The continually growing competition in markets has pushed businesses to do something different. They can either sell their products/services by cutting their costs and then selling their products at lower prices. Or, they can reduce their profit margins by lowering their prices and maximize market penetration.
There is another method that may be difficult to implement, but it is pretty effective and highly profitable. Yes, we are talking about differentiating your product/service in the market. That differentiation can be anything that makes you “the moon in the stars.” In business terms, we call it “Differentiation Strategy.”
I have already covered the cost leadership and focus strategy and today we are going to explore differentiation strategy.
What is a Differentiation Strategy?
Differentiation strategy is a marketing approach which “urges” businesses to develop a unique product or service. The word unique means that a product/service must be able to differentiate itself from its competitors.
The primary objective of this marketing strategy is to gain a competitive advantage over competitors and perform above the average performance. But is it that easy? Absolutely not. There are hundreds of companies standing in line to “hunt you down.” A company can only develop a unique product/service by realizing the “underlying” needs of its target customers.
How To Differentiate Your Business?
So, a company decides to differentiate itself with a unique offering. But, what are the options for a company? Generally, there are two basic ways to choose a differentiation strategy:
- Broad Differentiation Strategy
- Focused Differentiation Strategy
Broad Differentiation Strategy (BDS)
A company usually adopts the board differentiation strategy when it wants to target a wide range of customers. I.e., the company wants to serve a broader market that has similar needs. The company may develop an already available product but with better and enhanced features.
For instance, a cement company may offer its product to a vast market with a brand name. The company may target distributors, whole-sellers, or retailers.
Focused Differentiation Strategy (FDS)
On the contrary, there is another way a company can establish differentiation, and that is “Focused Differentiation Strategy.” A firm following this strategy will target a specific niche/segment of the market. A firm may target one or multiple segments. But, the firm will have to make custom products for different markets.
Coca Cola is a perfect advocate of this marketing strategy. For instance, they are offering diet cola, canned, and bolted cola, serving three different market segments.
Types of Differentiation Strategy with Examples
Apart from the above-mentioned differentiation strategies, here are some more specific types of differentiation strategy:
- Product Differentiation
- Service Differentiation
- Distribution/Channel Differentiation
- Relationship Differentiation
- Image Differentiation
- Price Differentiation
Product Differentiation
This is the most visible or noticeable type of differentiation strategy. Generally, consumers differentiate a product by its physical appearance. Companies following this particular strategy make their product look different. There are different ways to differentiate a product, such as unique product features, product performance, product efficacy (products meet its claims), etc.
Product differentiation is mostly common in B2C markets. Companies try to differentiate their products for the end consumers. But, it doesn’t mean that it isn’t common practice in the B2B market.
Example. A common and most suitable example would be coca-cola beverages. The company has a specific established brand name and a unique taste. There are hundreds and thousands of other beverage companies, but one can easily differentiate a coca-cola beverage by its taste.
Service Differentiation
Service differentiation, in simplest terms, means creating a unique way to serve customers. Well, every company serves its customers, so what can be different. There are several factors in servicing your customers, such as order processing, customer service method, etc.
Example. McDonald’s is one fine example of a service differentiation strategy. Apart from few rare exceptions, their way of serving is the same in every outlet. Either you are in California, New York, or any other location, the taste, and presentation of their product will be the same. For instance, their fries will have the same amount of salt, size and will be served fresh everywhere.
Distribution Differentiation
A company may differentiate itself from a cluster of competitors through a distribution differentiation strategy. It is impossible for every company to manufacture a product and then make it available to dealers, distributors, retailers, etc., with its own distribution channels.
Supply chain and distribution is a vital factor for a company that focuses on distribution differentiation. Companies tend to standardize the distribution channels to create a competitive advantage.
Example. Courier services can be a great example of a distribution differentiation strategy. For instance, TCS Pakistan is known for its standardized distribution channel for countrywide and worldwide distribution.
Relationship Differentiation
Another way for businesses to differentiate themselves is by creating impeccable customer relationships. From sales representatives to employees, technical service representatives to CSR, a company can differentiate itself by a relationship differentiation strategy.
