Product DifferentiationDefined with Examples & More

Written By:
Lisa Borga

Reviewed By:
FundsNet Staff

Product differentiation is the process of marketing a company’s good or service as unique from what competitors offer.

When performed successfully, product differentiation gives a company a competitive advantage in a market by highlighting the difference that its product offers over product substitutes offered by its competitors.

These are essentially the factors that will result in a consumer making a purchasing decision.

The elements focused on in product differentiation can include superior quality, unique features, better service, as well as other benefits.

The process of product differentiation is closely linked to the overall process of marketing a good or service to a target market.

As a result, product differentiation is a crucial marketing process for every company.

Product Differentiation Explained

Product differentiation is a marketing process in which a company attempts to distinguish its products from those offered by competitors with the aim of promoting them to a target market.

In performing product differentiation, a company aims to highlight the qualities of its product which sets it apart from those offered by its competitors and makes it more valuable to its target audience.

When performed successfully, product differentiation allows a company to create competitive advantage because its products are viewed by customers as a better choice over those offered by its competitors.

In some cases, product differentiation can involve focusing on marketing a product to a niche market, such as when a smaller company attempts to compete in a market against a much larger competitor.

By highlighting certain features, such as higher quality or capabilities, that provide more utility for the target audience, a smaller company can provide consumers with a reason to choose them over their competitors.

In some cases, product differentiation may be a measurable difference between products, such as offering the lowest price for a product in the region or a functional feature missing from product substitutes.

However, in many cases, the differences between products may not be physical at all and can instead be more abstract.

Many clothing designers and retailers pay celebrities and models to market their clothing in style.

However, there is no quantifiable way to judge how stylish it is compared to its competitors.

What this means is that, in many cases, product differentiation is subjective as it is aimed at changing how a target market evaluates one product against its product substitutes.

Marketing Product Differentiation

The features that make a company’s product stand out from the competition are often reflected in all of a product’s marketing, from its advertising to its packaging and even its name.

For example, many producers of food include words such as fresh, natural, and organic to help reinforce the idea that the product is healthy and high quality.

In order to decide how to differentiate a product from its competition, it is important to identify what the target audience for the product wants and what competitors are not providing them.

Differentiation does not mean that a product has to be created from scratch; in some cases, adding or removing features or even simply focusing on what is already present is effective.

Product differentiation can also occur inside of features present in the good or service itself.

Price, customer service, and customer experience can often play a major role in setting a product apart.

Product Differentiation Strategies

In most cases, a successful product differentiation strategy should show consumers that a product can achieve everything that its competitors can do but with additional benefits that only it can offer.

Here are a few of the most common strategies used to achieve product differentiation:

• Price Differentiation: Price is often used to differentiate a product in one of two ways depending on the target market. To market to consumers looking to maximize savings, a company can charge a lower price for a good or service than its competitors. However, high prices can be used to offer a sense of quality, luxury, and exclusivity to a good in order to market it to consumers willing to pay a higher price.
• Feature Differentiation: The addition of a feature that competing products do not offer can help to make a good or service stand out. Even basic details such as a choice of colors, a more compact form factor, or a streamlined experience can help to make a product stand out from its competition. Because the options for distinct features are virtually endless, this is often the easiest way to achieve product differentiation.
• Location Differentiation: A business can differentiate itself from competitors by marketing that it supports the local community. A service provider may indicate that it hires locally, and a producer of goods may market that its products are manufactured or sourced locally.
• Brand Differentiation: In some cases, a product may be the same as competitors’ offerings, but its branding can help it stand out. How a product is branded should focus on the target audience’s needs. For example, environmentally conscious consumers may be looking for clean and natural goods. If this were the target audience, a brand should reflect these needs.

Vertical Vs. Horizontal Product Differentiation

There are two basic categories of product differentiation that consumers base purchasing decisions upon.

However, in certain cases, consumers may rely on a mix of the two in their decision-making.

Vertical Product Differentiation

Vertical product differentiation exists when consumers can identify measurable factors on which to rank products.

This exists when the price and quality of a product can be identified for consumers to weigh in making a buying decision.

