priced product may necessitate cost-cutting measures that affect the level of follow-up service you are able to provide.

It's important to remember that the price you establish for your product communicates a wide range of intangibles to potential customers. Rather than trying to offer the least expensive product, you might want to consider strategic pricing to properly position yourself within the market.

Begin to view price as a tool to communicate the quality and value of your product in relation to your competitors. Done right, this can be a powerful way to establish market presence and eliminate the need to compete on price alone.

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