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.