Cost advantage

A company has a cost advantage when it can produce a product or provide a service at a lower cost than its competitors. Companies with this advantage produce in higher quantities and benefit from one or more of the following elements:

• Access to low-cost raw materials
• Efficient processes and technologies
• Low distribution and sales costs
• Efficiently managed operations

Companies can capitalize on a cost advantage in one of two ways:

• They can price their products the same as their competitors but make more profit because their costs are lower.
• They can lower their prices below those charged by competitors to attract more customers and gain market shares.
• In this case, the loss on margin—the difference between the price charged and the cost to make the product—is offset by higher sales volumes.

Cost advantage is one of three ways a company can create a competitive advantage, with the other two being an offer advantage (adding value to a product or service through unique features) and a niche advantage (serving a specific segment of the market better than anyone else). Excelling in at least one of these while remaining competitive in the other two puts a company in a strong position to gain market shares and improve its profitability.