Today’s question is about the impact of cost leadership on your brand.
I’ll begin by defining the concept of cost leadership.
The way that I teach it is that cost leadership means a business has the ability to be the low cost business in a sector through lower cost structures by quantity, leverage of manufacturing, and other factors.
In the wrong hands, there can be significant negative impacts on your brand.
Things like:
- Folks question the quality of your product.
- Negative brand associations that are connected to perception of cost to value.
- Resetting the prices in a way that may not be sustainable in the long-term and that make it difficult for you to raise the prices later.
Are there positives to cost leadership?
There can be. This is where context plays a heavy role.
To benefit from cost leadership, you’ll need to know what you want your brand associations to be.
If you are looking to be seen as an accessible or low cost brand with mass appeal, cost leadership can be helpful.
If you have a cost advantage and know that you can win tremendous market share and have the will to manage a price war effectively, cost leadership can be useful.
Where can cost leadership confuse folks?
You can get cost leadership confused when it comes to thinking around penetration pricing.
Penetration pricing is a dangerous idea because you are often doing this with little or no brand equity for your offering. Or, worse, negative brand equity.
Using penetration pricing can set your reference price at an artificially low point that is difficult to come back from.
Penetration pricing is also often sold as a way to get people to buy in and once they are into your product or service it is easy to raise prices.
Here’s the thing: raising prices is hard to do.
The other challenge here is that there are likely many alternatives to your product or service and the switching costs are likely pretty low, meaning that the customer isn’t going to be too put off by using something else.
Let me know what questions you have as I continue answering questions…And, let me know your experience with cost leadership.