Differentiation

Unless you are pioneering a groundbreaking new market—like Apple did with the tablet—your product or service will have established competitors. In this case, differentiation is key to your business’ success: you must find a way to set your offerings apart from theirs.

“If you’re not alone in your market, why would anybody buy from you?” asks Eileen Fischer, Professor of Marketing at York Univerity’s Schulich School of Business. “Differentiation is the answer.”

In an established market, customers are more likely to buy the product that provides more benefits or is better suited to their needs. That’s where differentiation becomes crucial.

Differentiation occurs when a company, product or service stands out from the competition. This might be achieved through offering a better price, higher quality, distinctive features, or a sleeker design, among other attributes. Whatever form it takes, differentiation is essential for attracting customers. 

Here is a comprehensive definition of differentiation. 

What is a product differentiation strategy in marketing?

In marketing, differentiation consists of making a company, product or service stand out from the competition in a comparison category.

It is important to determine a relevant comparison category because it defines the context in which consumers will evaluate the company, product, or service, and it establishes the criteria by which differentiation is measured. Without a clear comparison category, it becomes difficult to highlight unique attributes that set the offering apart from competitors.

“For instance, if we sell a sedan, we want to differentiate it from other sedans, not from pickup trucks. And if we are in the hotel business, we want to differentiate ourselves from other hotels, not from bed and breakfasts,” explains Fischer.

A marketing differentiation strategy involves more than creating a unique identity for a product or service—it’s also critical to effectively communicate this value to the chosen market segment.

Common product differentiation examples

To effectively differentiate your product, Fischer suggests doing market research. In practice, this could mean sending surveys or doing focus groups. But realistically, if you are a small business, this could be achieved simply by talking with potential customers. 

“As soon as you have an idea for a product or service, test it,” she says. “Talk about your idea with people in the market you’re trying to serve. Make a prototype, show it around, and ask prospective customers how much they’d pay to buy one.” 

A strong differentiation strategy will lead to numerous advantages. Among them are:

1. Attracting new customers
   Showcasing your product’s unique value can attract customers who are looking for specific features or benefits.
2. Increasing customer retention
   Differentiating your product can help you retain customers by creating a sense of exclusivity or better addressing their needs.
3. Improving brand loyalty
   A robust differentiation strategy can make your offer more unique, leading customers to develop a strong emotional connection to your brand.
4. Commanding a premium price
   If customers perceive your product or service as superior, you may be able to charge more, regardless of your costs.

How does product differentiation lead to competitive advantage?

Generally speaking, your company can gain a competitive advantage through several factors. For instance, it could have a lower cost structure than competitors due to better supply chain optimization or inventory management. But differentiation leads to a competitive advantage for one specific reason, explains Eileen Fischer. 

“Differentiation helps your company obtain a competitive advantage by making your product or service more desirable than that of your rivals,” she says. 

In practice, this desirability can be due to different factors, such as:

• superior quality
• unique features
• innovative design
• exceptional customer service
• strong brand reputation

What are the four main types of product differentiation?

Products can be differentiated along various axes. For analytical purposes, product differentiation tends to be most often divided in four types: price, feature, quality, and design. In reality, however, these types tend to overlap and influence each other. Price, for instance, is often reflected in quality, features and design. 

Here is an overview of each of the four types of product differentiation.

1. Price
   Price differentiation consists of making a product stand out through a lower price (more affordable) or higher price (premium positioning). This strategy enables businesses to cater to different market segments. On one end, they can appeal to price-sensitive consumers with competitive pricing, and on the other end, to customers looking for luxurious or exclusive offerings.
2. Feature
   Feature differentiation is when a product offers unique features, characteristics or capabilities. It differs from quality differentiation in that a feature is not something every customer may want. A shoe with a bigger toe box, for example, will appeal to certain customers but not others.
3. Quality
   Quality differentiation consists of making your product objectively better or worse than others along various dimensions such as durability, reliability, craftsmanship, or materials. It involves emphasizing the superior quality of your product, highlighting its benefits, or inversely, certain advantages of lower quality, like convenience (for instance, disposable utensils).
4. Design
   Design differentiation involves improving a product’s aesthetic appeal. You may achieve this by improving the product itself, or even its container or packaging. Perrier bottles, for instance, have a distinctive shape and colour.

Beyond those four main types, there are many other forms of differentiation. Location, for example, is one of them. According to Fischer, “You may have the same product as your competitors, but if you are in a prime spot, for instance, near high foot traffic areas, you can leverage that advantage to draw in more customers.”

Perhaps the most important, common and sustainable type of differentiation, however, is based on meaning and associations. By creating a set of cognitive or emotional associations with your brand—your offering may be more sexy, fun, exotic, refined or sincere, for example—your company creates a unique, distinct identity for itself.

“What is Mountain Dew? It’s a lemon-flavoured soft drink, but that’s probably not the first thing you think of when you hear the name. You think of craziness, youthful fun and adventure. It’s a bad boy brand that embodies a rebellious spirit,” says Fischer. 

She explains that Mountain Dew is a well-differentiated drink, but not because of what’s in the bottle. Their differentiation strategy is based on creating this adventurous image in the mind of customers through promotion and communication. 

Similarly, in the household product category, Dyson’s products are differentiated mainly through meaning. “They do often differ by their high quality and sleek design,” recognizes Fischer. “But what really brings it all together is that the company is an engineer’s brand. Dyson evokes innovation, functionality and sophistication.”

What is the difference between vertical and horizontal differentiation?

Vertical differentiation is when you distinguish a product based on objectively measurable attributes, like performance and quality. Horizontal differentiation relies on distinctions based on tastes or preferences.

What’s the difference between product differentiation and market segmentation?

Product differentiation is about products—making a product stand out from another. Market segmentation, on the other hand, is about your market and customers—deciding who you will be selling to.

More specifically, market segmentation involves dividing a broad market into smaller groups of consumers with similar characteristics, preferences or behaviours. This allows you to tailor your marketing efforts to meet the specific needs of each segment.

A market segment is a group of people sharing common characteristics. Here are some common bases for market segmentation:

• Age
• Gender
• Location
• Life stage (students, retirees, etc.)
• Family status (singles, young couples, parents, etc.)
• Behaviours (price-sensitivity, thrill-seeking attitude, etc.)

“Market segmentation is essentially deciding for whom you will be differentiating your offer,” explains Fischer. “In other words, when you differentiate a product, it’s usually to appeal to a particular market segment.”

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