In short words, the low cost business model is based on a strategy by which the business offers low prices in order to instigate demand thus, gaining market share. This business model can be adopted by virtually any company, but it is usually indicated in cases when there is no (or little) competitive advantage or when it is easier to achieve scale with production volumes, so they apply the strategy of cost advantage.
Low Cost Business Model Canvas
- Low-Cost Customer Segments: Price-sensitive customers are the main target of low-cost businesses, but you can say that this is pretty much a mass-market as well.
- Low-Cost Value Propositions: Low-cost businesses offer no-frills products or services for which the non-essential features have been removed to keep the price low.
- Low-Cost Channels: Digital stores like companies own e-commerce websites and aggregators. Physical stores at airports or high-traffic areas can also be part of the channel strategy.
- Low-Cost Customer Relationship: Usually self-service to avoid high human-resources costs. Customer support, especially if they can be outsourced for low-cost call centers.
- Low-Cost Revenue Streams: Low-cost prices attract customers, but the extra services for non-essential services or product features are what increase profit margins.
- Low-Cost Key Resources: The most important asset is having standardized processes and equipment in place. The operational cost must be minimum therefore optimized.
- Low-Cost Key Activities: Since the low price is responsible for attracting customers, operating the business to deliver the value with a low-cost structure is key.
- Low-Cost Key Partners: A good partnership with suppliers, especially equipment suppliers can make a big difference.
- Low-Cost Cost Structure: Operations and human resources are the heaviest cost in this model.
What is cost advantage?Simply put, a business may employ the cost advantage when it is able to manufacture some product or provide some service at a lower cost than its competitors. They can apply this advantage in two ways:
- By lowing their prices below the competition, thus attracting more customers, and gaining market share. The low margins will be, then, compensated by higher sales volumes.
- By pricing their products equally as their competition, but having a cheaper cost structure, thus making more profit.
- Low-cost raw materials,
- Sustainable processes, technologies, and operations,
- Efficient distribution,
- Low-cost sales strategy,
- Outsourced services,
- Lean manufacturing strategies.