Generally, consumers will weigh the price of a product against the quality it offers them and choose the option that offers the highest quality for a price they are willing to pay.

If two products offer the same price, consumers will choose the option that offers them the higher perceived quality.

Horizontal Differentiation

Horizontal differentiation focuses on the subjective decision-making of consumers, which means the difference between products cannot be objectively measured.

For example, consumers may prefer different flavors of ice cream or different colors of clothing, but this is a matter of personal preference which cannot be weighed objectively.

Horizontal differentiation focuses on affecting consumers’ subjective decision-making, such as by providing unique colors, flavors, or packaging to distinguish itself from competing products.

Mixed Differentiation

For most complex purchases, consumers will consider a mix of both vertical and horizontal differentiation.

For example, when choosing between multiple models of cars, a consumer may consider objective measures such as price, gas mileage, and acceleration.

However, subjective features such as color and brand reputation may also play a significant role in making a final decision.

The weight that any given consumer places on vertical and horizontal differentiation will vary.

Advantages of Product Differentiation

Successful product differentiation can provide significant benefits.

By providing consumers a reason to choose a product over its competitors, a company can potentially increase its sales, achieve a competitive advantage, allow the product to survive higher price points, and promote brand loyalty.

When a product is successfully differentiated to show that it is better in some ways to substitute products, a company can justify selling it for a higher price.

Correspondingly when products aren’t perceived to have much difference from each other, a product differentiation strategy can help a company to stand out.

Focusing on factors such as offering the lowest price point or non-functional features such as an attractive design can provide horizontal differentiation.

In short, product differentiation can provide consumers with a reason to choose one company’s product over its competitors.

Example of Product Differentiation

Differentiating a product can take many forms and is often an ongoing process.

For example, in the perfume industry, companies are continuously introducing new exotic scents in order to stand out, and this will often be coupled with new and equally unique packaging to market it.

In addition, perfume companies have introduced different ways for consumers to apply their products, such as rollerballs.

These companies have also introduced different market segments focused on a distinct selection of scents for men and women to encourage differentiation.

FAQ

What is product differentiation in marketing?

Product differentiation is the marketing process of setting a product apart from product substitutes sold by competitors.

In order to do this, a company will market the features of its product that appeal to its target audience.

The end goal of this is to encourage consumers to choose one product over others in the market.

How do you do product differentiation?

Any aspect of a good or service can and should be used to help it stand out from the competition.

As a result, opportunities for product differentiation should be considered in every part of providing a good or service, including marketing, sales, customer support, as well as the product itself.

Any meaningful difference between a company’s products and its competitors’ products that are valued by potential customers is an opportunity for product differentiation.

What are the main types of product differentiation?

There are three primary types of product differentiation, and these are vertical differentiation, horizontal differentiation, and mixed differentiation.

Vertical differentiation includes all objective factors by which products can be ranked, such as price and quality, whereas horizontal differentiation rests on subjective measures of consumer preference, such as color and flavor.

Mixed differentiation is simply a mixture of these two previous categories and applies to most complex purchasing decisions.

Why is product differentiation important?

Product differentiation is an essential process for allowing a company and its products to stand out from competitors in a market.

Without product differentiation, it would be nearly impossible for smaller companies that cannot achieve the same economies of scale as larger competitors to exist in a marketplace.

This also has benefits for consumers by encouraging innovation and reducing prices by encouraging competition.

Conclusion

Product differentiation is a marketing process in which brands and products emphasize what sets them apart from competitors.

Consumers choose products based on a wide array of preferences, whether it is for distinct features, a selection of colors, great customer service, unique experiences, or countless other factors.

By offering consumers one or more of these factors when competitors are not, a company can gain a competitive advantage and greater market share.

Key Takeaways

• Product differentiation is the process of distinguishing a company’s goods or services as unique from those offered by others in a given market.
• There are two primary types of product differentiation, vertical differentiation, which focuses on quality, and horizontal differentiation, which focuses on features.
• Product differentiation helps companies to distinguish their products and make them more attractive to a target market. In turn, this creates a competitive advantage and can increase sales.