Low cost is not a strategy

If you want to be a bad product manager, have a low-cost strategy. Customers are price sensitive, and if you can deliver a product for less than the competition, you’ll be successful at generating more sales. Even if your product isn’t as good as the competition, if it’s cheaper, more people will buy it.

If you want to be a good product manager, do not pursue a low cost strategy unless you truly are offering a commodity product that can not be differentiated at all from the competition. Instead, you should develop a strategy around differentiating your product from the competition strategy, and consider a low price to the customer as part of that strategy.

Michael Porter’s generic strategies are the basis for the differentiation / low cost strategy discussion, and suggest that developing a low cost competency can be part of a cost leadership or segmentation strategy. Unfortunately, this has been misunderstood and misinterpreted, leading many to believe that low-cost is a strategy in and of itself, when in most cases it is not.

In Porter’s model, low cost refers to the cost from the firm’s perspective to produce the product. Many instead believe that it refers to the cost to the customer and thus develop their strategy around providing the lowest cost product to the customer. It makes more sense to use “price” to refer to the price a customer pays for a product, and “cost” to refer to the cost for a company to produce it.

Price certainly matters to customers, but it is not always the most important factor in a decision, and rarely is it the only factor. There are almost always other attributes and benefits that a product can offer that can make the product more valuable to the customer and thus able to be sold for a higher price.

This can even apply for commodity products — nails sold at a hardware store, for example. Assume there are three companies producing nails: Firm A produces basic nails at a reasonable cost; Firm B produces basic nails at a slightly lower cost than Firm A; and Firm C produces premium nails that can support heavier weight, are lighter, more durable, and less likely to bend.

Firm C has chosen to differentiate by offering a premium nail, likely for a premium price. Firm A and B are producing the exact same product, but it costs Firm B less to do it. Firm A’s strategy may be low cost, but they are not executing it as well as Firm B. Which strategy is best? Depending on the needs of the customers and how important price is compared to improved nail performance, either Firm B or Firm C may prevail (or both). Firm A may have a good strategy but they are not executing it as well as Firm B.

Low cost as a strategy is about producing what, to the consumer, appears to be the exact same product as a competitor or a nearly identical product with the same value, just being able to produce it more inexpensively. When competing soley on price, the firm with the lower cost structure wins, since it could either charge less than the competition an increase volume, or charge the same as the competitor to generate more margins on the same volume.

If you’re not producing the exact same product as a competitor, your strategy is to differentiate your product somehow. Even companies that appear to be pursuing a “low cost” strategy really are differentiating themselves. Wal-Mart and Southwest Airlines, for example, tout their low prices, but there are other elements of their strategies that differentiate them from their competition (Wal-Mart vs. Target, or Southwest Airlines vs. United). Providing low prices to customers is part of their strategy, and their cost structures allow them to operate less inexpensively, allowing them to produce at low cost and still retain reasonable margins.

Product managers will always be dealing with differentiated products — after all, if you are producing a non-differentiated product, you do not need a product manager, just a production manager to drive down costs. The challenge as a product manager is to differentiate your product from the competition and provide value for your customers. This requires an understanding of the importance of price and various other attributes in the minds of your customer and positioning your product appropriately.

Compete on price if it is the most important attribute to the customer and there is no way to distinguish your product; otherwise, create a unique product that will provide more value to the customer than the competition.