Posted in Finance, Accounting and Economics Terms, Total Reads: 763
Definition: Low Cost Producer
This generally refers to a company which is able to produce provide goods and services at a lower cost than its competitors. This is possible typically by exploiting economies of scale and hence bringing the profit margin low but increasing their market size.
Generally a low cost producer has already invested a lot of capital in doing so as it is possible by using superior technology to bring down cost of production or to scale up production to reach the volume demands. Either way significant capital expenditure is involved. Following such a cost leadership strategy can result in a competitive advantage as customers more often than not try to procure from such a low cost producer and hence this will give them an unprecedented advantage in terms of market share over their rivals.
For example: Walmart is a low cost producer with massive economies of scale. With more than 11,000 stores operating in the world, it has a huge size. It does its own purchasing and procurement on its own and in turn brought down the cost of goods. Besides being such a huge player it exercises considerable control over its suppliers. Moreover it has an inexpensive distribution system through which it can cater to the customer. Having invested heavily in technological side of the business, Walmart has a very good information concerning its customers their likes, preferences and can maintain high level of customer satisfaction. Like Walmart can buy an item like pen for $6 from its suppliers while its competitors can do so in $7. Due to better distribution and economies of scale its cost of selling this pen to customer is $3, while this for its rival is $4. Thus the rival cannot sell below $11 while Walmart can keep a margin of $1 and sell at $10.