What You Need To Know If You’re Competing On Cost

In the 'Metail' economy, if you want to be cost competitive, you need to understand the implications that has on the way you must orient your cost structure as well as your strategy.

Price is what you pay, value is what you get. —Warren Buffett

Let’s face it—everyone loves a bargain. Most of us can quickly conjure up an idea of what the cost model looks like and understand its attraction to so many businesses. Apples to apples, who doesn’t want to pay less than someone else? But for a long time, cost was difficult to objectively determine. It was more about how someone felt about the price-value exchange versus the dead-net-lowest cost.

However, in the Metail era, price information is at every Me’s fingertips, and while bargains on goods and services will inevitably find buyers, competing at the lowest cost has become much more challenging. Even those of means think twice about paying full retail, and shopping at retailers across the cost spectrum has become almost chic. You now have countless Me’s shopping in a cost-conscious way who wouldn’t have been caught dead in an off-price retailer even 10 years ago.

Of course, some need a bargain more than others, particularly post-Covid, where millions of families have had to learn how to stretch a dollar. More Me’s seek out the cheapest option in a recession or crisis, amid widespread job layoffs and furloughs, because they simply must.

But that behavior carries forward. There are Me’s who like a steal for other reasons. These Me’s might believe in spending more on items like shoes or handbags, for example, eager to be seen with the right “it” bag on their arm no matter what the price, and yet they still stock up on a 10-pack of tube socks. Whatever drives your Me’s to hunt for the best deal, know that there is more to becoming a successful cost Metailer than you might think.

That’s because definitions matter. Cost means cost, not value. Value is too ephemeral to make it a C. Do shoppers care about value? Sure, sometimes—maybe even often. But value is relative, and cost is absolute. So, resist the temptation to confuse the two. Prior to Metail, many retailers could compete on cost whether they were lowest cost or not, because the information advantage—the power—rested with the company. Today, if you want to be cost competitive, you must mean it and understand the implications that has on the way you must orient your cost structure as well as your strategy.

Value Exchange

Too many companies have found themselves contemplating the cost model of Metail at one time or another. When little if anything you are offering is differentiated, the main way to compete is to provide products at a low enough cost to attract customers. Cost-model competitors like Dollar General and Walmart modeled their entire businesses around low cost and grew economic profit through sheer scale. That can still be a winning formula.

But if that’s your strategy, then you must root out costs wherever you can to pass those savings along to the consumer. Too many former cost competitors have allowed costs to creep into their businesses, making it more difficult to retain the title of lowest cost. With information available to everyone, either you are the lowest cost or you are not—hard stop. That’s why this C exclusively is not for most of you.

To use just one example, it’s a common misperception that Costco is a cost player; based on its name, that’s understandable. But it certainly doesn’t offer the cheapest goods in town. Rather, it offers a narrow selection of quality products in large quantities, or sharply priced individual items, all at relatively competitive prices on a per-unit basis. So, if you’re buying food for a Thanksgiving gathering of extended family members, you’re in good shape. But if you only want a package of muffins sized for a family of four, you might be better off going to your local supermarket. The point is that Costco customers value cost (among other Cs), but they do not view Costco as the absolute lowest cost for most items, unless they are buying in bulk. You might say that Costco has chosen a pinch of the cost ingredient, but just a pinch.

Cost-focused Me’s want to know that whatever they are buying—whether that’s a single bottle of Windex at a dollar store or a pair of $8 jeans from Primark or a tankful of the cheapest gas for their car—they are paying (and can check that it is) the absolute lowest cost. The competitive strategy here is simply that you’re offering the best deal possible.

 

Excerpted with permission from The Metail Economy: 6 Strategies for Transforming Your Business to Thrive in the Me-Centric Consumer Revolution  by Joel Bines, pp. 48-51 (McGraw Hill, January 2022).

Joel Bines is managing director and co-head of the Global Retail Practice at the business consulting firm AlixPartners. He is the author of “The Metail Economy: 6 Strategies for Transforming Your Business to Thrive in the Me-Centric Consumer Revolution” (McGraw Hill, January 2022).