You walk into a store and find two products that do pretty much the same thing. One costs 80 riyals, while the other costs 120.

Despite the price difference, some customers choose the more expensive product.

If a lower price were the only way to win, the second product should have disappeared from the market. Yet it may endure—and perhaps even be more successful.

So why don’t all companies try to be the cheapest?

The answer begins with a fundamental strategic decision: how does a company want to compete?

One of the concepts covered in Dr. @Mehran Hafizullah’s Strategic Management course at Al Yamamah University is business-level strategy: how a company chooses to compete within a particular business, with options including cost leadership, differentiation, and focus.

When price is part of the strategy

The first option is cost leadership: a company’s ability to compete on the basis of lower costs.

But lower costs don’t simply mean putting a cheaper price tag on a product. To keep competing this way, a company needs a business model that allows it to lower its costs relative to its competitors.

This may come from the scale of its operations, its production methods, resource management, or other factors that make it less costly to offer the product.

By contrast, another company may choose not to enter this competition at all.

Instead, it may pursue differentiation: offering value or features that make its product or service stand out in the customer’s eyes.

This difference may lie in quality, design, service, the customer experience, or other elements that give buyers a reason to choose the company even when it isn’t the cheapest.

This classification is associated with Michael E. Porter’s work on competitive strategy. He presented cost leadership, differentiation, and focus as generic strategies through which companies can build a competitive position.

This helps explain why products at different prices can both find buyers in the same market: customers don’t buy price alone; they weigh the price against the value they believe they’ll receive.

Not every customer is the target customer

A third path is focus, which means choosing a specific scope within the market rather than trying to serve everyone in the same way. One of the concepts covered in the Strategic Management course is that this focus can be paired with either low cost or differentiation.

A company may tailor its offering to serve a particular customer segment and understand that segment’s needs more deeply, rather than trying to offer a product that suits the entire market.

This makes the strategic question more precise than simply: How do we sell more?

It’s also about: Whom do we want to serve? And on what basis do we want that customer to choose us over our competitors?

That’s why not all companies try to be the cheapest: price isn’t the only way to compete. One company may build its position on low costs, another on differentiation, and a third on serving a specific part of the market.

Ultimately, the hardest question a company faces may not be: What should our price be?

It may be the question that comes before it:

What reason do we want customers to have for choosing us in the first place?

Theoretical reference:

Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, 1980.

Official link:

https://www.simonandschuster.com/books/Competitive-Strategy/Michael-E-Porter/9780684841489

Disclaimer: This material was prepared under the supervision of a Yamamah Insights editor and with the assistance of artificial intelligence tools for financial education purposes. It is not a recommendation to buy, sell, or hold any security, and it reflects the views of its authors, not those of the platform.