Let us assume that your start-up has figured out some way of reducing its costs below competition. It might have done so through finding cheaper sources of raw materials (thus lowering costs of goods sold), or reducing process steps, or using proprietary technology, or using cheaper labor, or whatever. Once accomplished, you have cost reduction strategies in place but that is only half a business strategy. Now you now have two sub-strategies to consider for the other half:
- Sub-Strategy 1: Passing Reduced Costs on to Customers: You leverage your unique capability and turn it into lower prices for customers, thus achieving higher market penetration. This is a particularly good sub-strategy to utilize when cost savings does not also result in a better product in the eyes of customers. Now, when customers compare your product and a competitor’s product side-by-side, they will see two products that provide relatively identical functionality but your product will be less pricey, and thus will provide more value.
- Sub-Strategy 2: Converting Reduced Costs into Higher Margins: You maintain prices comparable to competition, but because your costs are lower, you achieve higher profit than competition. With higher profits, your company will command higher valuation, and you can retain those profits, reinvest them in R&D, further enhance your processes, and thus drive down your costs even further.
The above extracted from my latest book, Will Your New Start Up Make Money? Buy your copy in Kindle or paperback format at http://www.amazon.com/Will-Your-Start-Make-Money-ebook/dp/B00JOOZQNE.