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What is Product Differentiation?
Product differentiation is the process of distinguishing a product from its competitors to make it attractive to that product’s target market. Companies differentiate their products from competitors’ products as well as others in their own product catalog.
Differentiation is about more than just creating a “different” or “better” product — companies need to communicate those benefits to their potential customers.
As such, product differentiation spans multiple departments and business activities.
- Product development. Differentiation starts with developing a product that has qualities unique to the marketplace. Discernible features that make a product stand out can include features like design, performance, durability, price point, and business- or industry-specific features.
- Marketing. Getting a product in front of the right buyers and communicating its value proposition is a job for the marketing team. Marketers use their product’s differentiating factors to write copy, design ad creative, and decide on the best distribution channels.
- Sales. The sales process is a critical opportunity for product differentiation — not just from the competition but among the products in a company’s own portfolio. When sellers can pair their prospects with the right product and explain its value, they can encourage customers to make the purchase.
- Customer success and retention. Companies can differentiate their products through customer service and after-sales support. This can include various services such as installations, repairs, training, customizations, upgrades, and more.
Product differentiation isn’t just about creating a better product than its competitors (or even selling it that way). It also helps sales and marketing professionals reach the buyers who could realize the most value from using their products, improving customer retention and overall satisfaction.
- Product differentiation strategy
- Product positioning
Importance of Product Differentiation
Differentiating products from others makes it easier for businesses to capture market share and deliver value to their customers. But over-differentiation or differentiating in a way that doesn’t meet customer needs can be costly and difficult to recover from.
Advantages of Product Differentiation
Differentiation helps businesses:
Capture a more targeted market share.
When sales and marketing teams are able to focus on a specific set of customers, the sales pipeline is filled with qualified leads that will actually convert.
Enhance customer acquisition and loyalty by delivering unique value.
The business truism, “You don’t have to be everything to everyone, but you have to be everything to someone,” describes product differentiation perfectly — businesses that focus their product features and messaging on specific customer segments lose fewer of them to competition (and gain more thanks to a better product-market fit).
Scale brand awareness through product features, design, and messaging.
Product marketers who are able to make their product stand out in the marketplace are more successful at building a recognizable brand. When they successfully solve the problems of a specific industry, businesses also benefit from word-of-mouth marketing.
Refine their customer experience.
The more research a company does into its buyers, the better its customer experience becomes. As they sell a differentiated product to others in the same market segment, they can streamline the sales cycle and make their ongoing support initiatives more predictable.
Capitalize on product-led growth (PLG).
Product-led growth initiatives are easier when companies have users in the same industry. The company’s content is more likely to resonate with each prospective customer, and others within the same industry (e.g., strategic partners, influencers, advisors) are more likely to become advocates for its product.
Disadvantages of Product Differentiation
Although product differentiation is generally a good thing, businesses need to be aware of the following risks:
New revenue is not a guarantee.
Especially in a competitive market, customers might not find value in a product’s features and choose to pursue another. Businesses need to continuously assess the market and tweak their product differentiation strategy if they want to see revenue growth.
Differentiation can come at the expense of resources.
Companies have limited time and money, so they should prioritize differentiation initiatives that will drive the most value in the shortest time.
Over-differentiation can turn buyers off.
The MAYA (Most Advanced, Yet Acceptable) principle describes how a product that is too far ahead of its time or too unfamiliar for its target market won’t gain adoption — businesses need to find the right balance between innovating, differentiating, and developing a familiar product.
The product’s perceived value can decline.
Differentiation efforts might negatively impact price optimization, as customers may expect to pay more or less than expected for a product with specialized features.
Departments Involved in Product Differentiation
Developers use customer data (e.g., product usage, cohort analysis, usability testing, and customer surveys) to turn a product from a concept into a reality.
The involvement of product developers in the differentiation process involves several key activities:
- Defining points of differentiation based on market research and customer insights
- Creating a product roadmap
- Building and fine-tuning product features and functionalities
- Prototyping and beta testing, collecting initial feedback from early users, and making necessary improvements
- Continually collect and analyze product usage data for post-launch enhancement
Engineers work closely with the product manager and development team, bringing the product from ideation to a tangible, usable product.
Engineering teams are tasked with several crucial responsibilities:
- Designing and developing software (or hardware) solutions that match the product concept, features, and unique selling propositions laid out by the product development team.
