How to Choose Good Stocks: Look for Companies with the Lowest Cost

In today’s world of intense competition, companies are always looking for strategies to be unique. With this aim to be unique, what is that one powerful strategy that helps companies attract consumers and hence, stand out. It is the ability to price very low.
How can companies gain this advantage & mold it into a winning strategy for the long-term? Which companies in India have this advantage?

Companies with the lowest cost can compete on price and win

With a big chunk of Indian consumers highly pricing sensitive, the low-price strategy helps a company to stand out, attract consumers and establish itself as a significant player in its segment.

Consider the example of Nirma. By the 1980s, Nirma catapulted to the top slot over Surf, then a well-established detergent powder.  Nirma achieved this by pricing its detergent at an unbelievably low price compared to Surf. Its quality wasn’t the same as that of Surf, but it did the essential job of cleaning, and customers were happy with it. With indigenous processes, low-cost packaging, low-profile marketing, and attractive pricing, Nirma quickly emerged as a dominant market player. This is the power of being able to price competitively.

Being the lowest-cost producer (having significant cost advantages) when coupled with large volumes helps a company grow its sales and profits, even when it sets prices of its products competitively.

• High volumes: For this, the company needs to gear up procurement, manufacturing, selling, etc. in a way that gives them a cost advantage.
• Cost-leadership strategy, i.e. the lowest-cost producer: This can be achieved by
  1. Working on low costs for everything — raw material, manufacturing, selling, and marketing.
  2. Having the power to negotiate lower costs with its suppliers. This power usually comes from long-term relationships with suppliers, by placing orders well in advance.
  3. Getting assets really cheap (maybe during the start-up phase).
  4. Coming up with a cost-effective process.
     

A low-price strategy may work well as an entry-level strategy, but by itself, it isn’t a long-lasting one. The company also has to make money/profits. The combination of attractive pricing and great profits is a long-lasting strategy — but a difficult one to implement! And you are likely to find only one such player in a particular industry with this moat.