What Is a Differentiation Strategy? (With Benefits and Tips)
By Indeed Editorial Team
Updated November 7, 2022 | Published October 18, 2021
Updated November 7, 2022
Published October 18, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
As business becomes more competitive, organizations develop various strategies to stay ahead. One of the most effective strategies for improving profits and outperforming the competition is differentiation. Understanding what a differentiation strategy is can help you contribute to the profitability of your employer. In this article, we discuss what differentiation is, explore broad and focused differentiation, identify the benefits of a differentiation strategy, provide how to differentiate your products, and give examples of differentiation.
What is a differentiation strategy?
A differentiation strategy is a method businesses use to alter a part of their product or organization to distinguish it from the competition. Usually, differentiation aims to improve the experience and satisfaction of their customers and to gain a competitive advantage. There are various methods businesses use to differentiate their products or services. For example, they may alter the content of the product or review its price.
Types of differentiation strategies
There are two major differentiation strategies that an organization may apply, and they include:
Broad differentiation involves building an entire brand or organization that's different from the competition. In addition, organizations can differentiate themselves by introducing technological disruptions or changing the nature of their services. For example, a retail company may introduce a virtual shopping system to differentiate its brand. Similarly, a restaurant may serve its customers with robots to improve their experience. Broad differentiation strategies apply to the majority of an organization's customers. Similarly, it affects all parts of their business processes.
Focused differentiation occurs when businesses alter aspects of their products or services. These alterations are usually modifications to improve the nature of the product and the quality of the user experience. There are various ways organizations can alter a product to appeal to certain tastes of the market. Ultimately, it depends on the organization's target audience and corporate goals. For example, an energy drink company may make their drinks 20% cheaper than the lowest market price. Similarly, a shoe manufacturing company may add autographs from celebrities to its products.
Benefits of using differentiation strategies
Differentiation has many benefits for an organization that uses it effectively, and some of these benefits include:
Reduced price competition
Differentiation widens the field of competition to other variables beyond price. By exploring other aspects of their product and services, organizations can offer clients better deals than the lowest price. For example, a chocolate company can differentiate its products by using healthier ingredients or improving their taste. Similarly, a corporate law firm may differentiate its services by offering complementary auditing services to clients. This variety allows companies to be creative in their production and delivery processes. As a result, customers have more options to choose from in the market.
Differentiation encourages organizations to focus on their unique selling point. This selling point is a unique advantage or benefits the organization can offer that others can't. As organizations focus on this selling point, they're likely to innovate and develop effective products. This uniqueness can aid marketing efforts and make it easier to connect with a target audience.
The process of differentiation can push companies to develop more unique products with better quality. Additionally, it allows companies to cater to the niche of their target audience. For example, a car manufacturing company can focus on producing high-end cars for the rich. Similarly, a publishing press can produce short, cheap comics that children can buy with their pocket money. When companies focus on effectively satisfying a niche, they're likely to receive more patronage. More patronage can help the company make more sales and profit.
Differentiation allows businesses to focus on satisfying a niche in the market. Usually, this builds customer loyalty as the organization focuses on serving its target audience's needs. Additionally, there are strategies of differentiation brands can use to attract greater loyalty from customers. For example, a brand can make a popular entertainer or athlete their brand ambassador. Similarly, an organization can invest in a charitable cause or support a social justice movement. These can endear the organization to their customers and inspire brand loyalty.
Creates an impression of no substitutes
When organizations successfully differentiate their products, they can create an impression that there are no substitutes. While there may be competitor products, this effect comes from the fact that the organization now serves a unique need. In essence, effective differentiation allows companies to deliver their products or services in unique ways. As a result, the business may continue to profit even with the influx of competitor products. Also, the business may reach a stage where it doesn't need to spend much on marketing as users are unwilling to consider alternatives.
How to differentiate your products or organization
Here are some steps you can follow to differentiate your products or organization from competitors successfully:
1. Decide the organization's brand image
The first step in differentiation is deciding the message behind the organization's brand. Remember that differentiation aims to make the organization unique. Customers may begin to associate any tactics you use with your brand. Determining the brand image you want for the organization can help you determine which strategies to use for differentiation. To determine the brand image you want, you can consider the company's goals and target audience. Similarly, consider the company or product's strengths and weaknesses to determine the optimal approach.
2. Research your target audience
Your target audience is one of the most important factors to consider when choosing differentiation tactics. Effective differentiation requires companies to understand the needs of their target audience. Then, by leveraging that information, the company can alter its products or services to serve those needs. There are various methods organizations can use to research their target audience. For example, organizations may use surveys or conduct product testing sessions. Also, organizations may hire analysts to generate valuable insights from the data, which can inform business decisions.
3. Select a differentiation
The next step is to select a differentiation the company can apply to its products or organization. Here are some examples of common differentiators:
Price is a powerful differentiation, as its one of the greatest determinants of customer behaviour. Generally, users opt for cheaper products if they're of sufficient quality. Due to this, many organizations attempt to penetrate markets using prices much lower than the market average. Additionally, some companies differentiate themselves with high prices. Usually, ostentatious or luxury goods producers adopt this approach to create an aura of exclusivity around their products. That aura may encourage users to buy the products.
Many companies also use unique packaging tactics to set themselves apart from the competition. Usually, these tactics are to improve the functionality or aesthetics of the product. For example, a soda manufacturing company may include a straw to make them easier to drink. Similarly, a farm produce shop may adopt handy paper bags that are easier to carry. Additionally, customers may use logos to create value around their products. This method is ideal for companies with popular brand names or unique logos.
Companies can also differentiate their brands by associating themselves with celebrities. For example, a company can employ an entertainer, athlete, or politician to use and endorse its products. Additionally, the company may require the ambassadors to feature the product in other aspects of their work. This approach leverages the emotional connection people have with celebrities they admire. Naturally, this admiration can influence people to buy products that their favourite celebrities endorse.
Companies can also differentiate themselves by providing options to the users. This approach is particularly useful for food production or fashion companies, though it can work in most industries. For example, a candy company can add three more flavours of candy that competitors don't have. Similarly, a mobile phone manufacturer may produce the phone in more colour options to attract more patronage. Variety is an effective differentiator as it affects the quality of the experience.
Companies can also differentiate themselves using sales tactics. They can do this by regularly offering discounts on their products. Also, a company can offer complementary products or gifts for every purchase.
4. Create a brand image
To make differentiation more effective, the company can create a brand image around it. Organizations can do this by telling a unique story behind why they decided to serve their niches. Through this, companies can establish their band's core values, mission, and vision. Additionally, this offers a great opportunity for brands to connect with their customers and foster customer loyalty.
Examples of differentiation
Here are some examples of companies using a differentiation strategy to distinguish themselves from the competition:
adopted the use of environment-friendly paper bags to package products for customers
introduced the new phone series in three new colours, unavailable elsewhere
adopted the use of organic cocoa to make the chocolates tastier and healthier for customers
penetrated the market by offering prices that were 15% below the lowest market price
improved customer experience by serving customer orders with automated service robots
introduced a community platform for users to engage with each other and ask questions
used consistent marketing to position their brand in front of customers and improve their visibility
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