My girlfriend and I made a bet of 5 EUR. It involved a blindfold, two sweet drinks, and a blindfold. Blindfolded, she claimed that she could tell the difference between Pepsi and Coca Cola. After three rounds of wrong guessing, she discovered that the sweet, sweet Coke that she loved so much was not that distinctive.
This begs the question: Why do people rate products so differently? The topic we will be discussing in this article is product differentiation.
What is Product Differentiation?
Product differentiation was first defined by Edward Chamberlin, a Harvard economist, in his 1933 book The Theory of Monopolistic Competition. It refers to the process of distinguishing one’s product or service from existing competitors in the market.
This process must be successful because it is important to communicate the unique value proposition of the product and highlight the differences from other products.
A successful product differentiation can lead to competitive advantages such as a higher awareness of the brand and product, the ability charge higher prices and a greater ability to target customers more effectively.
Different types of product differentiation
There are three types of product differentiation: horizontal, vertical and mixed.
Products that are horizontally differentiated offer the same product offering in terms of price and quality. Customers often evaluate these types of products based on their personal preferences. Example: Coca Cola vs. Pepsi, Pampers vs. Huggies.
Vertical differentiation allows products to be rated on one factor. Socks can be priced differently if they are equal in quality. Take a look at the prices you would pay for Nike socks and H&M socks.
This allows products to be differentiated by a variety of factors. The smartphone market is a great example. It offers products that are based on price, operating speed and design or camera performance. The company’s willingness and ability to target different consumers within the same product category is evident in the launch of the iPhone 11.
Benefits of Product Differentiation
A differentiated product experience can often bring many benefits. Here are some ways product differentiation can help a business.
Increased brand recognition: A product that is different from its competitors is, by definition. Customers will be able to recognize the product and increase their awareness.
Higher prices: Customers can charge more for differentiated products. Customers will pay more if there are parts of the product that differentiate from the rest, particularly if they have access to superior features or components.
What is the unique selling proposition of your product? This allows companies to identify what makes their products better than others. This information can be used to communicate with customers and create marketing campaigns.
Target audience: Businesses can target customers who are drawn to specific features by knowing what draws them to the product. For example, indoor bike manufacturer Peloton knows its customers will pay more, be more active and enjoy a digital experience. These attributes allow them to target the right consumers through channels such as YouTube ads for fitness-related videos.
There are risks of product differentiation
High reward is often accompanied by high risk. First, could be copied from competitors. Competitors can catch up in a matter of sprint iterations if your product differentiation is limited to a handful of features. Consider Slack for example, which was recently overtaken by Microsoft Teams in terms its user base. Ask Evan Spiegel about his opinion on Instagram’s obvious copy of its Stories function.
There are many other dangers that can be posed, beyond copycats.
Too broad or too narrow: When defining a user base, companies might run into the danger of being too broad (e.g. By going too far with a message or being too niche. The Total Addressable (TAM), as well as the Total Obtainable Market, are key indicators for assessing such an opportunity.
The race to the bottom: In a global connected world, everyone will be willing to sell cheaper products (especially in the world of software, where physical movement of goods is not a limitation). It is important to clearly communicate your unique advantages.
Shiny object syndrome People are driven to look at the best tech because they love the product category. It is best to redesign the product or move in a different direction if your unique selling point is found within a feature that will soon become obsolete. You can be proactive about implementing technology adoption cycles by understanding them.
Factors Influencing Product Differentiation
There are many ways to differentiate your product. These factors include:
- Service quality (e.g. Customer care or repair programs
- Performance (e.g. processing power)
- Delivery speed
- Style and form
- Experience with products (e.g. Easy ordering
- Brand perception