What Is A Differentiation Strategy? (With Examples) - Zippia (2024)

A differentiation strategy is a way to make sure that your service, product, or business stands out from its competitors. Differentiating your business is a way to attract and keep customers, appeal to investors, and build your brand. Developing a differentiation strategy is one of the primary ways that businesses gain a competitive edge.

If you’re curious about what a differentiation strategy is, how others have done it successfully, or what its benefits are, then this article is a good place to start.

Key Takeaways

• A differentiation strategy focuses on what makes your business unique from others in the same industry or market.

• Having a good differentiation strategy creates more stable brand loyalty, reduces price competition, increases profit margins, and lowers customers’ ability to substitute your product with something else.

• Three areas of differentiation include the company, the cost of the product or service, and the product or service itself.

What is a differentiation strategy?

A differentiation strategy is a business strategy that revolves around making your company, product, or service unique, so it stands out from other businesses in your industry or market segment.

While you should strive to provide something totally new and novel to your customer, no matter what industry or market you’re selling in, it’s most important to differentiate yourself within your industry. You want to make sure that your product is different (and better) than any direct competitors’ products.

Types of differentiation strategies

Differentiation strategies can be categorized in a few different ways. The most common is going to be broad as opposed to focused, but there are also vertical and horizontal differential strategies. All of these have to do with selecting your target audience and moving your brand or product to appeal to them.

Here are the types of differentiation strategies:

1. Broad differentiation strategy. A broad differentiation strategy is about appealing to a wide base with a brand that speaks to commonly-held values and expectations.

   Companies like Trader Joe’s and Whole Foods, for example, are all about organic food and a healthy lifestyle, both of which appeal to a wide range of consumers from different backgrounds.

2. Focused differentiation strategy. A focused differentiation strategy is about appealing to a narrow segment of the market by fulling their highly-specific requirements.

   An example might be a community bank that specializes in providing especially attractive small business loans or a resort that markets itself as the perfect romantic getaway from the kids.

3. Vertical differentiation. Vertical differentiation involves standing out for objective, factual reasons. Examples of vertical differentiation include:

   See Also

   Product DifferentiationDifferentiation in Calculus (Derivative Rules, Formulas, Solved Examples)Types of Differentiation Strategies With Examples6 Companies that Cleverly Use Differentiation Strategies & Gain Competitive Advantage

   • Offering the lowest price

   • Using the highest-quality technology/parts/ingredients

   • Having the best-reviewed product

   • Winning awards from authoritative organizations

   • Having the most commonly used/popular product

4. Horizontal differentiation. Unlike the other types of differentiation, horizontal differentiation is more about offering a wide range of products. For instance, if you make ice cream but don’t offer a chocolate flavor, then a number of customers are going to buy another brand because they want chocolate ice cream.

   Businesses such as Frito Lay’s that offer a plethora of flavors for their products are practicing horizontal differentiation. That means that if someone wants sour cream and onion potato chips, Lay’s will have it. Same with BBQ and any other flavor.

   Examples include:

   • Pepsi, co*ke, Cola, et al.

   • Bottled water

   • Hand soap

Examples of successful business differentiation strategies

Every prosperous business has a differentiation strategy. If you’re looking to find a niche for your business, it can help to look at successful differentiation strategy examples. In general, if a company has a dedicated customer base, they had an excellent differentiation strategy.

Let’s take a look at some popular examples of differentiated companies:

• Apple. While there are tons of tech companies out there, Apple has successfully differentiated its products over the years through innovation and product design. Their unique operating systems make them stand out from their competitors, while all of their products have a more elevated and sleek design than their counterparts.

• Amazon. The e-commerce giant is at the top of everyone’s list when you need something. They’ve distinguished themselves as a company that sells nearly everything at the lowest prices and with extremely fast service.

• Lush. The cosmetics brand stands out because of its DIY and handmade approach to beauty. They established their products as ethical and handmade, whereas their competitors provide manufactured and impersonal products.

  They also worked to create a unique and hands-on customer experience in their stores where you can try things out and get to know the products before you buy.

• Emirates. There’s lots of competition for airlines, but Emirates made themselves stand out while also charging high prices. They built their brand on amazing customer service and access to the latest in-flight technology.

