Differentiation Strategy

Differentiation Strategy

Definition:

A differentiation strategy is where a company's product has unique characteristics for which its customers will pay more or buy more from the supplier.

What it is: A differentiation strategy is an attempt by a company to change customers’ perception of the value of its product. Making changes to your product that do not change your perceived value is not a successful differentiation, even if the changes to the product or its services are changed in actuality. The only differences that will impact your product differentiation are the changes that impact the perceived value in the minds of your current or potential customers. The differentiation can be based on product features, brand name, convenience, reliability, quality, etc. If a customer will not pay a higher price or preferentially buy your product at the same price as the competition, then you do not have a differentiated position.
What it does: A successfully implemented differentiation strategy allows a company to charge a higher price for their products than competitors, or gain a higher market share at a similar price to competitors.

Uses:

How it is used: A company will implement a differentiation strategy by making changes to the product features, quality, and reliability, convenience, or brand image of their products. If they are successful, they will be able to charge a higher price or grow their market share.
Where: There are many industries where differentiation strategies are rewarding:

Create products that do the job better than the competitors (e.g., a vacuum that sucks harder than the competitors).
Create products that do more than the competitors (e.g., a swiss army knife with all of its attachments).
Create products that do a unique job (every phone can take a picture today, but there are still cameras sold that make studio-quality pictures).
Create products that have greater quality or reliability (things that last longer and keep doing the job are worth more).
Create products that are more convenient to use or more convenient to get (streaming a movie online is more convenient than going to a theater, video store, or Redbox).
Create a brand image that denotes a known standard or indicates status and wealth.

Why: If customers prefer your product, they will buy it more often or pay more for the same product. These are very valuable advantages for any company.

Limitations:

Where it shouldn't be used: Differentiation strategies are not very successful in commodity industries where the customers do not see a need for an improved product and are happy to buy and use the standard product in the industry.
Any restrictions: Building a brand image or differentiation strategy on a lie is likely to come back and bite. Don't do it!
Warnings: Sustainability continues to be the bane of differentiation strategies. Maintaining a unique position over time is difficult and can be very expensive.

Step-by-Step Process:

Gathering data: Understanding your customers' needs, wants, and desires will help you differentiate your product.

What are the basic needs (price, on-time delivery, etc.)?
What are the expected needs (level of quality, level of service)?
What are the desired needs (nice to have, but not necessarily deal breakers)?
What would your customer really be amazed and delighted to receive?
Identify the qualifiers your customers require. View these as a hurdle you must pass to do business with them. These may include the following:
Identify what the customer would perceive as a differentiating feature.
Identify the unique capabilities you could use to create a differentiated product or service.

Analysis of data: Match your unique capabilities to the the desires of your customers. Look at other industries to see how competitors have differentiated themselves and see if any of the concepts would work in your industry. Try and leverage your rare, unique, and valuable capabilities to create a sustainable competitive advantage.
Interpretation of results: To interpret the results, test your ideas with customers and experts in the industry. See if people would pay extra for your differentiation.
Presentation of results: Tie your capabilities to the desires of the customers and how your differentiation strategy would work.