Product differentiation: How to position yourself in the market

When you're looking for a particular product, whether it be a pair of red shoes or a software solution to automate email sends, chances are that you will not only find that product—you will likely be overwhelmed with options. Amazon, one of the world's largest online retailers, had nearly 120 million products listed for sale mid-2019. And many of these products are very similar in description, functionality, performance, popularity, and price.

So if you're running a business in today's crowded market, how do you make your products stand out? How do you convince customers to give you their money?

This is where product differentiation comes in. In this article, we will discuss product differentiation—what it is, why it's important, what types there are, and how to develop a strategy around it.

What is product differentiation?

Simply put, product differentiation is the process a company uses to make its products or services stand out. This includes creative marketing, enticing promotions and incentives, and competitive pricing. It also means knowing what your customers want so that you can emphasize features that are important to them. Product differentiation gives you a competitive edge because customers perceive your product as superior in a sea of options.

The responsibility for product differentiation does not fall on your marketing and sales departments alone. It typically involves several different departments and stakeholders who are motivated to do the work necessary to innovate and to deliver high-quality products with appealing price tags.

Product differentiation efforts can include team members from:

• Marketing
• Product management
• Engineering
• Sales
• Customer support

Why is product differentiation important?

New products are introduced into an already crowded market each and every day. Even new products from well-established companies with recognizable brands fail to gain customer support. This makes it hard for new companies with unknown and unproven products to successfully launch new products.

To improve your chances of success, you need to help your customers understand how your product differs from similar products and why they need to buy it. Remember that your customers are very knowledgeable and have a lot of products to choose from. If you can’t find a way to make your product valuable to your customers, you risk missing out on a lot of potential revenue. 

Product differentiation example

In the 1983 movie, A Christmas Story, nine-year-old Ralphie Parker wants a BB gun for Christmas. But Ralphie doesn’t want just an ordinary BB gun. He wants a "Red Ryder carbine-action, two-hundred-shot Range Model air rifle with a compass in the stock and this thing which tells time."

Of all the BB guns that Ralphie could have asked for, what was different about the Red Ryder gun? What made it rise above the competition and stand out? 

During the Great Depression when other companies were closing their doors, Daisy Outdoor Products, the makers of the Red Ryder BB gun, managed to not only survive but to prosper. As the depression continued, Daisy learned that colorful and fun advertising aimed primarily at children combined with innovative promotions kept the company operating at full capacity.

Some of the creative advertising and promotions that Daisy devised included:

• The option to trade in old models for new models at a discounted price
• Tie-ins with popular comic strip, radio, and movie characters like Buck Rogers and the cowboy Red Ryder
• Color “handbooks” that included loading and firing instructions, a Daisy product catalog, and comic strip stories
• Color posters suitable for hanging in your room

These types of promotions made Daisy air rifles very popular and must-have gifts for Christmas. By 1949, the Red Ryder BB gun was so popular that it sold one million units in a single year, an amazing sales figure for the time.

The importance of product differentiation for Daisy Outdoor Products was the difference between going out of business or thriving during the worst economic downturn of the 20th century.

Types of product differentiation in marketing

How your company approaches product differentiation will vary depending on your industry and your target market. Your approach may include introducing new products or finding ways to improve the features or design of existing products. Whatever you decide to do, your goal is to find a way to meet customer needs so they will want to buy from you.

There are three main types of product differentiation you can use to grab consumer attention: horizontal, vertical, and mixed.

Horizontal differentiation

This type of differentiation is based on emphasizing certain product features. Horizontal differentiation tends to be subjective as the feature differences do not necessarily increase or decrease product quality. If you can get new customers to buy your product simply by changing the color of the packaging, that is much cheaper and more efficient than pouring a ton of money into a new product that may fail.

Because the differences are usually minor, pricing is typically very similar among various products. But sometimes the pricing can vary considerably based on subjective perceptions of the quality of one brand over another.

For example, a store-brand cold cereal may be very similar to a comparable name-brand cereal in look, size, color, and even taste. But the name brand will usually sell more units than the store brand, even if it costs twice as much. Often, the store brand is just as good as the name brand. However, the name brand will win a large portion of the market because of subjective consumer assessments of packaging and perceived higher quality.

Vertical differentiation

Unlike horizontal differentiation, vertical differentiation is more concerned with the quality of the product. Companies introduce various levels of quality for a particular product to appeal to a wider audience. There is a quality hierarchy that ranks a product type from high to low.

When offering many different quality levels of the same type of product, manufacturers provide tiered price points to make it easier for consumers to afford the products they want. This is a good way for companies to target multiple consumer segments. Customers determine which product is best based on individual needs.

For example, everybody needs sheets for their beds. But not everybody needs or can afford $2,400 Charlotte Thomas sheets woven with 22-carat gold thread. That’s why this company also sells everyday bed linens at a much smaller price point. With several different choices from the same brand name, consumers have the freedom to select the sheets that best fit their needs and their lifestyles.

Mixed differentiation

Mixed differentiation is sometimes called simple differentiation. It is a combination of differentiation factors across a spectrum of quality and features. 

For example, everybody wants an HDTV. Brands like Samsung and Vizio make a variety of TVs in the same product class with varying screen sizes, picture quality, and audio capabilities. These options give the consumer the freedom to buy what they want, what they need, and what they can reasonably afford while still buying a high-quality product.

Advantages of a differentiation strategy

The obvious advantage of adopting a product differentiation strategy is that when it’s done successfully, you’ll see increases in customers and profits. In addition, other advantages include:

• Added value: Product differentiation creates a perceived value difference between product features, quality, and price. Value gives the customer a sense of saving and getting their money’s worth.
• Higher prices: Differentiating your product and adding value justifies pricing decisions.
• Non-price competition: Differentiation lets you compete in more areas than just price. For example, by focusing your strategy on quality, your product may be seen as a status symbol for those who buy it.
• Brand loyalty: When your differentiation strategy brings customers back for more, it creates brand loyalty. Customers are more likely to try future products based on past good experiences.
• No perceived substitutes: Focusing on quality, design, and brand loyalty creates the perception that there is no other substitute that is suitable for purchase. And this is great for your business.

Disadvantages of a differentiation strategy

There are also some potential disadvantages of product differentiation.

• Revenue increases are not guaranteed: Customers may not see the value that you want them to see. If they don’t perceive value, a similar product at a lower price may better suit their needs.
• Perceived value can decline: Your perceived value may only last for a short window of time. You should plan how long your product differentiation strategy will last so that you are prepared to seamlessly shift to a new strategy.
• Pressure increases: The planning and execution of a product differentiation strategy can take a lot of time and effort. It can also put a lot of pressure on all players as you determine which avenues of quality, design, and features to emphasize. Be realistic about timetables and expectations from the beginning to help alleviate this stress.

How to start developing your product differentiation strategy

When working on any type of business plan, a good place to start is with visuals, such as a product positioning outline, that will help you determine your product strategy. As you work through your plans, consider the following recommendations to help you get started:

• Know your market: What products and features already exist? Who are your main competitors? Who are the customers you will target?
• Work with your team: Develop ideas that will potentially distinguish your product from similar products.
• Identify opportunities for future differentiation strategies: Work with your team to figure out where your strategies can be added to your product roadmap.

Whatever ideas and strategies you come up with to rise above the competition, be sure to collaborate, communicate, and document processes to ensure that implementations run smoothly now and in the future.