Ultimately you have to settle for one of the three business strategy options, and it is important that you are clear on what one you are going for.  

Your business strategies choices are, at the end of the day, very simple.   The big question is, how do you want to position yourself in relation to  your competition.  Basically your options are:  

• To be the cheapest
• To be the best
• To dominate a market niche

Many small businesses go for the first option, in the mistaken belief that it is the only way to survive.   The problem is, there will always be someone who can do what you do more cheaply than you can.  

A cost leadership strategy is only really suitable for big businesses that have substantial economies of scale.  They are able to spread their overheads thinly over large volumes, and charge low unit prices.   So, if you are running a small business, this strategy probably won’t work for you.  

If, as a small business, you build your business reputation on being the cheapest, you are operating from a position of weakness.  Even if you can survive with your low prices, you will not be able to withstand a price war with a bigger competitor.  

The second strategy, being the best, can be used to build a powerful competitive advantage.  It means, however, that you have to have a unique product.  Otherwise you will have to spend a lot of money on research and development to stay ahead of the competition.  

You need deep pockets to win with this strategy.  Unless, of course , your product is so specialised that no one else is producing it.  And big companies, for whatever reasons, don’t want to produce it either.  That would give you dominance over a niche of your own.  Generally speaking, a product leadership strategy is only for the big boys.  While being the best in the category and staying that way can be a powerful strategy for highly specialised small businesses, it is just not sustainable for most.  

Dominating a market niche in your industry is the most suitable business strategy for most small businesses.  By adding value in a way that attracts a particular kind of customer, you can steadily build your business success. You are able to charge a premium.  And you don’t have to be the “best”.  

The trick, of course, is to clearly identify your niche market, and convince your target market that you provide the best solution to their problem.   For nearly all businesses, finding a niche and dominating it provides a solid foundation for building a business on.  

It is very important that you are absolutely clear on what generic strategy you are relying on.   Your business direction, by definition, is supported by a number of strategic tactics, whether you are aware of using them or not.    If you aren’t clear about your overall strategic direction, you may end up using conflicting strategies. For example, focusing customers on your low prices at the same time as you introduce best of class products.  Doing this means your profitability suffers and you fail to attract the customers you want…. not good!   Deciding on the generic strategy that will create the business success you are looking for, clarifies your thinking.  And it helps you see clearly what tactics you need to use.

• Achieving a higher gross margin per dollar of sales by increasing price and/or reducing variable costs, and/or
• Achieving greater sales per dollar of fixed costs by increasing the productivity of those things which have a fixed cost.  

You should be aware that to a price discounting policy to capture sales can be a dangerous policy for the financial health of a business.  The following table illustrates how much you have to increase sales by if you reduce your prices:  

That is, if your Gross Margin is 30% and you reduce price by 10% you need sales volume to increase by 50% to maintain your profit.  Its unlikely such a strategy will work .  

Many small business people regard price as the only factor influencing the buying decision of their customers.  Sure , there are some customers who may only buy at the lowest possible price but this does not apply to all customers and it may be that a premium price can be achieved if the product or service is marketed in such a way that the customer perceives added value and you promote other features and benefits that you can offer your customers. For example better quality, longer warranty, satisfaction guarantee, 24 hour accessibility, more convenient location, greater resale value etc.    

This is all about getting more sales per dollar of fixed costs.  It can be achieved by either or both, increasing your sales at a faster rate than your fixed costs increase or reducing your fixed costs without affecting your sales.  

Advertising your product or service is one of the best ways to increase your sales.  Effective advertising means getting the most out of your advertising dollar and includes:

• Ensure you use the most effective media pertinent to your product or service

• Target your customers- never try to appeal to everyone and focus specifically on those people who you know will benefit from your product/ service

• Make your offer compelling and relevant to the market you target

• Backup  your advertising/ marketing strategies with first class service to get repeat  business and further business by word of mouth  

Fixed Costs must be incurred for you to remain in business.   In the short term they do not change as your volume of sales increases. Some of these costs are discretionary in the sense that you can make a decision to reduce them simply by cutting back. Others, however, are committed and you cannot avoid them.  

The critical thing with each fixed cost is to ask yourself the following questions:

• What service does this cost provide to my business

• Can I obtain the same service from another source at a lower cost?    If so, is it practically feasible to switch to another supplier of that service?

• If I do switch to another supplier, would I get equivalent quality and would this affect the quality of my product or service?

• If I were to spend more on this service would it generate a gross profit that exceeds the additional cost?  

You will notice that all of these questions are directed towards what you are getting for what you are spending.  They are not simply concerned with whether or not you can eliminate or reduce cost.    Take wages for example.  In difficult times people will often think of dismissing staff.   This may be appropriate but should be considered carefully, as it may be more appropriate to invest more in staff training to show them how to improve customer service and how to sell more to customers.    

It is startling what effect relatively small changes can make to your bottom lines.  The following illustration indicates that , in these circumstances that profit increased by more than double with change factors of only 5% for the number of customers, the frequency of purchase, the average sales value and an increase in the Gross Margin %, and a 10% change factor in fixed costs: