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Pricing and Business Strategy

What is the relationship between the pricing point an organisation chooses for its products and its overall business strategy?

Let's start saying that to compete sustainably companies can adopt one of the following strategies: Low cost or Differentiation.

The main challenge in developing a low-cost strategy is squeezing the costs of production to the bone. An organisation can do that by standardising and consequently automating the activities required to manufacture their products.

McDonald's provides an excellent example for this. In the recent movie The Founder, you can see how Richard James "Dick" McDonald and his brother Maurice James "Mac" McDonald created a low-cost strategy in the food industry.

The following slide shows how low-cost manufacturers despite selling their products at a reasonable price, can generate higher margins, therefore higher profits, by reducing the cost of production.

The second type of strategy leading to sustainable competitive advantage is differentiation.

Companies competing through a differentiation strategy produce premium products commanding higher prices which more than justify the increased cost of production.