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Cost Leadership, Differentiation and Profit Models

So Today morning , All I had to do was attend class.

This class was taught to us ( Minor in Entrepreneurship ) by Srini Addepalli ( Founder, GlobalGyan )

I really enjoyed his teachings and found them to be very useful.

Here I would like to share some of my notes with you.


Cost Leadership and Differentiation

There really are two kind of pricing and cost models

Cost Leadership :

The company reduces the cost of the product while selling the product at the average price.

The companies can reduce their cost using

1) Innovation

2) Volume

This allows them to gain a competitive edge over other companies.

Example : Indigo Airlines

Differentiation :
The company sells the product at a price higher than the average price.

In order to do this they create two kind of benefits :

  1. Tangible : Quality , Features
  2. Intangible : Brand , Social , Design and Experience
Example : Apple , Nike , Adidas


Law of Diminishing Marginal Utility ( Rasgulla Happiness Theorem )

Basically it says that the amount of happiness one gets after consuming a product does not improve much after a certain limit.

For Example :

-> If a person is given one rasgulla , he is happy

-> If he is given another rasgulla , he is happier

-> After third , he is full

-> After fourth , his happiness does not change much

-> After fifth, he is not able to eat any more..

Thus same is the case with innovation, after a certain limit the user happiness does not affect much with the increase in quality of a given feature.


Niche ( Cost Leadership and Differentiation )

To enter the market , companies can focus on small niche of users.

Such as a equipment specifically for surgeons. The differentiated companies won’t enter such a market as they would lose their prime customers there and thus is a winning strategy.


The 4 types of Profit Models

Most businesses today follow either of these 4 kind of Profit Models
  1. Asset builders
2. Service Providers

  1. Technology Creators

  2. Network Orchestrators

The way these businesses can make more profits is considerably different and require different strategies.


Asset Builders

These companies use Capital to produce Capability.

These companies include Airlines , Hotels , Transport , Real Estate etc.

What these companies do is basically collect assets in exchange of capital to produce revenue.

The revenue here is usually calculated in terms of Unit / Volume

In order to produce more profit asset builders must focus on Capability Utilization ( ie. Asset Utilization )


Service Providers

These companies use Human Resources to provide Services

Example : IT Industry , Freelancers , Musicians , Doctors , Lawyers etc.

The revenue here is calculated in terms of Unit / Time

In order to produce more profit service providers must focus on Productivity

-> Talent Management ( Training etc. )

-> Automation


Technology Creators

These companies use technology as a leverage to sell Intellectual Property.

The main selling point of these companies is the uniqueness of the product.

Examples include Books , Courses , Music Albums , Films etc.

The revenue here is usually calculated in terms of Unit / Features or Unit / Uniqueness or Unit / Product ( Book , Course , Album etc. )

In order to produce more profit technology creators must focus on increasing the value of their product.


Network Orchestrators

These companies rely on existing asset builders and consumers.

They enable the asset builders to reach more asset utilization and also the consumer to reach the producer more easily.

Thus they act as Marketplace for transactions to take place.

For Example : Uber , eBay , Ola , AirBNB , Play Store

The revenue here is calculated in terms of Percentage Fee

In order to produce more profit these companies must “Reduce Friction” in the marketplace

-> Use Ratings for sellers

-> Targeting


I hope that you learned something of value from this post. Please leave a feedback if you like it.

Cheers :)