Are you a premium product producer or a cost leader?

Have you ever had a customer ask for a replacement after the warranty expired? And how did you respond? If you responded that the warranty had expired and you couldn’t replace it, you are probably a cost leader. Did you know that?

Knowing whether you are a cost leader or a premium product producer is incredibly powerful, but also very important, and here’s why.

A premium product producer makes a product that has unique attributes in the market – one or more things that set it apart. For instance, a premium toothbrush might have different handle covers that can be changed out. Or a premium lawn mower might have a rock detector. These products command a higher price because they are unique in some way. That added feature must have some value to the consumer. If consumers don’t value a lawn mower that detects rocks, the product may not sell. But if it saves time or money or increases safety (think Volvo), it may be able to command a premium price.

On the other hand, a cost leader makes a product that fulfills a need, but has no significant unique features. This toothbrush has a handle and brushes your teeth just like the hundred other products on the market, even though the handle might have an extra curve or be colored red. This lawn mower cuts and bags grass, has a capable engine, and has all the standard safety features, but so do the others.

Knowing whether you make a premium product or a cost leader has a dramatic impact on how you should approach the market.

  Premium Product Producer Cost Leader Producer
Pricing Always try to have highest price Always try to have lowest price
Features Have unique features that set you apart In constant feature battle with competitors
Margin % Larger Smaller
Volumes Likely smaller Hopefully larger
What sells Word of mouth Lower price
Service Maintain customers at all cost Expect customers to buy by price next time
Support Repair or replace anything at your expense Stick religiously to product warranty language

Word of mouth sells the premium product, while cost sells the cost leader product. Therefore, a premium product producer must do everything to ensure that the customer is satisfied and recommends the product to someone else. On the other hand, a cost leader doesn’t need to worry about recommendations, so they provide less service and support.

It would be easy to jump to the conclusion that it’s best to produce a premium product. After all, cost leaders constantly have to lower prices to bring in customers. Yes, premium products command a higher price and deliver a better customer experience, but usually the volumes are lower since people will gravitate to price unless you’ve made a case for why your product is better. And the costs of maintaining a customer base are much higher due to the exemplary support you deliver. Many companies over the years have made their fortunes making cost leader products. Ford makes the bulk of their revenue not from the premium Mustang, but from the cost-leader Ford Focus.

The mistake is not in choosing to be one type of producer or the other, but in choosing neither. All too often, companies don’t realize that they are a premium product producer and then skimp on service or try to out-bid their competitors for price. Doing so is the easiest way to erase the customer’s perception that there is anything premium about your product. On the other hand, maintaining the higher price in the market says that something is different about your product and gets people thinking.

I once worked for a company that whose engineers had worked on a whiteboard that would record your writing. But it turned out to be more difficult than they thought to build. By the time the product came out, it had to be priced higher than all the other similar products. As it was being released, a national magazine released a “round-up” of products in the category. To the engineers’ surprise, they called our product “The Cadillac” of the category. Why? Because it was the most expensive. From that day on, the product was a premium product. Had we attempted to compete on price, our margins would have been too low and we would have gone out of business.

Trying to be both is a recipe for low margins and high costs.

Before your market decides whether you have a premium product or a cost-leader, you need to decide for yourself. If you do, you’ll be able to deliver the right level of service and know whether it is okay to compete on price. And in the end, you’ll make more money.