product-differentiation

Product Differentiation And Why It Matters For Your Business Long-Term Survival

Product differentiation is a marketing strategy used by a business to differentiate its products or services from the competition, thus enabling your business to gain a long-term advantage (an economic moat), thus building a viable business model.

Understanding product differentiation

In understanding product differentiation, it’s important to note that differentiation should not be sought for the sake of it. In other words, it must be meaningful.

When used correctly, this strategy helps a business develop a competitive advantage by defining a compelling unique value proposition (USP).

unique-selling-proposition
A unique selling proposition (USP) enables a business to differentiate itself from its competitors. Importantly, a USP enables a business to stand for something that they, in turn, become known among consumers. A strong and recognizable USP is crucial to operating successfully in competitive markets.

Businesses with multiple or similarly related products can also use market differentiation to avoid product cannibalization. This occurs when the introduction of a new product displaces an older product from the same company, causing a decrease in sales volume.

Product differentiation is vital in many industries where the barriers to entry have reduced significantly. Although commonly associated with marketing, other departments play a key role in differentiation including product management, engineering, customer support, and sales.

This is also critical to make sure customers can capture your brand’s essence.

brand-essence
Brand essence is defined as the core characteristic of a brand that elicits an emotional response in consumers. Brand essence is unique to every business, and the most successful businesses use it to create a reliable feeling in their target audience that builds loyalty over time.

Achieving product differentiation

In their highly regarded book Differentiate or Die, authors Jack Trout and Steve Rivkin define four key steps to achieve product differentiation.

Here is a very general summation of each step:

  1. Define the context and the competition. What do the customers want? What are they trying to achieve? With this information, the business can then identify the products already competing in that space.
  2. Differentiate. A point of difference can be established by considering product form, features, price, performance, or durability. Customer experience should also be considered, including factors such as delivery options, ease of ordering, staff demeanor, customer care, and responsiveness. Alternatively, the brand story or the corporate culture of the company itself may be unique.
  3. Follow through. A business must deliver on its point of difference to gain trust with consumers.
  4. Tell a story. Differentiation wrapped in a compelling story or message must then be sent to the target market. There is no point in creating a unique product if no one knows it is available for sale.

Here it’s also critical to develop your own brand’s voice.

brand-voice
The brand voice describes how a brand communicates with its target audience. The exact style of communication is based on the brand persona or the collection of personality traits and values that a brand embodies regularly, and it needs to communicate the brand’s essence to the desired target audience.

Three different types of product differentiation

In the previous section, we looked at differentiation factors such as price or customer experience. 

These factors, in turn, are categorized into three differentiation types:

  1. Vertical differentiation – where products have the same features but are differentiated based on price and quality. Cheaper products provide some functionality, while more expensive products tend to be longer-lasting. For example, a pair of blue shorts from a budget department store has the same functionality as a pair from a top designer. But in the latter, price and quality are higher.
  2. Horizontal differentiation – describing any type of product differentiation unrelated to price or quality. Here, products offer the same features for the same price, and a customer will often decide based on personal preference. Bottled water brands are a classic example of horizontal differentiation.
  3. Mixed differentiation – or differentiation based on a combination of factors. Two new vehicles for sale in the same category but from different manufacturers may use warranty length or safety rating to stand out.

Porter’s view on gaining a competitive advantage

Another view on gaining competitive advantage comes from Porter’s generic strategies, which is a classic framework in the business strategy world. Here it’s important as well to establish differentiation and avoid getting stuck in the middle.

porters-generic-strategies
In his book, “Competitive Advantage,” in 1985, Porter conceptualized the concept of competitive advantage, by looking at two key aspects. Industry attractiveness, and the company’s strategic positioning. The latter, according to Porter, can be achieved either via cost leadership, differentiation, or focus.

Understanding the five product levels

According to Kotler’s five product levels you can understand how to get to develop a generic product, up to make it become an augmented or potential product.

five-product-levels
Marketing consultant Philip Kotler developed the Five Product Levels model. He asserted that a product was not just a physical object but also something that satisfied a wide range of consumer needs. According to that Kotler identified five types of products: core product, generic product, expected product, augmented product, and potential product.

Develop your economic moat

In the end it’s extremely important you make your business develop its economic moat, or its long-term competitive advantage.

moat
Economic or market moats represent the long-term business defensibility. Or how long a business can retain its competitive advantage in the marketplace over the years. Warren Buffet who popularized the term “moat” referred to it as a share of mind, opposite to market share, as such it is the characteristic that all valuable brands have.

Key takeaways:

  • Product differentiation is a marketing strategy used by businesses to differentiate their products or services from those of their competitors.
  • Product differentiation can be achieved by considering many factors, including price, customer experience, brand story, corporate culture, and ease of ordering.
  • Product differentiation can be divided into three broad categories: vertical differentiation, horizontal differentiation, and mixed differentiation.