  Customers are willing to pay the extra few hundred dollars to fly with them instead of a cheaper competitor.

• Chipotle. Chipotle revolutionized fast food and created the fast-casual trend. Their commitment to providing fresh food in a quick and relaxed atmosphere was then copied by companies around the world.

• Hermes. This luxury brand is home to some of the most expensive clothes and accessories, but that doesn’t stop thousands of people from buying their products. They made sure to create products that are always up to an extremely high-quality standard, making their high cost seem worth it.

  They also worked to create exclusivity and make their products a status symbol since so few people can get their hands on their handbags each year.

Benefits of a differentiation strategy

Successfully differentiating your product can lead to increased customer loyalty, bigger profits, and a strong brand image. Differentiation strategies are a must for almost every business because of how many benefits a well-executed one can have. Here are some of the pluses for your businesses:

1. Brand loyalty. If your product or service stands out from the others, then your customers will keep coming back. This can be in terms of status, quality, price, or ease of use. Whatever the reason, having repeat customers makes a big difference in a company’s bottom line.

2. Better profit margins. Once you’ve differentiated your business or product, you can start charging a premium for it. People will be willing to pay extra to get the best product, or the one that best suits their needs.

3. Reduced product substitution. If your product or service is truly unique, then there isn’t anything that can replace it. That means that consumers won’t be pulled away to a competitor on price or features, because there won’t be anything that fills the same niche.

4. Reduced price competition. When your product stands out on its merits, then you won’t have to compete on price. You can set a higher price and let your competitors try to come in under you.

5. Builds a brand image. Having a unique product, service, or company culture builds your brand. Many businesses aim to have all three, further setting themselves apart. A brand can help to sell goods just as much as quality and price, and having a strong, recognizable brand secures your business’s position.

6. Draws the right audience. When you build a differentiation strategy, you should be appealing to a specific group of people. That means that as you continue to build your brand and differentiate your product, the people that it’s aimed at will be the ones drawn to it. And they’re likely to be repeat customers.

Basis of differentiation

There are three main ways you can achieve differentiation. While the three levels of differentiation are all related, you’ll need to take different approaches to achieve differentiation on all three levels, but that doesn’t mean that you only have to focus on one aspect.

1. Company. One way to stand out is to make your company unique. Companies that rely heavily on their brand name, brand loyalty, location advantage, or customer support tend to have high company differentiation.

   This means that the company is one of a kind in how they treat their customers, how their brand functions, or that they’re the only competitor in the industry. Customer service is becoming a huge differentiator as companies shift their focus to creating happy customers to turn them into returning customers.

   See Also

   Mastering Differentiation Strategy for Professional Services Firms - Hinge Marketing

   Finding a way to provide the best customer service in your industry can be one of the best differentiators to use.

2. Cost. Another way to differentiate your product is to adjust the pricing depending on your customers’ needs and expectations. Commonly, companies will make sure they’re the cheapest product so consumers will choose theirs.

   For example, Amazon became popular because people know they can find the lowest prices for any product they’re looking for.

   Other strategies involve maximizing prices, so customers feel like they’re getting an elevated experience. Luxury brands use high prices because the price tag is part of the experience that they’re selling. Both strategies have their pros and cons; it just depends on what kind of company you are and the product you’re selling.

3. Product or service. Finally, you can differentiate the product or service you’re selling so that it’s totally different from anything else available. Providing innovative and unique products can be a great way to stand out from others, but it can be costly in terms of time and resources since you need to determine what that unique product is and take time to develop it.

   You don’t have to reinvent the wheel and make something completely new, but you do need to have a product that meets customer needs better than anything else available.

   Typically, having a differentiated product is the most costly route, but it can also have the highest return on investment since you’ll have a unique product in the market until others copy you.

Testing Your Differentiators

Once you’ve come up with what sets your company apart, you need to test those differentiators to make sure they’re worth developing into a strategy. If they don’t check these three boxes, you need to either make adjustments so they do or choose different differentiators to focus on:

1. Is it true? You can’t fabricate or even exaggerate your differentiators. Customers will quickly see through your claims, and these false differentiators will end up hurting your company rather than helping it.

