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Thursday, July 8, 2010

Betting high on Volumes & low on Prices

Company which bet high on volumes & low on prices emerge as a clear winner!

Being the lowest-cost producer (having significant cost advantages), when coupled with large volumes helps a company grow its sales & profits, even when it prices its products competitively. With a big chunk of the Indian consumers being highly price sensitive; this advantage helps establish the company as an important player in that segment.

1) Working on high-volumes: What happens when a company offers very low & attractive prices for its products or services, so low that nobody can match? Very obviously, it attracts a large number of customers which leads to increased sales volumes. For this the company needs to gear up everything for the large volumes i.e. procurement, manufacturing, selling etc in such a manner that it gives them a cost advantage.

2) Working on a cost-leadership strategy i.e. the lowest-cost producer: This can be achieved by
  • Working on low-costs for everything; procuring raw material, low manufacturing expenses, low selling & marketing expenses etc
  • Having the power to negotiate lower costs with its suppliers. This power usually comes from long-term relations with suppliers, placing orders well in advance (by forecasting demand).
  • Inventing a cost-effective process 
One of the famous text-book example that has sustained this competitive advantage for years is Wal-Mart. Wal-Mart’s rise to massive market capitalization from its modest beginnings was largely a result of its aggressive cost controls which enabled it price lower than competing retail outlets.

An Indian company that exemplifies this advantage is Amul. Amul has been a market leader for the last 4 decades now. It adopted a low-cost strategy for selling its products like ice-cream, butter etc & has since then emerged a winner in this segment. It has a cost advantage as it gets milk directly from a large number of farmers. Amul has always been known for providing value-for-money products, with no compromise on quality.

In a particular industry, you are likely to find only such player existing; who has managed to convert its low cost of operations into attractive pricing & hence earn profits out of it. For example: It is unlikely to have another Wal-Mart in the same segment

Which companies in India have this advantage?

Consider Koutons Retail, the largest discount retailer for readymade apparels in India. Its strong retail network and a value retailing format combined with a franchise based model enables it to offer heavy discounts on apparels.

Big Bazaar a part of Pantaloon Retail (India) Ltd. provides consumers the experience of shopping at a malls and supermarkets giving them acceptable quality and service at the lowest prices. Its punch line very rightly suggests the same – Is se SASTA aur ACCHA kahin nahi!

Tata Motors is also known to provide good quality cars at very low costs. This started with Tata Indica which provided the public with an affordable alternative to the Maruti 800. Infact just hours before the car was launched, Maruti called for a press conference announcing price cuts across its lineup and introduction of more cheaper variants, fearing its bread and butter model, Maruti 800 was in trouble! And now with the entry of Tata Nano, they have carried the tradition further.