The major disadvantage of target costing is the lack of customerexpansion. Having the lowest price can be advantageous to your marketing effort, but the strategy also has several disadvantages. McKee began selling sugary treats for five cents. The Nature of the Cost Leadership Strategy It is tempting to think of cost leaders as companies that sell inferior, poor-quality goods and services for rock-bottom prices.
Cost leaders tend to share some important characteristics. Advantages High profits can be enjoyed if a cost leader has a high market share. Perception of Quality Competition-based pricing is a model that relies on the pricing habits of your competition. Increased Market SHare An alternative to leveraging cost-leadership to earn higher profits is to use it to increase customer demand and market share.
Lagging rivals in terms of detecting and reacting to external shifts can prove to be a deadly combination that leaves cost leaders out of touch with the market and out of answers. Thus a cost leadership strategy helps create barriers to entry that protect the firm—and its existing rivals—from new competition.
Some consumers shop only at stores that offer the lowest price, Disadvantage of cost leadership means industries like groceries and gasoline often have price wars. The firm passes some of these savings to customers in the form of reduced prices in its stores.
McKee began selling sugary treats for five cents. Cost leaders tend to keep their costs low by minimizing advertising, market research, and research and development, but this approach can prove to be expensive in the long run.
This is a huge number, but Walmart is so large that its advertising expenses equal just a tiny fraction of its sales.
Lagging rivals in terms of detecting and reacting to external shifts can prove to be a deadly combination that leaves cost leaders out of touch with the market and out of answers.
It does not take into account product cost, your profit margin or product demand. McKee started selling treats for five cents each in the early s.
May provide too much detail - obscuring the bigger picture. Because your company strives to provide the lowest prices at all times, you may not have sufficient profit margin to offer occasional promotional discounts.
He has been a college marketing professor since In many settings, cost leaders attract a large market share because a large portion of potential customers find paying low prices for goods and services of acceptable quality to be very appealing. Yugo exited the United States in the early s and closed down entirely in Why or why not?
Waffle House, for example, limits its advertising to billboards along highways. In both the soft drink and cigarette industries, for example, customers appear to be willing to pay a little extra to enjoy the brand of their choice. The cost leadership strategy also makes it difficult for new companies to enter the market because of thin profit margins.
This is certainly true for Walmart, for example. The ability to charge low prices and still make a profit is challenging. Should they start advertising?
Key Takeaway Cost leadership is an effective business-level strategy to the extent that a firm offers low prices, provides satisfactory quality, and attracts enough customers to be profitable.
Many cost leaders rely on economies of scale A cost advantage created when a firm can produce a good or service at a lower per-unit price due to producing the good or service in large quantities.
References Open Learning World: This huge customer base includes people from all demographic and social groups within society.However, cost leaders’ ability to make a little bit of profit from each of a large number of customers means that the total profits of cost leaders can be substantial.
In some settings, the need for high sales volume is a critical disadvantage of a cost-leadership strategy. Advantages and Disadvantages of Cost Leadership Each generic strategy offers advantages that firms can potentially leverage to enhance their success as well as disadvantages.
The cost leadership strategy also makes it difficult for new companies to enter the market because of thin profit margins. Disadvantages Focusing on price can make the company lose sight of evolving customer tastes and preferences.
If cost-leadership strategies can be implemented by numerous firms in an industry, or if no firms face a cost disadvantage in imitating a cost-leadership strategy, then being a cost leader does not generate a sustained competitive advantage for a firm.
Disadvantages of Cost-leadership- technological advancement makes the low cost advantage outdated. - imitation ability of competitors. Advantages of the Cost-Leader Strategy by Neil Kokemuller - Updated September 26, A cost-leadership strategy is a broad approach to business whereby a significant aspect of a company's strategy is an effort to operate as the lowest-cost business in its industry.Download