Differentiation means distinguishing your business organization from other businesses in the same industry.
In order to compete, companies need to make their products different from their competitors’ products. Differentiation means making a product distinctive, so that it stands out from competitors’ products in consumers’ perception, e.g. unique shape of the Dior’s J’Adore perfume bottles.
This is the attempt by the manufacturer to create a perceived difference in the minds of consumers of the superiority of one product over others. Even though the products are often equal, or very similar.
The differentiated product may be better than the others. But, the differentiated product might often be inferior too, e.g. like General Motors (GM) versus Ford in the early years.
Definition of differentiation
Product differentiation is a marketing strategy that involves making a product to stand out from its rivals. Possessing a unique element could help withstand competition. An example is product branding that allows consumers to easily identify a company’s product.
In a broad sense, differentiation involves a firm using different Marketing Mix activities, such as product features and advertising, to help consumers perceive the product as being different and better than competing products. The perceived differences may involve physical or nonphysical features such as image or price.
In a narrower sense, differentiation involves a firm selling two or more products with different features targeted to different market segments.
TIP: Differentiation is not the same as Differentiated Marketing. While both are marketing strategies, they are used for different purposes. Differentiation is used when the type of product offered to the market is new. Differentiated Marketing, or selective marketing, means targeting each market segment with a different Marketing Mix. It is used when the level of market penetration is medium.
Benefits for a business from differentiation
Benefits of an effective differentiation include:
- Adds value. The firm offering customers something that is different, unique and special adds value to their lives. The producer, wholesaler or retailer who is able to develop something different from other firms on the market will be able to catch customers’ attention comparing with substitute products from rival firms. This added value will allow the business to charge higher price, hence gain higher profits. The differentiated good or service can now fulfill expectations of wealthier customers who can afford to pay higher price but become pickier in their shopping habits at the same time.
- Price advantages. Added value gives opportunities for charging higher prices for products due to exclusive design and unique look, strong branding or better service. Differentiated products are inelastic, so prices can be higher while standardized products are price elastic due to substitutability. Customers are more willing to pay higher prices, so they can associate themselves with the brand that is different from other – in this way they can ’be different’ too. This will lead to higher sales revenue than sales of undifferentiated products.
- Extends the life of a product. Product differentiation can also help to prolong Product Life Cycle by making it stand out from other products offered by competitors. Product Life Cycle describes the stages a product will pass through from its introduction, through its growth until it is mature and then finally its decline. In the maturity stage, product modifications are made and features are added in order to differentiate the product from the competition. However, the competing products may be very similar at this point, increasing the difficulty of differentiating the product. There will be possible price reductions in response to competition. New distribution channels and incentives to resellers are offered in order to avoid losing shelf space.
- Consumer recognition and loyalty. Consumer recognition leads to greater sales and people feel comfortable buying a brand they are familiar with. By having a unique element in a product offered by a firm, this could help the firm to withstand competition. Promotion will emphasize differentiation and building of brand loyalty offering incentives to customers to switch from buying competitors’ products. Therefore, brand recognition is a valuable source of competitive advantage.
- Improved promotion. There are many possibilities for a business to improve promotion in connection with Unique Selling Point (USP). Firstly, the business can focus its promotional activities on the differentiating feature of the good or service. This will bring free publicity from business media reporting on that Unique Selling Point (USP). Secondly, products with Unique Selling Point (USP) often catch a lot of attention from the society, hence are being promoted by word of mouth and in social media. This free attention can save the business on its marketing budget. Thirdly, the business can use its ethical business objectives and Corporate Social Responsibility (CSR) activities to differentiate itself on the market. Consequently, this will improve corporate image.
- Distribution advantages. Due to limitation on retail space and in wholesalers’ warehouses, vendors present in the distribution channel only stock of the best-selling brands. As retail space is very limited, so better selling brands and differentiated products that have the highest possibilities of being sold the fastest will get space and ideal placements.
When thinking about differentiation, you can refer to yourself on the job market or students graduating from college. What makes you different from other candidates applying for the same job? You both need something special and unique, right?
