Amazon, Costco, Southwest.
These 3 great companies have 1 thing in common: A low price strategy.
I recently read this book titled “Confessions of the Pricing Man” by Hermann Simon. He is known as one of the world’s leading strategists on pricing. It’s been helpful to understand what is needed to make low pricing work in business. It’s not just about offering discounts or getting into a price war. It’s more than that.
Here's 5 frameworks to help you identify "low pricing business models":
For this to work, low pricing must be built into their business model.
These companies value things like:
- Frugality
- Process efficiency
- Strong procurement from suppliers
It's part of their DNA since the start. Low pricing also starts from the leadership and culture. From the type of car the CEO drives... to the furniture in the office (think of Jeff Bezos making tables out of wooden doors in the early days of AMZN)...
It sends a message to the employees:
We keep costs low!
Many low pricing companies have little profits. So they don't survive long.
But the exceptional ones are the opposite. Low pricing must co-exist with huge growth. Why? Because only with growth, are they able to create scale. And it's only with scale, that the business can enjoy cost advantages like:
- Lower unit cost
- Better payment terms
- Power over suppliers
Only with these, can the business lower its costs.
These great companies ensure they deliver quality products to customers.
Consistently.
They do NOT let low prices give an excuse to compromise on quality. Otherwise, sales volume will not be sustainable in the long run.
They know what to leave out.
Often, these companies produce products that are stripped-down versions of their competitors. This allows them to lower unit costs...
While still delivering what the customer wants
They do not wage price wars suddenly.
Or introduce discounts and promotions to push sales up.
Instead, they are mindful to associate everyday low prices to their brand. Customers expect it. They also don't send mixed signals. They do not pretend to be premium or aspirational. Their ads focus on low price. This allows them to dominate that category in the audience's mind.
And only with a strong brand, comes huge sales volume.
*****
If you like what you read, then you should check out my viral tweet on how to find 10-100 baggers.
I share the key investing concepts that allowed me to grow my portfolio by over 450% in the last 2.5 years.
Feel free to drop me a message too if you have questions or feedback. Happy to chat.
-Max
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What do you mean by "better payment terms"?