July 15

What Is Product Differentiation? Types, Advantages & 3 Examples

In a world of fierce competition for successful products and services, how can you make sure yours stands out from the crowd? Why is product differentiation important and what are some good examples of this where companies have succeeded? Why do customers choose one kind of product or service over another? We take a look at all of these topics and more below.

What is product differentiation?

Differentiation is a word often bandied about in the product world – but how can we truly define product differentiation? At its heart, product differentiation is about competitive market advantage and describes the reasons customers might choose your product or service over someone else’s. This could be anything from your unique product features (USP) or functionality that better solve a customer problem through to delightful elements of your service that tempt users away from their existing service of choice.

Definition: product differentiation

In short, product differentiation refers to building a strong value proposition for your product or service that distinguishes your brand or business in the market, targets a specific audience or set of customers and has longer-term viability for your business.

Why is product differentiation important?

The market is awash with a myriad of different products and services that aim to solve customer problems in the world, so competition is stiff and there’s a need for successful product differentiation in order to stand out from the crowd. People can also form strong habits and emotional connections with the products that they use, so work to better solve customer problems or give them a reason to adopt your product or service can be key to winning in the market.

One of the pitfalls of competitive analysis is that companies try to emulate what others in the market are doing in the hope that customers will choose their product, but this is rarely a winning formula. Competitive advantage can be viewed in another way – 

People will often choose to abandon their use of an existing product and begin using another for many reasons. The Jobs to be Done framework outlines some of the thinking behind this, sometimes known as the “Forces of Progress”, which go hand-in-hand with product differentiation.

The Forces of Progress are loosely based around two areas: demand generation and demand reduction and really describe the “why” behind the importance of product differentiation.

Demand generation focuses primarily on:

  • Push – when people are ‘pushed’ away from the current product or service they are using – this can be down to being unhappy with the way things are – e.g. poor customer service, the product doesn’t solve their problem anymore etc
  • Pull – this is when customers are ‘pulled’ towards a new product or service and the thought of a ‘better life’ – they feel they would make progress in their life by switching to or choosing something different. It can also simply be about a more subjective preference for a different product

Demand reduction focuses primarily on:

  • Anxiety – there can be an undercurrent of anxiety in customers when it’s not clear if the new product or service available, no matter how differentiated it is, will solve their problem or help them make progress
  • Habit – understanding current customer habits can play a key role in whether they choose to move away from their current product or service  – “old habits die hard”, as they say, and this is a key factor when considering demand reduction

Companies often heavily focus on demand generation but forget to consider demand reduction and the important role that plays when considering product differentiation.

3 types of product differentiation

When thinking about product differentiation, there are 3 main sub-categories we can consider when looking at how customers might make their choices about which product or service to choose. Let’s take a look at those here:

Vertical differentiation

This type of differentiation is when customers make a choice between your product or service in the market based on an objective measurement such as price points or quality. Although the measurement can be something more tangible, customers will still use their personal or subjective needs to make the decision.

For example: there are two brands of peanut butter, one more expensive than the other – the cheaper one contains palm oil but the more expensive one does not – customers who place more value on environmental issues may opt for the more expensive peanut butter, despite the additional cost.

Horizontal differentiation

Sometimes customers make a purely subjective decision when choosing a product or service, because there is no objective factor to distinguish between best and worst. This could be a personal preference or something on a more emotional level.

For example: there is no qualitative measure to rank different kinds of chocolate – whether you prefer white, milk or dark chocolate is really a matter of personal taste.

If the products on the market share a lot of similar qualities and cost roughly the same, customer choice and purchasing decisions for similar products often come down to subjective factors.

Mixed differentiation

Customers making larger or more complex decisions or purchases may use a mixture of both vertical and horizontal differentiation factors to reach a conclusion. 

A good example of mixed differentiation is the thinking that goes into making a car purchase. Objectively customers will consider things like price, mileage and the quality of the safety features. Subjectively things like design aesthetics and feeling about each car brand will come into play. 

In a similar way to vertical and horizontal differentiation, customers will place more individual value on the different elements – some caring more about price and others caring more about design aesthetics, for example.

3 advantages of product differentiation

Building a differentiated product or service has plenty of advantages for your business, as well as your customers. Let’s take a look at a few of those here.

Building reputation, brand loyalty and habit

From a product perspective, building habits can be very challenging, but once customers have chosen to use your product or service and use it repeatedly, you can start to build an engaged user base. Product differentiation can really be the key to unlocking choice, and later habit with customers as you are providing them with a reason to both choose and continue using your product. 

Product differentiation is not simply a one-time exercise – good product teams need to continue to understand potential customer needs, and to iterate and evolve their product or service to ensure it remains valuable and differentiated. Over time this contributes positively to brand loyalty and the reputation of your business for putting out great products or services that people come back to time and time again. Your marketing strategy is also key here.

Honing in on your target audience

All good product development starts with product discovery, and part of that process is research and understanding who your target market is and what sort of needs they have. It can be challenging to get a really refined target audience defined right from the outset, but through experimentation and iteration of your value proposition and the way you differentiate your product, more can be learnt about who your exact customer base is or should be.

Increasing revenue

Having a differentiated product or service is partly about serving the unique needs of your customers, but of course your business has needs too and increasing revenue is likely to be one of them!

It goes without saying that positive product differentiation that really distinguishes your business in the market and solves those unique needs for your customers is likely to go hand in hand with an increase in revenue.

