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).
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.
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:
- 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.
- 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.
- Follow through. A business must deliver on its point of difference to gain trust with consumers.
- 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.
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:
- 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.
- 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.
- 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.
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.
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.
- 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.
Connected Business Frameworks
Read the remaining product development frameworks here.
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