2. Is it relevant? In other words, do your target customers care that your company values sustainability or offers free returns? Make sure your differentiators will actually impact customers’ decision-making rather than just making an interesting “fun facts” list.

3. Is it provable? You have to be able to back up your differentiation claims to customers. If you say you offer the best customer service, for example, you need to have a hefty list of positive customer reviews, some unique customer service policies, and intense training for your customer service reps to back up your claims.

How to make a differentiation strategy

To successfully differentiate your product, you’ll need to go through a lot of research, analysis, and testing to find what works for your company, product, consumer, and industry. There’s no one-size-fits-all approach to differentiation since that would defeat the purpose of creating unique companies or products.

Here’s a general checklist to keep in mind:

1. Know your target audience. You can get started on differentiating yourself by creating a product that uniquely addresses consumer pain points, providing a product that is innovative and new, adjusting the price of the product based on consumer value and budget, and creating a solid brand identity.

   To get to all of these, you’ll need to spend time researching your industry, client, and alternatives to your product. Keeping your customer central to your differentiation strategy is vital. At the end of the day, consumers choose to buy your product, and all of your efforts should be centered around their needs, budgets, and opinions.

   Doing lots of research on who your ideal customer is, what they look like or behave like, and how they feel about your product will give you a better differentiation strategy than if you try to create it in a vacuum without understanding your consumer.

2. Consider your differentiator. Now that you know your audience, you need to decide on what your company’s specialty will be and how you’ll provide some unique value on the market. Think about where you’re strong and how you can leverage that or lean into it to create a unique brand identity.

   Use some of the differentiating factors found in this article to get you started.

3. Create a narrative. People don’t really like adjectives — or at least, they don’t trust them at face value. If you tell someone a company is “innovative” or “inexpensive,” they’ll come in with their own associations (like “innovation” is usually a BS term and “inexpensive” usually implies cheaply made).

   But if you instead tell a compelling story about how the founder was led to this great solution to a common problem and then figured out a way to deliver a high-quality answer for a low price — now you’ve got people interested.

   Being active on social media, creating a good “About Us” page, and engaging with the community are a few ways that companies shape their brand’s narrative and differentiate themselves from the competition.

4. Be consistent (once it works). Imagine if Amazon suddenly dropped free 2-day shipping? Or if Walmart’s prices rose to the level of Whole Foods? Once you’ve got a system that works and consumers know why you’re different, stick to it.

   The tricky part is new companies who can’t really be sure if their differentiation strategy is working or not because the business is too new. Rebranding can be effective in these early days of business, but be wary of overdoing it, or customers will be confused as to what your company is all about.

Differentiation strategy FAQ

1. What is the goal of a differentiation strategy?

   The goal of a differentiation strategy is to make your business, product, or service stand out from its competitors. By doing this, it’ll show consumers that your business offers something different — or better — than similar companies.

2. What are the three types of product differentiation?

   The three types of product differentiation are horizontal, vertical, and mixed.

   • Horizontal differentiation. This kind of differentiation applies more to personal tastes among consumers, such as having different flavored drinks. Horizontal differentiation means that you can make inroads in a part of the demand, such as having a slice of the ginger ale market.

   • Vertical differentiation. This is a more direct ranking system, such as distinguishing a product on quality, price, or ergonomics.

     While customers’ judgments on this is still subjective, there are aspects that are quantifiable: such as the number of calories in a meal.

   • Mixed differentiation. In larger or very expensive purchases, a customer may consider both vertical and horizontal differentiations.

     When buying a laptop, for example, the customer will consider the specs, such as processor speed, RAM, and size of the display, but they’ll also consider the color, design, and brand image.

3. Why is product differentiation important?

   Product differentiation is important because it’s how businesses define themselves in the marketplace. It helps lead to a competitive market, because smaller companies can define themselves and gain a share of the market.

   In addition, it can help businesses respond to a consumer need or interest that may not be being currently met.

References

1. MasterClass — Differentiation strategy: 5 Ways to Differentiate Your Product

2. Investopedia — Product Differentiation: What It Is, How Businesses Do It and the 3 Main Types

3. Harvard Business Review — There Are Still Only Two Ways to Compete