Be aware; a low-cost strategy brings high risk

Aja Stuart

Everyone loves a bargain. There are plenty of customers out there looking for the best deal, and plenty of businesses offer cheap or discounted goods and services.

This particular business strategy, however, is one of the riskiest. If you’ve found a way to provide a cheap product, you may want to consider how sustainable this strategy really is.

So, what are the risks of the race to the bottom?

You make less money

It seems right to start with the most glaringly obvious problem of a cost-based strategy. Your amazing prices are amazing! Your profit margins, less so.

With less money coming in you will be highly dependant on keeping your business costs low. This skin-of-the-teeth existence poses a significant risk to the sustainability of your business simply because you have no cushioning against the normal ups and downs of business.

This skin-of-the-teeth existence poses a significant risk to the sustainability of your business.

While you may have access to some great low cost products or services now, this can change instantly. Price fluctuations are extremely common. Droughts, policy changes, new technologies, you name it; there is an eternal stream of factors outside your control that can impact your business costs and eat up your margins almost immediately.

Ebbs and flows in sales are another sobering factor for a business with a low cost strategy. What happens when you have a quiet sales period? What if it goes for longer than you anticipated? Do you have enough of cushion to see that through?

If your margins are tight and suddenly you can’t source your product cheaply, or you have a drop in income for a short period, you can quickly find yourself in the unenviable position of trading at a loss.

You have fair weather customers

When you provide the cheapest goods on the market you attract customers looking for the cheapest goods on the market. Well, yeah, of course. The thing about price-buyers is that’s either their thrill, or what they can afford. They aren’t raving fans of your business. They’re raving fans of affordability.

This means your customer base has very little, if any, loyalty to you. So if something causes you to have to charge more, or a bigger, cheaper competitor hits the scene, there go your customers. It seems obvious, but it’s a huge factor in a tight, competitive market.

It’s hard to change your mind

Picture this, you’ve worked hard to build your businesses up to be a leader in discount goods and now your spot is the go-to for great prices and everyone knows it. As your business grows, so do the expenses, and your tight margins are squeezed tighter. Or, without warning, you can’t source your products so cheaply (see above) and your margins start looking practically anemic. In a catastrophic scenario, both these things happen and now there’s red all over your accounts.

So you decide to swap it up, introduce some premium products, and get fancy.

"his kind of reputation often translates as reputation for low quality, and it’s hard to shake that.

The problem is, all your customers know you as a discount leader. This kind of reputation often translates as reputation for low quality, and it’s hard to shake that. Just think of how many millions of dollars and years of work McDonald’s has had to do to rebrand as a high quality café. Even after all that, they still haven’t managed to completely shake their fast food reputation. Do you have, or intend to have, the capital and resources to do a major rebrand?

Not to mention your customer base most likely consists of bargain hunters (again, see above.) This has the potential for a double-whammy of losing your original customers to the cheapest competition and also having to convince a whole new market that you’ve changed. Put simply, it can be quite a difficult position to rebrand.

Unless you have an amazing industry innovation that’s hard to replicate or some serious strategic thinking behind your business, a purely low cost strategy comes with some big risks. Is the discount really worth it, after all?

Aja Stuart

Aja is Sydney-based writer and serial entrepreneur. She regularly writes about small business, entrepreneurship, and health and wellbeing. Her latest entrepreneurial adventure is!

Image: Russell Street, Flickr Creative Commons License