- Testing the product design’s quality and effectiveness
- (In the case of software engineering) deploying the software, monitoring its performance, and addressing ongoing issues with the codebase.
- (In the case of physical product engineering) ensuring the product design is able to be manufactured on an industrial scale and meets safety requirements.
The distinction between product development and engineering teams lies in their focus areas. While product development is a broad term that covers every stage of the project life cycle, from inception to completion, product engineering zeros in on the practical aspects of design and prototype.
Engineering scrutinizes functionality, cost-effectiveness, ergonomics, safety, and other factors that contribute to a superior and differentiated product.
The main purpose of a marketing strategy is to convey the product’s value and unique features in a way its target buyers can react to.
The marketing team’s responsibilities in product differentiation range from:
- Creating compelling content (e.g., videos, website copy, blog posts, white papers) that positions the product as the best solution to the target customer’s problem
- Creating a distribution strategy for that content (e.g., SEO, SEM, social media) to reach and engage potential buyers
- Creating product-specific buyer enablement content (e.g., case studies, tutorials, documentation) to drive customers toward a purchase decision
- Researching competitors and analyzing customer feedback to refine product positioning in its market
- Developing pricing strategies that reflect the product’s value and account for price elasticity
- Managing the product launch strategy by creating a timeline of activities and deadlines for each team member involved in the process
Sales and marketing functions are increasingly intertwined, but sales teams are responsible for taking a product from concept to cash flow.
The sales team’s involvement in product differentiation efforts involves:
- Qualifying sales leads based on whether or not they’ll benefit from the product’s unique features and USPs
- Creating a customer-centric buying experience that connects buyers with the right products for their pain points
- Delivering personalized sales demos that illustrate the product’s advantages for the prospect
- Providing the right content for everyone involved in the sales process
- Working within the product’s pricing model and navigating complex purchases
- Collecting and analyzing data to monitor sales performance
- Making sales projections to forecast future demand
Customer Support and Success
A strong product differentiation strategy is incomplete without customer success and support teams.
They’re responsible for fostering long-term relationships with customers, solving their problems, sharing helpful content, and encouraging customer loyalty.
For customer success teams, a product strategy includes:
- Customer onboarding processes (e.g., implementation, training, and companywide adoption)
- Creating personalized support plans for each customer
- Providing technical assistance and troubleshooting when necessary
- Nurturing relationships with customers by offering post-sales advice, sharing best practices, and sending product updates
- Collecting product feedback from customers to inform the product roadmap and market positioning strategy
- Monitoring customer sentiment and underscoring recurring issues with the product
Types of Product Differentiation
A successful product differentiation strategy takes one of three forms: horizontal, vertical, or mixed differentiation.
Horizontal product differentiation refers to that which has nothing to do with a product’s quality or pricing.
When customers make purchase decisions between horizontally differentiated products, it usually comes down to personal preference (think Coca-Cola vs. Pepsi or iPhone vs. Android).
Horizontal product differentiation is often used in highly saturated markets, where customers have plenty of options to choose from and prefer certain products for their aesthetic value or brand reputation.
- Design (e.g., color, shape, size)
- Brand identity
- Perceived value from the buyer
- Social responsibility initiatives
Vertical product differentiation focuses on creating a superior product based on its quality and pricing. It’s the classic “better mousetrap” concept — customers won’t hesitate to pay a premium if your product is better than others (and if all products were priced the same, there would be a clear overall winner).
In vertical differentiation strategies, product features are carefully tailored to specific customer needs and wants (e.g., branded products vs. generics, low-cost tools vs. enterprise software).
Examples of vertical product differentiation include:
- Pricing (e.g., promotional offers, discounts)
- Quality of materials or components
- Product performance
- Support services
Mixed differentiation is a combination of the two types described above. It helps companies hit the sweet spot between quality and cost, creating an appealing product for buyers without sacrificing profitability.
It also acknowledges the multivariate factors associated with more complex buying decisions. For example, a car buyer may care about fuel efficiency and performance, but also how the car looks, what extra features it has, and whether or not there is a promotion going on.
Mixed product differentiation requires research to understand customer needs and preferences in order to identify which factors are most important to them.
Product Differentiation Examples
To dive deeper into product differentiation, here are three hypotheticals:
Soft Drink Company (Horizontal Differentiation)
Company X is a soft drink brand that offers an array of flavors, each tailored to appeal to different taste preferences, from the classic cola flavor to unique ones like peach or cinnamon. Though the quality of all their drinks is consistent, the differentiation lies in the distinct flavor profiles, each appealing to different consumer tastes.
