A best-cost strategy relies on offering customers better value for money by focusing both on low cost and upscale difference. The ultimate goal of the best-cost strategy is to keep costs and prices lower than other providers of similar products with comparable quality and features.
What is Best Cost Strategy?
The concept of best cost strategy is derived from the theory of business strategy, which argues that a firm’s pricing decisions affect its relative position in the market and the overall profitability of the firm. A best cost strategy can be defined as a method of setting prices that makes a high proportion of the firm’s products the best value for customers. A best cost strategy combines both low cost and high value. These strategies rely on price-based competition, in which the price of the product is the main differentiator, and on quality differentiation, in which the product’s features and technology and its reliability are the major differentiators.
It is widely presumed that firms with a best cost strategy enjoy market supremacy. According to hypothesis, top-quality and low-cost products stimulate customer demand, which, in turn, brings in higher sales, higher market share and lower costs. Lower costs, in turn, ensure lower prices and higher profits. This is especially true if the firm enjoys competitive advantage over competitors, due to its ability to innovate, build brand image, and develop customer rapport. However, studies show that firms that pursue a best cost strategy often lack competitive advantage.
Best Cost Strategy – Definition
Best cost strategy is based on cost leadership, a marketing concept that argues that a firm can earn higher profits by providing consumers with a wider range of products and features at lower prices. According to the theory, a firm enjoys comparative or competitive advantage in the market if its products are available at lower costs compared to products offered by its competitors.
A “best cost” is economical in relation to other sellers of comparable goods. A pricing strategy is termed best-cost if a large proportion of a firm’s product sales could be achieved at the best cost.
It is difficult to define a best-cost strategy in absolute terms, because it can change from situation to situation and from firm to firm. A firm does not always use a best cost strategy; it may use other pricing strategies instead, such as cost leadership, differentiation or focus. However, it is possible to determine companies which have used a best-cost strategy by identifying instances where firms have kept prices low in almost all price levels for the majority of their product lines.
A best-cost strategy is often confused with low-cost strategy, which focuses on reducing costs of production only. However, a best-cost strategy differs from cost leadership in many ways. A cost leadership strategy targets either mass or unique market segments, whereas a best-cost strategy is targeted across all market segments. The relationship between the two strategies is similar to that between cost leadership and differentiation strategies. A low-cost strategy is, therefore, a part of a best-cost strategy.
Difference Between Best Cost and Low Cost Strategy
The best cost strategy is similar to the low-cost strategy, because both strategies provide the customer with the best price in the market for a comparable product. However, they differ in many ways.
Comparison between Best Cost and Low Cost Strategy Based on their Approach
Both strategies are similar in their approach. Nowadays, both strategies are equally successful for firms. According to the concept of best cost, the products should be obtained at the lowest possible cost. On the other hand, a low-cost strategy says that the products should be priced at the lowest possible level.
A best cost strategy may be considered to be more effective than a low-cost strategy, as a low-cost strategy is a part of a best cost strategy. A low-cost strategy is an outcome of a best cost strategy, but not the entire strategy.
A firm follows a low-cost strategy when it tries to attain competitive advantage through specialization, manufacturing efficiency, high utilization of resources, scale economies and customer innovations. On the contrary, a best-cost strategy gives competitive advantage to a firm based on quality and features of the products, brand name, global market product cache and its distribution.
Comparison between Best Cost and Low Cost Strategy Based on their Objectives
The objective of a low-cost strategy is to attain a low price for the product in the market. The best-cost strategy helps in achieving the highest possible price for a product, along with lower costs of production. A low-cost strategy is a part of the best-cost strategy, as a firm follows a low-cost strategy when it tries to attain competitive advantage through specialization, manufacturing efficiency, high utilization of resources, scale economies and customer innovations. On the other hand, a best-cost strategy gives competitive advantage to a firm based on quality and features of the products, brand name, global market product cache and its distribution.
According to a low-cost strategy, a firm should produce only one type of product, which can be manufactured and delivered at minimum cost. The best-cost strategy is less restrictive in this respect. Even though a low-cost strategy follows a best-cost strategy, its job is to produce the same range of products at lower costs.
Comparison between Best Cost and Low Cost Strategy Based on their Pricing Strategies
The best cost strategy and the low-cost strategy can be distinguished on the basis of their pricing strategies. It is true that low-cost strategy players may offer products to customers at a lower cost than their best cost players. However, a low-cost strategy is characterized by a limited range of pricing strategies, in which the custom of charging customers extra for additional services is commonly found.
On the other hand, the best cost strategy allows firms to set prices in multiple ways across a wide range of price points. A firm can use a best-cost strategy by focusing on two main pricing strategies that are category pricing and low-end pricing. Category pricing entails that firms usually set prices for products based on the category in which the product is classified. Low-end pricing is used when profit margins are high.
Comparison between Best Cost and Low Cost Strategy Based on Competition
A low cost strategy should be followed by firms that manufacture a product with distinctive features or a unique combination of benefits and features. Such products are not easily copied. In this regard, a best-cost strategy is not applicable in such situations.
On the other hand, firms that create different products and compete in the same industry segment with those of their competitors should follow a low-cost strategy. According to the best cost strategy, the products should be obtained at the lowest possible cost. This strategy should be followed by firms that are in a position to produce identical products at lower costs compared with their competitors.
The concept of best cost is important in strategic pricing, as its unique goals differentiate it from other pricing strategies. According to the concept of best cost, the products should be obtained at the lowest possible cost. On the other hand, a low-cost strategy says that the products should be priced at the lowest possible level.
Comparison between Best Cost and Low Cost Strategy Based on the Limitations for Using the Strategies
A best cost strategy is useful when there is competitive parity between the products of various sellers. In such situations, the firm that offers its products at a lower cost but at the same quality enjoys an advantage over its competitors.
On the other hand, a low cost strategy is applicable when there is a lack of competition from other sellers of the firm’s products. In such situations, the firms that follow a low-cost strategy can charge customers extra for products or services. However, such firms may face heavy competition later on, if other sellers enter the business.
Thus, it can be concluded that the main difference between best-cost and low-cost strategies is that according to the best cost strategy, a firm should produce only one product with lowest possible cost, whereas, according to the low-cost strategy, the firm should produce the same range of products at lower costs compared with its competitors. Both strategies help in charging the customers with the lowest profit margins possible. Under these circumstances, it is evident that there is not much difference between the strategies.