Fighting Inflation - The 4 Recipes of Low-Cost Brands to Profit From It.
Low cost is also, in its way, a form of sobriety.
Faced with inflation, consumers have begun to change their behavior by switching to retailer’s brands and “first prices” in the major food retailers.
Moreover, some are turning to low-cost distributors, also known as “hard discounters”. Lidl, for example, saw a sharp increase in sales in the summer of 2022 in Europe.
In other sectors, low cost is also making headway: in the automotive sector, the success of the Dacia range is undeniable, to the point of representing 40% of Renault's sales today. In air transport, low cost has reached 47% market share in Europe in 2022, compared to 41% in 2019.
But how exactly does this model work? Here are the 4 recipes of low-cost brands to take full advantage of it and satisfy growing consumer demand.
Step 1 - Reduce the product to its essential use
The first step is always the same. Low-cost brands start with a complex product in demand by consumers before stripping it of all its non-essential features for the customer.
What do you get? You get a minimalist product, whose promise is summed up in a slogan: “The essentials, nothing but the essentials”.
In the car industry, the dashboard with multiple features is out. Instead, it's all about reliability, to avoid breakdowns. In food distribution, no more shelves with dozens of references for the same product. Instead, the equation “one need = one product”, with a good quality/price ratio.
In air transport, no more free snacks on board. The main thing is flight safety. Ryanair and EasyJet have never had a fatal accident since their creation.
Step 2 - Standardize the manufacturing process
Once the product has been simplified in the first step, it is time to standardize the manufacturing process. The goal? To lower the costs of course.
In food distribution, a discount chain offers 1,500 references, ten times less than a classic distributor. This reduction of the assortment makes it possible to massify purchases from suppliers and thus obtain significant discounts.
The same is true in the airline industry: since there are no promises other than safety, and no time wasted in restocking and waiting for connections, planes can make quick turnarounds and cabins can be densified.
Step 3 - Price below the benchmark products
You have an oversimplified product and a standardized manufacturing process. Now you need to set a price lower than the reference products but higher than your costs of course.
The lower price will stimulate demand and create an induction effect.
The objective is not to target only the customers who already use the reference product but to target new customers. This is the case of Dacia, whose entry-level model allows customers who were buying used cars to go into the new market.
Step 4 - Add some paid options
The last step is optional, but all brands are doing it to generate additional revenue. It consists of adding a pinch of paid options, which are the non-essential features that you initially removed.
These ancillary services, at the customer's option, are a significant source of margin, especially in the airline industry. The result is a business model that can be very profitable, combining high volumes and positive margins. This is the paradox of low cost: even though they charge attractive prices, the low-cost giants, such as Ryanair or Lidl, outperform their competitors in terms of profitability.
Low cost is certainly not the stuff of dreams because of its minimalist promise and sometimes, as in the airline industry, because of its questionable social practices, but in times of inflation, it has a bright future among consumers.
Low cost is also, in its way, a form of sobriety: less fuss, less unnecessary, just the essentials. A model that also fits perfectly with the frugal movement that continues to grow.
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