I recently made a 5€ bet with my girlfriend involving a blindfold and two very sweet drinks (no you perv, no kinky shit!). She claimed that she could taste the difference between a Coca Cola and Pepsi while being blindfolded. Well, three rounds and wrong guesses later, that sweet ol’ Coke she claimed to love so much wasn’t that great of a distinctive taste.

Which begs the question: why do people perceive and rate comparable products that different? Part of the answer lies in the topic we are going to cover in this article: product differentiation.

What Is Product Differentiation?

First coined by Harvard economist Edward Chamberlin in his 1933 publication The Theory of Monopolistic Competition, product differentiation deals with the process of separating one’s products or services from the existing competition in the market.

For this process to be successful, it is essential to identify and communicate the product’s unique value proposition while highlighting the distinct differences to competing products.

Successful product differentiation creates competitive advantages, including a heightened awareness of the product and brand, the ability to charge higher prices, and target customers more effectively.

Types Of Product Differentiation

Product differentiation can be categorized into three distinct themes, namely horizontal, vertical, and mixed differentiation.

Horizontal Differentiation

Horizontally differentiated products provide the same offering, both in terms of quality and price. Oftentimes, customers assess those types of products by personal preferences. Examples include Coca Cola vs. Pepsi or Pampers vs. Huggies.

Vertical Differentiation

Within vertical differentiation, products can be assessed on one factor. For instance, with quality being equal, socks can be priced differently. Just take a look at how much you’d pay for H&M and Nike socks, respectively.

Mixed Differentiation

Hereby, products are differentiated based on a multitude of factors. A great example is the smartphone market, which offers products based on categories such as price, operating speed, design, or camera performance. Taking a look at Apple’s launch of the iPhone 11 shows the company’s willingness to target a different set of consumers for the same product category.

Benefits Of Product Differentiation

Establishing a differentiated product experience oftentimes yields a multitude of benefits. Here’s how product differentiation can benefit a business.

Increased brand awareness: A differentiated product is, by definition, distinct from its competition. This allows customers to easier recognize it, thus increasing awareness of the product (and consequently brand).

Charging higher price points: A differentiated product experience allows customers to charge a higher price for their offerings. Customers are willing to bear the cost, especially when parts of the differentiation arises from a superior set of features or components.

Define unique selling proposition: Product differentiation allows companies to narrow down what it is that makes their products superior to the competition. This can then be communicated in their marketing and sales strategy, for instance when talking to customers or creating marketing campaigns.

Specify target audience: Knowing what it is that draws customers to a product allows businesses to specifically target customers that are attracted by these sets of features. Indoor bike maker Peloton, for instance, knows that its customers are willing to pay higher prices, are fitness enthusiasts, and possibly don’t mind a digital experience. These characteristics allow them to find the right channels -to target consumers, such as YouTube ads on fitness-related videos.

Risks Of Product Differentiation

Conversely, where there is high reward, risk is not far around the corner. First and foremost, there is the chance of being copied by competitors. If your product differentiation advantage lies within one or few features, competitors catching up is just a few sprint iterations away. Take, for instance, the case of Slack, which was just recently surpassed by Microsoft Teams in terms of user base. Or just ask Evan Spiegel what he thinks of Instagram’s blatant copy of its Story function.

In addition to copycats, there is a multitude of other risks.

Too much or too little focus: When specifying a target user base, companies may run into the risk of being either too broad (e.g. by going too far with a message) or too niche. Assessing such an opportunity is therefore tied to the Total Addressable (TAM) as well as Total Obtainable Market (TOM).

Race to the bottom: In a globally connected world, there will always be someone willing to offer cheaper prices (especially in the software world, where physical movements of goods is not a limiting factor). Clearly expressing your distinctive advantages is therefore essential.

Shiny object syndrome: People always want the latest and best-looking tech, either due to a fascination towards the product category or simply because of social pressure. If your differentiating factor lies within something that may become obsolete in the near feature, it is advisable to revamp the product or pivot into a new direction. Understanding technology adoption life cycles can help you to proactively do that.

Factors Influencing Product Differentiation

Product differentiation can be achieved in a multitude of ways. Factors include:

  • Price
  • Quality of service (e.g. customer care or repair programs)
  • Durability
  • Performance (e.g. processing power)
  • Features
  • Speed of delivery
  • Location
  • Style and form 
  • Product experience (e.g. easiness to order)
  • Brand perception

Examples Of Differentiated Products

There are countless instances in business history where companies successfully differentiated themselves from the competition.

Some of the most prominent examples include Apple’s iPhone, Sony’s PlayStation, or Toyota’s Corolla car.

Let’s look at some recent examples in the section below.

Lemonade Insurance

Lemonade Insurance provides customers with renters, homeowners, and pet insurance policies. The policies can be booked online within a matter of minutes.

When users file a claim, smart AI programs will assess the claim first. Oftentimes, users can expect to receive compensation for their claims within a matter of hours.

Furthermore, the company donates any claim surplus to a charity of the user’s choice, which reduces the instances of insurance fraud.

The company’s product is differentiated through a noble social mission, ease of use, transparency, and speed of delivery (i.e. how fast the claims are handled).

Zoom

In recent times, Zoom has risen to worldwide prominence, becoming the poster child for the accelerated growth digital businesses experienced during the pandemic.

Zoom launched in 2011 and quickly took the video communications world by storm. The company’s superior product and low price point helped it to differentiate against legacy players such as Skype, Cisco, and others.

Nowadays, Zoom is furthermore expanding into hardware products and networking which allows them to serve customers end-to-end.

MasterClass

MasterClass offers online video classes that are taught by top performers in their respective fields. Example classes include tennis lessons from Serena Williams or cooking lectures from Gordon Ramsey.

Other competing platforms, like Udemy or Coursera, rely on ‘everyday’ individuals and academic scholars to create educational content.

Product differentiation on MasterClass comes in the form of enhanced quality, both in the form of world-class instructors and high-end video production. The superior quality allows them to charge above-average prices for their courses.

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Hi folks, my name is Viktor! During the day, I lead a tech team of 10 folks for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..