How much do you think socks should cost? And winter socks? And if they are handmade? And if they are made of high-quality wool? What if these designer socks are handmade of Italian hand-dyed wool?
Each of the listed products is on the market, but due to its characteristics, each of them is worth a different price. Unique features that increase the number on the product price tag are differentiators.
In this article, we will look at what a differentiation strategy is and how to build it step by step in your company. And I will also share inspiring examples of differentiation that are worthy of entering marketing textbooks.
What is a differentiation strategy?
Differentiation strategy is one of the basic competitive strategies according to Michael Porter. The essence of this strategy is to compete with other market players not by price, but by the unique features of the product or service.
Porter urges readers not to try to compete on both differentiation and price together, as this is a path to getting stuck in the middle of the market. At the business level, you should choose your priority: price or uniqueness.
This decision may be dictated by the industry, the market, or the internal capabilities of your company. If you have a real opportunity to make the product cheaper for the buyer (for example, thanks to innovative production), do it, and don’t worry about differentiation.
But if the market is already divided by large players with roughly the same product, your competitive path lies in creating a unique product that consumers will be willing to pay more for.
The strategy of differentiation is inherent in companies that are oriented to a wide range of consumers. If a company with a unique product focuses only on an audience with a certain characteristic (for example, a vegan cafe or a diaspora bookstore), then a strategy of focusing, not differentiation, will be effective for it.
If you want to learn about other competitive strategies, read the article What Are The 4 Porter’s Generic Strategies?
How to identify your difference and build a strategy around it
To build and implement your differentiation strategy, follow the steps below.
1. Identify real buyers and their needs
A classic marketing story: before you do something, research whether someone needs it. Or, if you already have customers, find out what they miss in the product.
Porter advises to identify and rank the criteria by which products are chosen in your niche, expressing each of them quantitatively; and also model how one or another criterion will affect the final cost of the product.
Differentiation strategy: identify your target audience
This would be an ideal turn of events, but in the real world, not everyone has the resources to do full-fledged customer research. However, in any case, do not neglect this step and research the needs of the audience as much as you can.
2. Create a list of in-demand differentiations
The next step when undertaking a differentiation strategy is to create a list of the differentiations that are in demand.
Analyze how each will affect the purchase or customers. In addition, here you should look around at your competitors – is there someone already doing what your customers expect from you.
Remember that differentiation is built on unique competitive advantages, and aping the competitors will simply be playing on someone else’s field, not differentiation.
3. Calculate the planned costs
For those differentiation options that were not screened out in the previous step, calculate the planned costs. It’s usually about improving the product, and it can’t be free.
Although, sometimes, in the process of such an analysis, companies notice an opportunity to reduce costs — somehow, when a business becomes eco-friendly and begins to hand over raw materials for processing, receiving money for it.
4. Make a simulation
The next step to develop your differentiation strategy is to make a simulation.
Next, you should work with the calculator again and simulate which feature will make the product the most valuable for the buyer, but which is the least burdensome for the business.
Look for a model where you can raise the price a little, but not too much for yourself. However, please note here that your differentiation must be copy-protected. If the step is too cheap or simple, it will quickly be copied by competitors and it will cease to be your feature.
5. Final step
Once you’ve chosen your difference, the final step of defining your differentiation strategy is to start cutting back on things that aren’t related to it. Optimize what is not related to your uniqueness, but optimize the uniqueness itself only as a last resort.
This is how the process should ideally happen. However, entrepreneurs often arrive at their differentiation strategy by accident, create a unique product that attracts customers, simply from their inspiration.
If you also came to your unique product without all the listed stages, read this article to the end. Perhaps it will inspire you on exactly how to articulate existing differentiation to attract new customers.
Key differentiating factors – 5 Awesome examples
Each differentiating strategy is unique in its way, but the whole spectrum can be classified according to the sources from which the main defining feature derives.
Let’s look further at the key sources of differentiation, with differentiation strategy examples of companies that have made a bet on one or another option.
1. Policy choices and values
Here we are talking about the moral orientations of business and how they are expressed in voluntary decisions. A few years ago, there was a trend for such declarations, from Starbucks to the smallest coffee shops had their mission and declared their values in their Instagram profile.
Due to such ubiquity, failures occurred, especially when the actual actions of the company did not correspond to the declared values. It is better to have no mission than to have a hypocritical one.
But if you really want to make fundamental decisions in your market, and some clients are waiting for these decisions, use this tool and act on your conscience.
Example of differentiation due to values
Volvo has declared that they want no people to die in their cars in 2020.
And, following this vision, it artificially blocked the ability of its cars to drive more than 180 km/h. And that’s in an automotive market that’s used to racing ahead; at a time when flagships of competitors boasted the ability to squeeze more than 250 km/h.
Is it a political decision? Of course, it is. Is it differentiation? Undoubtedly.
However, it is not enough to just silently do something according to your principles, because then customers may not learn about your uniqueness and may even perceive it as a bug.
2. Linkages and integration
This is about how companies configure their internal processes. The very optimization of work and adjustment of processes, as a rule, is not carried out in general as such.
It is unlikely that anyone has seen the advertisement “we have connected a virtual PBX to answer calls faster, so call us”. But the very fact of connecting the PBX helps the company process calls better, and customers feel this.
Also, an interesting source of a differentiation strategy can be the integration into one’s production cycle of what was previously ordered from contractors. It is about creating enterprises with a full production cycle that does not depend on anyone.
