Product differentiation is a marketingstrategy 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).
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 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:
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.
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:
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.
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.
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.
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 marketingstrategy 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.
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.
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.
You can use the Ansoff Matrix as a strategic framework to understand what growthstrategy is more suited based on the market context. Developed by mathematician and business manager Igor Ansoff, it assumes a growthstrategy can be derived by whether the market is new or existing, and the product is new or existing.
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.
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 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 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 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.
The 8 dimensions of quality are used at a strategic level to analyze the product or service quality characteristics. They were first described by Harvard Business School Professor David A. Garvin in 1987. Instead of defensive measures to pre-empt quality control, Garvin proposed that American companies take a more aggressive stance where quality itself would be the basis of product differentiation and a competitive strategy to secure market share.
The product-process matrix was introduced in two articles published in the Harvard Business Review in 1979. Developed by Robert H. Hayes and Steven C. Wheelwright, the matrix assesses the relationship between:
The stages of the product life cycle (from ideation to growth or decline), and
The stages of the process (technological) life cycle.
Brand marketing describes the process of an organization building a relationship between its brand and customers from the target audience. Instead of marketing the features of a particular product or service, brandmarketing promotes the whole brand by mentioning how those products and services support the brand’s promise.
Promotional channels, sometimes referred to as marketing channels, are used by an organization to advertise its products and services and communicate with the target audience.
News coverage is one of the most difficult promotional channels to secure, but it is also one of the most valuable. Editors are bombarded with pitches daily, so the brand needs a compelling and ideally topical story to tell.
Other promotional channels include guest posting, influencer outreach, advertorial, and native LinkedIn feed advertising.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
