A low cost pricing strategy in marketing is an attempt by a company to increase sales by offering a product or service at a low price relative to competitors. This strategy, sometimes also called a price leadership strategy, is typically a difficult strategy for smaller businesses to employ because of the high sales volume needed to make up for smaller profit margins.
In general, a low cost pricing strategy works best with a product or service that has little or no differentiation from competitive products or services. This strategy is often employed by large corporations that are able to achieve an economy of scale. An economy of scale occurs when a company is able to be more efficient by producing a large volume of a product resulting in a lower unit cost.
One of the greatest drawbacks to low cost pricing strategies, especially for small businesses, is that competitors can lower their prices. Lower prices are generally most effective when the company has the ability to produce goods at a lower cost than competitors.
A low cost pricing strategy may also result in potential customers associating the brand with being cheap or of lower quality than its premium priced competitors.