You may not have the most expensive product or service on the market but if people choose to use it in large numbers then your product differentiation strategy will have paid off.

3 product differentiation examples

We have touched on a few examples of product differentiation above but let’s take a look at some from the big brands out there who have succeeded in their strategies:

Apple 

No look at product differentiation would be complete without mentioning tech giant Apple and how they executed their strategy!

Founded in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne, Apple has had a huge impact on the computer software and consumer electronics industries over the years. Famous for their innovative products – the iPad, iPhone, Mac, and more – their “Think Different” approach to product development has successfully distinguished them from their competitors in the market.

How did they do this? It can be argued that they took a multi-layered approach to product development and innovation.

The first thing to consider is their iconic product design – the sleek, minimalist aesthetic of Apple products was a real standout feature from others in the market. The elegance and simplicity of their products is something customers place a high value on and are willing to pay a premium price tag for.

Some companies would be content with differentiation through design alone, but Apple went one step further and also offered its own unique operating system on its products that really served to distinguish the user experience gaps in its competitor’s products.

We have already touched on the premium price tags but Apple’s pricing strategy can also be seen as a differentiator where people associate high quality products with higher prices.

Emirates

While Apple is a great example of a differentiated physical product, Emirates is a great example of a successful differentiated service. Other airlines such as Ryanair and EasyJet have chosen to differentiate on lower price, Emirates has approached their strategy by focussing on high quality service.

Emirates is a state-owned airline based in Dubai that operates over 3,000 flights per week to more than 150 cities in 80 countries.

Things that really help them to stand out from other airlines are their exceptional customer service, high quality Economy Class services and their adoption of new navigational technologies.

Economy Class seats are not known for their perks, but Emirates provides complimentary beverages, high quality in-flight entertainment, regionally-inspired meals, wi-fi and memorable customer service. They also received an award for their First Class service in 2020.

Hermés

Established in 1837, Hermés is a French luxury goods manufacturer famous for its iconic handbags, jewelery, watches, clothing and perfume. They have executed a powerful approach to product differentiation through a combination of exclusivity, storytelling, and high quality craftsmanship.

If we take a closer look at their strategy around exclusivity we will find a few different approaches:

  • Scarcity of certain products – Hermés Birkin bags, for example, are crafted by hand and in small numbers due to the time-consuming process to create them, meaning you can own a bag that not many others have
  • The waiting list – it’s not possible to simply buy a Hermés Birkin bag from their website or a physical store – you will need to join a waiting list to be eligible, and then there is the further waiting for your bag to be made!
  • Lack of choice – if scarcity and the waiting list weren’t enough to make you want a Birkin bag all the more, the level of exclusivity means that you can’t even have a say in what your bag will look like – just consider yourself lucky enough to be able to get your hands on one!

The exclusive nature of Hermés handbags is such that they are not only used as accessories but also seen as investment pieces, some are so rare that they fetch hundreds of thousands of dollars at auction.

How do you develop a product differentiation strategy?

Understand your customers

Key to developing a product differentiation strategy is truly understanding your customers. What do they value? What are their needs? What Jobs to Be Done forces are at play (push / pull / habits / anxieties) that might influence their decisions to choose your product or service? Doing due diligence with your user research cannot be emphasized enough here!

Be aware of your competitors

As we mentioned earlier, awareness of your chosen market and competitive landscape is super important when it comes to finding how you can distinguish yourself from your competitors. Remember, it’s not emulating what they do that will lead to success, it’s finding your niche and the unique ways you can solve customers problems and add value. 

Identify your opportunity and market fit

Once you have a good handle on your target audience, their needs and your competitive landscape, you can use something like the Lean Canvas to flesh out your opportunity, unique value proposition and advantages as well as any revenue plans and cost structures. You’ll need to conduct plenty of experiments with any potential solutions in order to find product market fit.

Keep learning and iterating

Product differentiation approaches need to evolve over time because what someone finds valuable today might not be the case tomorrow if your competitors move in and disrupt the market. Keep aiming to learn about your changing customer needs, what they value and adjust your product or service accordingly.

Are there any disadvantages to differentiated products? 

We have spent a lot of time here focussing on why differentiated products are a positive thing, but there can be some pitfalls to look out for.

You may find yourself in a position where you have a really good grasp on customer needs, you have found a unique value proposition that really resonates with your target audience and you have evidence that people are willing to pay for it. However, it might be that the running or manufacturing costs for your product are too high and won’t provide a good return on investment.

Or you have been giving your highly differentiated digital product away for free but when the time comes to ask people to pay for it, they haven’t formed enough of a habit or don’t value your product highly enough to pay for it. It’s important to flush issues around cost out at the start of your product development journey to ensure you have good market fit and aren’t left with a highly differentiated product that isn’t providing good ROI or revenue.

Key takeaways

In conclusion, product differentiation is a key factor when it comes to building and launching a successful product or service. Taking into account customer needs and what they value, how they make their choices when it comes to switching to or buying a new product and planning to evolve your product or service to continue to meet these needs are all important parts of formulating a unique selling proposition.

Monica Viggars

About the author

Monica Viggars is a Product Coach with over 15 years of experience working in product and tech. A Product Manager in a past life, Monica now enjoys helping product teams to improve their ways of working and best practices as well as supporting companies on their journey to becoming more product-led. When not writing or product coaching, Monica enjoys travelling (when there's not a pandemic happening!), arts and crafts and baking cakes.


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