DEFINITION of Low-Cost Producer
A low-cost producer is a company that can provide goods or services at a low cost. In general, low-cost producers utilize economies of scale in order to execute their strategy of low prices. Consumers that are sensitive to price changes will more likely shop at the stores that offer the lowest prices, if the good or service is relatively homogeneous. Alternatively, low-cost producers could even price the goods or services at the same level as their competitors and maintain a wider margin.
BREAKING DOWN Low-Cost Producer
A low-cost producer is capable of making a substitute good or providing a substitute service for a lower cost than other companies. Usually, these goods or services are consumer staples which are in high demand with readily available substitutes provided by many competitors in the marketplace. Specialty goods generally do not have low-cost producers. Becoming a low-cost producer requires enough capital to achieve economies of scale large enough to provide a distinct price advantage over competitors. This requirement is one reason why many companies are not able to be low-cost producers. Wal-Mart is likely the best example of a low-cost producer with massive economies of scale.