Cost Leadership Strategy: Definition & Examples

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  • 0:02 Competition in Business
  • 0:28 Defining Cost…
  • 0:57 Examples of Cost…
  • 2:21 Why Be a Cost Leader?
  • 3:16 Disadvantages of Cost…
  • 3:56 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
Lower prices tend to attract customers, but offering lower prices is just one piece of a puzzle on the business end. In this lesson, we'll learn how companies can offer lower prices than their competitors and still stay in business.

Competition in Businesses

We all purchase goods and services. And, unless you have a money tree in your backyard, I'm sure you've shopped around for a better deal. How is it that one company offers one price for an item while another can offer a much lower price for the same thing? Don't both companies have the same operating costs and don't they have the same expenses they need to cover just to stay in business?

Defining Cost Leadership Theory

Cost leadership theory gives us one possible answer. It describes how companies get ahead by lowering their operating costs beneath those of others in the same business. This means they try to find ways to reduce costs in their company so they can offer a product at a lower price than their competitors. Because so many customers want to pay a lower price for goods and services, these companies can gain a wide audience and become the cost leader in the industry.

Examples of Cost Leadership Theory

While some consumers feel that a lower cost equals a lower quality product, that's not always true. Many companies have had great success fulfilling the role as cost leader while still offering products that consumers want and appreciate.

For example, Walmart, the largest company in the world today, is known for its low prices. It's been estimated that 1/3 of Americans shop at Walmart each week, which hints at its success of utilizing cost leadership theory to keep prices low. Walmart lowers its operating costs by trying to limit excesses at every turn. Its top executives fly coach instead of first class, and they share hotel rooms. Employees are encouraged to use the bare minimum when heating and cooling buildings. And, to some protest, workers are paid low wages and offered lower benefit health insurance plans.

Payless ShoeSource is another prime example. Its slogan 'Why pay more when you can Payless?' grabs consumers' attention. Why should we as customers pay more money for a good or service when we could get it for a cheaper price? While Payless offers lower priced goods, it still offers quality name brand shoes. Payless is able to over low prices because it only has a few employees in the store at one time (customers serve themselves) and because it stocks only those goods that the target population demands.

Why Be a Cost Leader?

So what advantages are there for a company that employs cost leadership theory?

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