Most successful businesses are super-simplifiers. They are either in the mass market segment (low-cost player) or in the premium segment (value proposition player). Businesses that don't have any competitive edge are usually stuck in the middle of this conundrum.
Geoffrey Moore, the author of the famous book Crossing the Chasm, observed that there are two key business architectures: high margin, low volume (complex systems model) or low margin, high volume (volume operations model). This concept demonstrates that a company cannot do both at the same time.
Few examples;
Maruti Suzuki is a low-cost player in the Indian car industry.
BMW is a premium brand in the car industry.
Southwest Airlines is a mass-market player in the airline industry.
Apple is a premium brand in the tech consumer products industry.
IKEA is a mass-market player in the furniture industry.
The mass market model is all about offering a low-cost product or service in the entire industries, and businesses should have a product and system that can reduce the costs dramatically not just incrementally. The key question is how could the cost be reduced substantially when compared to the competition so that it creates a massive demand for the product in the market.
Back in 1910, Henry Ford reduced the price of the car and created a massive demand for the entire car market. He introduced assembly line to manufacture the cars quickly by reducing the labour costs and also reduced the variety of the car just to one model T. Ford. He scaled up the business quickly so that competition didn’t catch up.
To reduce costs, a company needs to deeply look into their cost structure right from manufacturing, distribution, pricing and marketing.
The premium segment is all about enhancing the value proposition and service to a specific market that is not price-sensitive.
Apple does this brilliantly. It offers premium technology products like smartphones, watches, iPad to a specific target market, which craves for aesthetic design and great usability. They charge a premium price and is one of the most profitable companies in the world.
To put things in perspective, you either have to be the Ford or Apple of your industry.
To choose which route to travel, low cost or premium, you just need to check your own mindset, company culture, and capabilities. If you, as an entrepreneur, has a flair for aesthetics and elegance and has built the skillsets of your organization accordingly, the premium segment would be an ideal fit for you.
On the other hand, if you have an eye for costing and experienced in procuring materials and labour at lower costs, then go for the low-cost strategy. To become a low-cost player, you need to quickly scale-up the business. This will further help you to negotiate with the suppliers and reduce the costs further and also build an entry barrier to the competition.
Having clarity on this fundamental business model will help you devise the entire business strategy, product, pricing, company culture and marketing efficiently.
About the Author
Rajesh Srinivasan is a Marketing Strategy Consultant, Author, and Keynote speaker.