Other product development frameworks

Below a visual list of product development frameworks you can use to prioritize, operate, develop and maintain your core products.

product-development
Product development, known as the new product development process comprises a set of steps that go from idea generation to post-launch review, which help companies analyze the various aspects of launching new products and bringing them to market. It comprises idea generation, screening, testing; business case analysis, product development, test marketing, commercialization, and post-launch review.
bcg-matrix
In the 1970s, Bruce D. Henderson, founder of the Boston Consulting Group, came up with The Product Portfolio (aka BCG Matrix, or Growth-share Matrix), which would look at a successful business product portfolio based on potential growth and market shares. It divided products into four main categories: cash cows, pets (dogs), question marks, and stars.
ansoff-matrix
You can use the Ansoff Matrix as a strategic framework to understand what growth strategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growth strategy can be derived by whether the market is new or existing, and the product is new or existing.
user-experience-design
The term “user experience” was coined by researcher Dr. Donald Norman who said that “no product is an island. A product is more than the product. It is a cohesive, integrated set of experiences. Think through all of the stages of a product or service – from initial intentions through final reflections, from first usage to help, service, and maintenance. Make them all work together seamlessly.” User experience design is a process that design teams use to create products that are useful and relevant to consumers.
cost-benefit-analysis
A cost-benefit analysis is a process a business can use to analyze decisions according to the costs associated with making that decision. For a cost analysis to be effective it’s important to articulate the project in the simplest terms possible, identify the costs, determine the benefits of project implementation, assess the alternatives.
empathy-mapping
Empathy mapping is a visual representation of knowledge regarding user behavior and attitudes. An empathy map can be built by defining the scope, purpose to gain user insights, and for each action, add a sticky note, summarize the findings. Expand the plan and revise.
perceptual-mapping
Perceptual mapping is the visual representation of consumer perceptions of brands, products, services, and organizations as a whole. Indeed, perceptual mapping asks consumers to place competing products relative to one another on a graph to assess how they perform with respect to each other in terms of perception.
value-stream-mapping
Value stream mapping uses flowcharts to analyze and then improve on the delivery of products and services. Value stream mapping (VSM) is based on the concept of value streams – which are a series of sequential steps that explain how a product or service is delivered to consumers.
eisenhower-matrix
The Eisenhower Matrix is a tool that helps businesses prioritize tasks based on their urgency and importance, named after Dwight D. Eisenhower, President of the United States from 1953 to 1961, the matrix helps businesses and individuals differentiate between the urgent and important to prevent urgent things (seemingly useful in the short-term) cannibalize important things (critical for long-term success).
moscow-method
Prioritization plays a crucial role in every business. In an ideal world, businesses have enough time and resources to complete every task within a project satisfactorily. The MoSCoW method is a task prioritization framework. It is most effective in situations where many tasks must be prioritized into an actionable to-do list. The framework is based on four main categories that give it the name: Must have (M), Should have (S), Could have (C), and Won’t have (W).
scaled-agile-framework
The scaled agile framework (SAFe) helps larger organizations manage the challenges they face when practicing agile. The scaled agile framework was first introduced in 2011 by software industry guru Dean Leffingwell in his book Agile Software Requirements. The framework details a set of workflow patterns for implementing agile practices at an enterprise scale. This is achieved by guiding roles and responsibilities, planning and managing work, and establishing certain values that large organizations must uphold.
kanban
Kanban is a lean manufacturing framework first developed by Toyota in the late 1940s. The Kanban framework is a means of visualizing work as it moves through identifying potential bottlenecks. It does that through a process called just-in-time (JIT) manufacturing to optimize engineering processes, speed up manufacturing products, and improve the go-to-market strategy.
minimum-viable-product
As pointed out by Eric Ries, a minimum viable product is that version of a new product that allows a team to collect the maximum amount of validated learning about customers with the least effort through a cycle of build, measure, learn; that is the foundation of the lean startup methodology.
leaner-mvp
A leaner MVP is the evolution of the MPV approach. Where the market risk is validated before anything else.
design-thinking
Tim Brown, Executive Chair of IDEO, defined design thinking as “a human-centered approach to innovation that draws from the designer’s toolkit to integrate the needs of people, the possibilities of technology, and the requirements for business success.” Therefore, desirability, feasibility, and viability are balanced to solve critical problems.
jobs-to-be-done
The jobs-to-be-done (JTBD) framework defines, categorizes, captures, and organizes consumer needs. The jobs-to-be-done framework is based on the premise that consumers buy products and services to get jobs done. While products tend to come and go, the consumer need to get jobs done endures indefinitely. This theory was popularized by Tony Ulwick, who also detailed his book Jobs To Be Done: Theory to Practice.
swot-analysis
A SWOT Analysis is a framework used for evaluating the business’s Strengths, Weaknesses, Opportunities, and Threats. It can aid in identifying the problematic areas of your business so that you can maximize your opportunities. It will also alert you to the challenges your organization might face in the future.
tows-matrix
The TOWS Matrix is an acronym for Threats, Opportunities, Weaknesses, and Strengths. The matrix is a variation on the SWOT Analysis, and it seeks to address criticisms of the SWOT Analysis regarding its inability to show relationships between the various categories.
pirate-metrics
Venture capitalist, Dave McClure, coined the acronym AARRR which is a simplified model that enables to understand what metrics and channels to look at, at each stage for the users’ path toward becoming customers and referrers of a brand.
5-whys-method
The 5 Whys method is an interrogative problem-solving technique that seeks to understand cause-and-effect relationships. At its core, the technique is used to identify the root cause of a problem by asking the question of why five times. This might unlock new ways to think about a problem and therefore devise a creative solution to solve it.
agile-project-management
Agile project management (APM) is a strategy that breaks large projects into smaller, more manageable tasks. In the APM methodology, each project is completed in small sections – often referred to as iterations. Each iteration is completed according to its project life cycle, beginning with the initial design and progressing to testing and then quality assurance.

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"