Example. Fiverr, one of the leading international freelance platforms is a sublime example of a relationship differentiation strategy. The firm offers maximum facilitation to its customers in any or all forms. The firm truly places customers above everything else.
Image Differentiation
Image differentiation, in a sense, is a combination of multiple strategies. It means creating a reputable and differentiable image of your brand. A company can only do that by mastering all departments such as product quality, customer service, product performance, etc.
Example. Rolls Royce, one of the oldest and most iconic automobile companies, is a great example of image differentiation. Rolls Royce is famous for producing high-performance luxury cars. Whenever someone talks about luxury cars, Rolls Royce is always found at the top of the list.
Price Differentiation
Price differentiation, also termed price discrimination, is a differentiation strategy that involves charging different prices for the same product. Companies follow this strategy to capture bigger markets, but they readjust their prices for different sets of customers/markets according to their price preferences. This not only helps companies to penetrate deeper into the market, but it also boosts their revenues.
Example. Amazon is the best example of price differentiation. The biggest online retailer readjusts the product price according to its competitors and the purchasing power of its buyers. Amazon doesn’t have retail stores, which allow it to win the price wars easily.
Benefits of Differentiation Strategy
It is not a difficult thing to understand that implementing a differentiation strategy has lots of benefits such as:
Reduction in Price Competition
A differentiation strategy allows companies to reduce the price competition in the market. For instance, if a firm is providing a quality product, its competitors will still struggle even after lowering their prices. When people get value and quality, they agree to pay higher prices.
Uniqueness in Products
Product differentiation is one of the most common types of a differentiation strategy. When a company goes for product differentiation, it develops something which its competitors cannot deliver. Product differentiation then allows the companies to stand out in the market.
Higher Profit Margins
When a company creates a competitive advantage in the market due to its unique product, it can charge higher prices. This ultimately increases the profit margin, and the company may generate more revenue even with fewer sales.
Customer Loyalty
When you give your customers what they want, you can earn their loyalty. Differentiation is only possible when you are empathetic towards your customer and create a product/service they actually need.
Minimum or No Substitutes
Differentiation strategy allows companies to create products that have no or minimal substitutes. For instance, if a company creates something unique, the customers will have nowhere else to go unless a competitor delivers the exact same thing at a similar price.
Why Does Differentiation Strategy Fail?
Differentiation strategies often fail, and here are some common reasons:
- Attributes with little value. A customer will only choose to buy a specific product if the product’s attributes offer them their desired value. But, if a product’s attributes are of little value, the product will fail to capture the market.
- Easier to copy. If a firm creates a unique product, but it is easier to replicate it, the strategy may fail. The competitors often come up with better features, and there will be no competitive advantage to cash on.
- Over Differentiation is another strategic blunder. It is possible that a company may create a product that is “over beneficial” for the customers. For instance, the customers may need specific benefits from a product. But, if the product is offering extra benefits at extra-high prices, the customer will not buy it.
- Fail to understand the customer. Sometimes, companies develop a product according to their point of view rather than the customer’s point of view. This marketing blunder is often termed as marketing myopia, where a company fails to understand the customer’s need.
Differentiation Strategy Examples
Apple
Apple Inc. is a name that simply needs no introduction. Without a doubt, Apple is considered the “leader” in the electronics and computer software industry.
The best thing about apple is it does not follow a single differentiation strategy. For instance, the company creates products with elegant and unique designs. Not only this, Apple is a trendsetter in terms of product value and product features. It always brings unique features with its products.
Last but not least, Apple is known for its high-priced products. Well, this feature differentiates this brand, and people happily pay for it because Apple gives them “value.”
Tesla
A name that is not only famous in the United States but people across the globe simply “drool” over its products.
Tesla Inc. simply revolutionized the automotive industry by pioneering the development of electric vehicles. The highest form of product innovation is Tesla’s biggest strength. According to Forbes, Tesla is a perfect example of “word-of-mouth” marketing, and the credit goes to Elon Musk.
