Competitive advantage – any feature of a business that allows it to compete effectively with rival products as the have an ‘edge’ over competitors.]
Competitive advantage can be gained in the following ways:
- Lower prices will increase demand.
- Better quality will encourage customers as well as better customer service will lead to repeat customers.
- A unique feature which allows it to be superior to competitors and stand out.
- Strong brand reputation will lead to brand loyalty.
- Entering a niche market is also another way.
- Product differentiation
Product differentiation – designing and making the product/service so it is different from competitors’ products.
By differentiating a product, it seems more favourable than those from a competitor which gains them a competitive advantage over other firms.
ADVANTAGES OF PRODUCT DIFFERENTIATION
- Products stand out and gain attention.
- Consumers think that the product is better/ more desirable so are willing to pay higher prices e.g. better packaging leads to artificial differentiation.
- Higher prices can be charged so increased profit margins.
- Product life cycle will be steady sales and reliable products.
Adding value – creating worth or additional value to a product over its’ cost of production.
Why is adding value important?
- To survive financially (covering costs).
- To differentiate the products from competitors.
- To make a product.
- To focus on a certain market segment.
How do firms decide on price and output level?
Pricing strategy – the way in which a business decides on the price of a product.
Price and output are linked to a range of factors:
- Type of market
- If the product is differentiated or has competitive advantage.
- If the economy is growing
- Their position in the market
- Advertising campaign
- Adding value
Cost plus: add a profit margin to the cost of production
Competitive pricing: taking the market price (based off competitors)
Premium pricing: high prices for status brands.
Market penetration: low prices used initially to gain market share
Stable market – pace of change is slow; market share and size are constant with little variation in price.
Dynamic market – rapid changes in demand (affected by change in income and taste. There are often new entrants to the market with price changes and there can be creative destruction.