The price and quality of soft drinks are well-defined, so Company X focuses on creating a unique brand identity and perception that resonates with customers. Their marketing campaigns emphasize their flavors’ fun and exciting elements, using season-specific advertising to associate their drinks with special occasions.
Luxury Fashion Brand (Vertical Differentiation)
Company Y is a luxury fashion brand specializing in high-end clothing and accessories. Their products are carefully crafted using quality materials and intricate detailing, making them desirable to customers who appreciate finer things.
Since its product management team works closely with small luxury manufacturers and sources the best materials, Company Y prices its products at a premium, which lets it capture the value associated with its superior quality.
The marketing team develops campaigns that emphasize the features of their garments — including the quality of materials and craftsmanship — to appeal to customers who understand the value of their luxurious products.
CRM Software Vendor (Mixed Differentiation)
Company Z sells CRM software specifically for digital marketing agencies. It is built specifically for ad hoc sales and ongoing client relationships, which are common among digital agencies.
The product development team is continuously improving the features and functionalities of their software to meet customer demands, such as integrations with popular marketing platforms, automated workflows, performance reporting tools, and a project management software add-on.
Company Z also offers different pricing tiers based on customer needs and budgets. The pricing model has been carefully tailored to suit customers at different stages of their business growth, from startups to larger enterprises.
The marketing team creates content showing digital marketing agencies how to streamline their internal operations with CRM and manage ongoing client engagement.
Comapny Z’s sales team specifically reaches out to US-based digital marketing agencies with over 20 employees doing over $10MM in MRR — the exact customer persona the software is tailored to.
How to Develop a Product Differentiation Strategy
1. Know your market
There is no way to know “for sure” how customers will respond to a product, but customer research and competitive analysis can make a differentiation initiative as predictable as possible.
Start by understanding the market and researching customer needs, wants, and preferences in the following ways:
- Conducting interviews and focus groups
- Sending out surveys
- Reviewing competitors’ products and pricing
- Analyzing customer feedback
To truly know your market, you will have to test certain features on small groups of individuals before rolling them out to your entire customer base.
2. Define your unique product qualities
Once you know which features your customers (or potential customers) are looking for, you need to quantify them in terms of profitability and target market size.
Think of every customer need as its own customer segment, and ask yourself the following questions:
- Are there enough customers in this segment to justify investing in product development?
- Can I produce this feature or product at a low enough cost to make a profit?
- Does the feature have a tangible impact on other critical features of the product?
Chances are, you’ll find multiple features your customers could benefit from using, but it’s important to only invest in the ones that make sense from a business standpoint.
3. Develop a marketing and sales strategy around differentiation
Marketing, sales, and product development should all work off the same data to ensure alignment. Using those insights, marketing and sales strategies involve the following:
- Finding a clear way to sell a product’s complex benefits and differentiators
- Creating buyer personas
- Developing targeted campaigns for each customer segment
- Ensuring that sales reps understand how to explain the value of different features in terms of customer needs
- Testing different marketing channels, messaging, and campaign elements (for marketing) and developing sales methodologies (for sales)
Sales and marketing professionals should work with product development understand the product specs and features that are most important to customers. Otherwise, they won’t be able to effectively communicate the product’s value.
People Also Ask
Which market structure predominantly uses product differentiation to attract consumers?
The monopolistic competition market structure relies on product differentiation to attract consumers. In this market structure, multiple sellers offer similar products or services, but each one can differentiate their offering based on features such as price, quality, or marketing.
What is an example of product differentiation?
A few examples of product differentiation include:
1. Coca-Cola vs. Pepsi (similar products with customers who prefer one over the other)
2. Apple vs. Android (similar functions with different interfaces and product designs)
3. Hanes tees vs. luxury designer clothing (similar products with price, quality, and design differences)
4. Walmart vs. Whole Foods (similar concepts with different price points and qualities of product offerings)
How does differentiation build customer value?
Differentiation builds customer value by delivering a unique product or service that meets a specific customer’s requirements. Rather than being a “jack of all trades but a master of none,” product differentiation means focusing on a specific niche and delivering an experience tailored to a customer’s needs through sales, marketing, product development, or all three.