What is product differentiation?
Product differentiation is the key aspect that differentiates a company's products or services from its competitors. Successful product differentiation leads to brand loyalty and an increase in sales.
A product differentiation strategy involves identifying and communicating the unique qualities of a product or company while highlighting the distinct differences between that product or company and its competitors. Product differentiation goes hand in hand with developing a strong value proposition so that a product or service is attractive to a target market or target group.
If this is successful, product differentiation can be acompetitive advantagefor the seller of the product and ultimately building itbrand awareness.
Key learning points
- Product differentiation depends on consumers' attention to one or more key benefits of a product or brand, making it a better choice than similar products or brands.
- The elements of differentiation include product design, marketing, packaging and pricing.
- A product differentiation strategy must demonstrate that a product has all the features of competitive choices, but with additional exclusive benefits that no one else offers.
- Companies gain competitive advantage and market share through product differentiation.
- Product differentiation increases market competition and controls prices for consumers.
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How product differentiation works
Product differentiation is essentially a marketing strategy to encourage consumers to choose one brand or product over another in a crowded field of competitors. It identifies the properties that distinguish a productsimilar productsand uses these differences to driveConsumer choice.
Differentiation marketing can also focus on:niche marked. For example, a small business may have difficulty competing with a larger competitor in the same industry. As a result, the smaller company can, for example, highlight its more personalized services.
Promote product differentiation
References to a product's distinctive features are reflected in its packaging and advertising and often even in its name. The cat food brand Fancy Feast implies high-quality cat food that cats love, and the advertising reinforces this claim. The cat food brand FreshPet emphasizes the use of natural ingredients. Hill's Science Diet says animal nutritionists developed the cat food.
A product differentiation strategy may require adding new functional features or may be as simple as redesigning the packaging. Sometimes differentiation marketing does not require changes to the product, but a new advertising campaign or something elsecampaigns.
Measuring product differentiation
As mentioned earlier, the differences between products can be physical in nature or measurable, such as the cheapest gym in a region. However, the differences between the products can be more abstract; for example, a car company claiming that their cars are the most luxurious on the market.
Retailers and designers often spend significant advertising dollars to show their clothes to young, hip models to emphasize that their clothes are trendy. In reality, no company can measure or quantify the style level of their product.
As a result, product differentiation is often subjective as its aim is to change customers' assessment of the benefits of one product over another. The advertising slogan 'Removes the toughest stains' suggests that it concerns a specific detergentfeelingis more efficient than others. But the actual difference in the productcompared to competing productsmay be small or even non-existent.
Non-functional features are also important
When the functional aspects of two products are identical, as with bottled water, non-functional features can be a differentiating factor, for example the design of the packaging or the bottle.
Types of product differentiation
Ideally, a product differentiation strategy should demonstrate that the product can do everything the competing choices can do, but with an added benefit that is exclusive to that product. Below are some of the most common strategies used to differentiate a product or service.
Taken
Price can be used to differentiate a product in two ways. Companies can charge the lowest price compared to competitors to attract price-conscious buyers – retailer Costco is an example. However, companies can also charge high prices to imply quality and indicate that a product is a luxury or high-end item, such as a Bugatti sports car.
Performance and reliability
Products can be distinguished based on their reliability and durability. For example, some batteries are known to have a longer lifespan than others, and some consumers purchase them based on this factor.
Location and service
Local businesses can differentiate themselves from their larger national competitors by emphasizing that they support the local community. For example, a local restaurant will hire local staff and source its food and ingredients from local farmers and suppliers.
Vertical product differentiation vs. horizontal product differentiation
There are two strict forms of product differentiation: horizontal and vertical. However, in some cases, a consumer's choice when making a purchase may be a combination of both.
Vertical differentiation
An example of vertical differentiation is when customers rank products based on a measurable factor, such as price or quality, and then choose the highest-ranked product.
Although the measurements are objective, each customer chooses to measure a different factor. For example, a restaurant may be at the top of a customer's list because their meals have fewer calories. Another customer might choose a different restaurant because the meals are cheaper and price is the most important factor for him.
Horizontal differentiation
An example of horizontal differentiation is when customers choose between products based on personal preferences rather than on objective measurements.
For example, whether someone chooses a vanilla, chocolate or strawberry milkshake depends on personal taste. If most products on the market cost about the same and have many of the same features or qualities, the purchasing decision is based on subjective preference.
Mixed differentiation
More complex acquisitions usually involve a mix of vertical and horizontal differentiation. For example, when buying a car, a consumer might consider safety data and gas mileage, both objective measures and examples of vertical integration. But the consumer can also think about what colors the car is available in or what the brand image is. Each consumer will assign a different weight to each criterion.
Benefits of product differentiation
A differentiated product can increase brand loyalty and even survive a higher price. If a product is considered better than its competitors in some way, consumers will find it worth the higher price.
Differentiation marketing can help companies differentiate themselves when a product is not perceived as very different from that of the competitor, such as bottled water. The strategy may be to focus on lower price or to be a local company. When functional aspects of the two products are identical, non-functional features can be emphasized. The strategy can be an attractive change in design or styling.
A successful product differentiation campaign piques consumer interest and gives consumers a reason to believe they need one product over another.
Examples of product differentiation
Companies introducing a new product often cite its cost benefits. If company X produces a coffee machine that is virtually identical to that of company Y, company X can offer a variant at a lower price. If a reusable filter is included, the savings on paper filters are emphasized in the packaging and advertising.
Product differentiation, for example, is vividly displayed in today's many coffee machinesto notice. KitchenAid coffee makers feel solid and have a premium price to match. Keurig distinguishes itself with its user-friendly coffee pods. As always, Amazon Basics has an unbeatably low price.
What is an example of product differentiation?
An example of product differentiation is when a company emphasizes a feature of a new product in the market that sets it apart from other products already in the market. For example, Tesla distinguishes itself from other car brands because their cars are innovative, battery-powered and advertised as advanced.
What are the elements of product differentiation?
Every aspect of a product can distinguish it in a consumer's mind. Therefore, a manufacturer or producer must consider opportunities for differentiation in all areas of their production: marketing, product management, engineering, sales and customer support.
What are the 3 types of product differentiation?
The three types of product differentiation are vertical, horizontal and mixed. A common example of vertical differentiation is when two products are similar but priced differently. Horizontal differentiation occurs regardless of the quality or price of a product. Mixed differentiation is complex and involves factors of both vertical and horizontal differentiation.
Why is product differentiation important?
Product differentiation is important because it allows different brands or companies to gain a competitive advantage in the market. If differentiation were not feasible, the larger companies with economies of scale would always dominate the market because they could undercut smaller producers on price. Product differentiation is also a way to control costs for consumers by maintaining a competitive market.
In short
Product differentiation is a way for products and brands to gain market share based on consumer preferences. Customers choose products for different reasons, whether it is price, brand image, quality, sustainability, taste, color or a temporary trend.
If a product can uniquely differentiate itself from its competitors and appeal to consumers, it will have a competitive advantage and gain market share. Therefore, product differentiation is also a way for market forces to do their work and keep prices low for consumers.
