Low cost Strategy vs Differentiation Strategy

There are basically two strategic paths a business can travel down. Option one: take the low cost path, cutting costs as much as possible and then pass those savings to the customer in the form of lower prices. Option two: try to differentiate your product in such a way that consumers are willing to pay a price premium.

The first option can involve complex operations management schemes, outsourcing to third world countries, or limiting employee benefits like health care. The second option requires creativity and innovation in order to develop a differentiating quality.

Most marketers would attest that the second option is superior. Seth Godin says “the only route to healthy growth is a remarkable product”. The title Differentiate or Die by Jack Trout, speaks for itself.

But then there’s Walmart and Dell, who have shown us that the low cost strategy can be effective. On the other side of the spectrum there’s Apple Computer, BMW, and Nike who have used a differentiation strategy, to build tremendous brand equity.

The thing is, you can do both if you are creative. Southwest Airlines cut costs by only flying 737’s, eliminating reserved seats, and not serving meals. But they also differentiated themselves by creating a fun experience for guests by performing stand up comedy and jumping out of overhead storage bins. It shows that you don’t have to spend a lot to differentiate your product from the competition.