The paper "Cost Leadership Strategy, Using Discounts as a Pricing Strategy to Increase Sales" is a perfect example of a business assignment. Vizio is using a cost leadership strategy. This is a strategy that involves a firm working to keep its operating costs low so that the products or services that it produces can be sold at low prices. By keeping their operating costs low, firms that are engaged in the cost leadership strategy are able to make a profit even when selling their products at lower prices than what their competitors offer.
The components of the cost leadership strategy are as follows. To start with, the firm needs to improve its cost structure by reducing direct and indirect costs. For Vizio, this has been achieved in a number of ways. For instance, the company has outsourced most of the services that it requires, including research and development, warehousing, tech support and shipping. The company also has considerably fewer employees and managerial layers compared to the industry average. In addition, Vizio has low overhead costs in that the company’ s overhead costs are less than 1% of its sales.
This is far below the average ratio among the company’ s competitors, where overhead cost as a percentage of sales is about 10 percent. Vizio has also ensured that other functions that are critical to success and which would lead to high costs such as the development of concepts, marketing, and customer service are kept in-house. The company also seeks to improve its cost structure by having a low-cost distribution network that includes discount chains like Costco and Sam’ s Club and others, with the aim of reaching mass-market buyers who have a tendency to be price sensitive. Another component of the cost leadership strategy is to improve asset utilisation.
Vizio maximises the use of its assets by having many functions that would need to be located in different places managed in-house. For instance, instead of having a separate location for offering technical support to customers, the company has maintained all technical support services within its service centre in South Dakota. Also, instead of having separate dedicated premises for selling its computers, the company uses the same distribution channel that it uses to sell televisions by selling its computers through retailers such as Costco, Amazon, Target, Sam’ s Club and Walmart.
Vizio also sells its computers through portable mini-stores that are designed from old shipping containers, which the company places in college grounds, music festivals and other functions. This means that the company is not only able to avoid high rental costs through the use of containers, but it can also use one container in more than one location where its target market is located because of the containers’ portability. Topic 4: What are the dangers of using discounts as a pricing strategy to increase sales?
Explain each danger identified. Selling goods or services at a lower price than the regular price can be costly. To start with, by offering discounts, it means that customers may never pay more, implying that the buyers may never pay the full price that the business would have expected. This may eat up the business’ s existing revenue. In other words, discounts may result in a reduction in a business’ s profit. Offering discounts can lead to devaluation of a brand.
This is because there is a thin line between the promotion of a brand and diluting the brand. Offering discounts make a service or product more enticing to try, but this puts the business at risk given that customers may not see the real value in paying the full price of the service or product if they know that they can get a discount. Since most people value brands based on price, selling a product or service at a discount may lead to a perception among customers that what is being sold at a lower price has a lower value. Using discounts as a pricing strategy may not be a sustainable practice.
This is because customers may only buy the items that are discounted and not others. Also, new customers who are attracted by the discount offer may not turn into repeat customers. This implies that the high sales volume that is achieved as a result of discounts being offered may only be short-lived. Offering discounts may spark a price war with competitors. What this means is that when a business sells products or services based on price, it is always at the mercy of any other competitor that aims to compete based on price.
The competitors may lower their prices to an extent that it becomes difficult for some firms to even survive because of very low prices being offered and the reduced profit margins. Offering discounts may set a bad precedent for customers. This is because customers may get used to buying only when discounts are being offered instead of paying the regular price. In addition, some customers who get a discount will also expect to get a discount on their next purchase.
Also, some customers may stay away until they hear about other discount offers. This is bad because the business will be forced to always offer discounts in order to increase sales, which may not be sustainable.