The call for integration is somewhat at odds with the current trend of the Sharing economy. But precisely in such conditions, when competitors maximally share work with contractors, owning A full production cycle can become a unique feature that differentiates the company in the market.
Example of differentiation due to combination of processes
A vivid example of a differentiation strategy is through process optimization is Amazon, which offers same-day delivery to Americans. The company has so clearly structured the processes that this has become possible.
And now impatient buyers agree to pay more to get the desired item, and it will be difficult to drag them to stores from which the parcel will arrive in 2-3 days.
And here it should be remembered that Amazon started as a bookstore, which during its development integrated more and more processes into its own work.
Being in the right place at the right time is an art form. At first glance, it is about releasing an innovative, different product before others. But this is not entirely true, the product should be released not as early as possible, but on time and in the right place. Let’s consider an example.
Example of differentiation by timing
In early 2010, Apple introduced its iPad. The product turned out to be truly revolutionary, as 3 million computers were sold in the first half of the year. It would seem, an innovative product: they were the first to release it, launch the market, everything is right, everything is great.
However, it should be mentioned here that Microsoft was the first to create a portable touchscreen computer. Their Tablet PC was introduced in the fall of 2002 but was not as successful.
Example of a differentiation strategy: Apple
Some people attribute the Tablet PC’s modest results to the fact that it was heavy, didn’t work as fast as the iPad, and generally cost a lot. Although, if you compare today’s tablets with their 10-year-old ancestors, all the same criticisms remain valid.
Therefore, I have every reason to assume that the reason for the failure of the Tablet PC is that the market seemed unready for innovation.
But Apple correctly differentiated itself in time and released a product when the market was already ready for it. In 2010, smartphones were already spreading in the USA, the digital world was emerging, and creative professions were developing — and all this provided fertile ground for the appearance of tablet computers in 2010, which did not exist in 2002.
The next example of a differentiation strategy is location.
The location of your business can be your competitive advantage if presented correctly to your customers. A network business can use differentiation through the convenient location of branches.
At the same time, for example, the uniqueness of any nature reserve open to visitors is based on its unique location and differentiation based on this feature.
Example of differentiation by location
Speaking of a good differentiation strategy, let’s take a look at one example of location.
Since we have already considered general obvious examples of differentiation by place, here we will talk about a place that Porter did not know existed when he formulated his theory – the digital world. In the 1980s, digital was only a concept of science fiction writers.
But now the presence of a business online is the norm of the market, which can nevertheless be turned into a source of differentiation. So, for example, Uber differed from all other taxi services in that its taxis were not located at a remote taxi rank, but simply on the client’s phone.
Some advantages of a company depend on its scale. And here, again, a strong point can be made both from a large scale and from the modesty of small production. Only a giant can handle the tasks that SpaceX solves.
But at the same time, only small “boutique” companies can offer customers a unique product and a flexible individual approach.
Example of a scale differentiation strategy
Paradoxically, a hamburger at the franchise McDonald’s, which is typical and the same in hundreds of thousands of establishments, is a uniquely differentiated product precisely because of the scale of the company.
A regular customer of McDonald’s, wherever he is, can count on the fact that the fries and burgers in the nearest establishment will be exactly as they should be.
Differentiation strategy at scale: McDonald’s
Warning: Common mistakes in a differentiation strategy
I hope that all the previous examples were inspiring and that you already want to start analyzing the needs of customers to create a unique product for them. But still, let’s review common mistakes in a differentiation strategy so that you don’t repeat them.
The product is unique, but it does not bring value to buyers. It happens that in a specific market, the chosen differentiation strategy does not carry real value for consumers.
In countries with right-hand traffic, a right-hand drive car will be somewhat unique. But such a configuration does not simplify the driver’s life so much that a person is ready to pay extra for the very fact that the steering wheel is not where everyone has it.
Business contempt for value description. If the uniqueness of the product does bring additional value to the consumer, this should be communicated in your advertising.
It is necessary to consistently convey to potential buyers the presence of this uniqueness and its value, as all the players listed in the article do.
An excess of differentiation is a huge mistake in a differentiation strategy. Too good is already bad. If the product significantly exceeds the expectations of customers from it, then there is a high probability that the price of your product exceeds the expectations of your customers and target audience.
In this case, you should either look for a way out to a new audience that needs your product or simplifies the product to meet market expectations.
Or, if it is about an innovative product, its value should be communicated more effectively to customers through marketing activities.
Misestimation by the business of its differentiation costs. Remember the economic side of the issue: differentiation must pay off, that is, its costs must be less than the markup you set for the product.
Neglect of distribution and service. If you consider the possibilities of differentiation, you should remember not only the product but also all the links that lead the product to the buyer: advertising, distribution, the production process – anything can become your uniqueness.
And a separate item that can disappoint an entrepreneur on the path of differentiation is customer segmentation. When you choose a differentiation strategy, you automatically cut off consumers who focus only on price.
You can try to attract them by explaining the value, but this will not work for everyone. It should also be understood that differentiation will in any case cut off customers with polar views.
For some, a bank in a smartphone is convenient, but those who are used to dealing with cash and with live administrators in the branch will not turn to it.
Someone needs to eat a familiar burger in an unfamiliar city, but tourists in search of new experiences will not do this. And differentiation based on the company’s policies and values is already an eternal field for criticism from opponents.
If you choose to pursue a differentiation strategy, be aware of these potential customer losses and simply don’t waste resources trying to please everyone.