What Is a Cost Disadvantage?
A cost disadvantage means your business is unable to create, produce, acquire, transport or distribute goods to customers at rates equal to or better than competitors. Small businesses often face cost disadvantages relative to larger companies simply because economies of scale benefit those who can buy products or raw materials in bulk, but larger businesses sometimes experience cost disadvantages too.
Companies enter the market as either first movers or second movers. A first mover is the initial business to offer a certain product, service or solution to a particular customer segment. First movers sometimes face cost disadvantages because of higher investments in market and product research. Before you enter the market as a first mover, you want to ensure the offer and time are right. You may also have cost drawbacks because your work processes and distribution systems haven't been fine-tuned.
Second movers wait until after the first product is launched, either intentionally or because of delays. While second movers can sit back and wait, they still face some potential cost disadvantages. Small businesses often enter a market after larger competitors have entered. First movers sometimes secure patents, partnerships and exclusive distribution arrangements. This forces second movers to sometimes invest fully in a new type of solution, to invest time and money to find partners and to use less desirable, more expensive distribution processes.
The business concept of economies of scale means that the more raw materials a manufacturer buys or products it produces, the less each unit costs to make. Suppliers normally offer discounts to resellers who buy in larger quantities, placing small businesses at a disadvantage. A single movie rental shop, for instance, can't buy nearly as many copies of films as a large retail chain can. This is one reason why many small, private movie rental stores have disappeared. When you can't negotiate favorable pricing deals with suppliers, you have to accept lower gross profit margins or increase prices and try to offer better value.
Cost disadvantages also affect strategic decisions. Local companies typically can't economically transport goods around the country in the same way that a large chain with various distribution centers can. This may restrict the geographic market to local customers. But larger companies can also have cost disadvantages, and marketing is one area where this can be seen. Small companies often rely on local radio, newspapers, store signage and direct mail to reach customers in their smaller marketplace. Larger companies often have to allocate larger budgets and more money through television and other mass media to reach a broader audience.