What is Product Differentiation? A Complete Guide

By Indeed Editorial Team

Updated September 21, 2022 | Published November 5, 2021

Updated September 21, 2022

Published November 5, 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.

In marketing, there are various strategies companies use to make their products stand out from the competition. Product differentiation is a concept that focuses on the uniqueness of an individual product to influence a customer's buying decision. Understanding the purpose and importance of product differentiation can help you create a successful marketing strategy to improve brand awareness and increase sales. In this article, we discuss what product differentiation is, identify various types and factors of differentiation, and highlight several ways to achieve a product that stands out from the competition.

What is product differentiation?

Product differentiation is a marketing strategy companies use to promote a product or service that makes the organization stand out in the marketplace. The strategy involves identifying the unique characteristics of the product or service while highlighting how it's different from the competition. Product differentiation also focuses on offering a product or service seen as unique and valuable by a target audience. Product differentiation creates a competitive advantage over similar products or services developed by other companies while increasing brand awareness when successfully executed.

There are several elements included in product differentiation that a company considers when developing a new product or service. These elements include product design and packaging, product marketing, and pricing strategy. Ideally, a product differentiation strategy includes showing potential customers that the product has all the features of competitive products but unique elements that no one else offers in the marketplace.

Related: What Is a Differentiation Strategy? (With Benefits and Tips)

The importance of product differentiation

Product differentiation helps a company create products and services that set it apart from its competition. This competitive advantage allows a company to gain market share. In addition, as a consumer, product differentiation encourages competition within the marketplace and, therefore, controls pricing for customers. Some of the other benefits of product differentiation include:

  • increasing brand recognition, loyalty, and equity in the marketplace

  • providing customers with a reason to purchase from a brand repeatedly

  • answering the customer's most important question of "what's in it for me?"

  • raising product awareness

  • transforming the product's characteristics into specific customer benefits

  • allowing a brand to price above the market baseline as an exclusive or specialized item

Related: The 4 Types of Competitive Strategy (With Examples)

Types of product differentiation

There are three primary types of product differentiation. These types focus on a customer's perception of the product, their buying decisions, and motivation for purchasing the item. The three main types include:

1. Horizontal product differentiation

Horizontal product differentiation focuses on a buyer's decision based on personal preference rather than a quantifiable reason. Products can be similar in price or functionality, but the brand, packaging, shape or colours set them apart from the competition. A customer makes a decision based on their taste and is subjective. For example, if ice cream is available in vanilla, chocolate and strawberry, customers choose what flavour they enjoy most. If most ice cream on the market is about the same price and has similar features, the purchasing decision is subjective and preference-based.

Related: What Is Pure Competition? (Including Characteristics)

2. Vertical product differentiation

Vertical product differentiation focuses on a buyer's decision based on quantifiable factors, such as quality, price or measurable features. Instead of buying decisions being subjective, vertical product differentiation uses objective measurements. The purpose of vertical differentiation is to set a product apart from the competition by focusing on a specific factor. For example, if a customer sees two t-shirts that look similar in quality, colour, and fit, but one is a luxury brand, and one is a store brand, then pricing is the factor to differentiate the products. Thus, each customer chooses different aspects when making a buying decision.

3. Mixed product differentiation

Mixed product differentiation is the combination of horizontal and vertical factors. This means that both subjective and objective factors influence a customer to purchase the product. For example, when buying a new car, a customer may focus on the outstanding safety features and fuel economy related to vertical product differentiation. The customer also chooses based on brand reputation and the available exterior colours, which relate to horizontal factors for personal preferences.

Related: 11 Business Strategies Examples (With Strategy Components)

Factors of product differentiation

There are many factors of product differentiation that a company considers when marketing a consumer item, including:

Price

The cost of an item is one of the first factors often considered by consumers. Companies understand that price is a primary factor in determining which target audience will want a particular product. Some companies focus on being recognized as a luxury brand with corresponding prices, while others focus on providing lower prices for mass-market consumers. Price can affect the brand image, product quality, perceived value and item replacement cost.

Related: How to Use the Value-Based Pricing Model (With Benefits)

Location

Some companies focus on their physical location as a determining factor for differentiation in the marketplace. For example, a local business may advertise supporting the regional community instead of prominent national names. This sets them apart in the minds of consumers. Another example is a local restaurant that supports local farmers and gardens, supplying fresh seasonal produce in their cooking. In contrast, a national company may focus on the benefit of their availability across the country for customers to find a location wherever they live. Both use area to their advantage in these scenarios.

Performance and reliability

Companies can market based on the performance and reliability of their products to set them apart from the competition. For example, specific brands of batteries form their marketing campaign around the idea of lasting longer than the competitor's batteries. As a result, some customers purchase the company's product based on this factor of differentiation. Another example is a product that guarantees a customer can see results by an expected time after use.

Related: Top 10 Skills of a Marketing Manager

Ways to achieve product differentiation

When creating a marketing strategy that focuses on product differentiation, there are several ways you can achieve success. Below are six examples of various ways to make your product stand out from the competition:

Bonus differentiation

One way to make your product stand out is to include a bonus or gift-with-purchase exclusive to the item. Companies can offer cost-effective rewards that don't consume the profit margin yet still provide added value to the customer. For example, large cosmetic companies have offered gift-with-purchase bonus events for many years, creating successful sales during these times. Customers eagerly anticipate what bonus items are available when purchasing their favourite cosmetic products, including exclusive makeup bags, trial-sized skincare or soon-to-be-released colours or fragrances.

Brand differentiation

Branding can help you gain an edge over the competition by how customers perceive your products and company. Many brands use the company's mission and core values to create an overall brand marketing strategy. For example, if your company's mission is to promote sustainable living by encouraging recycling, environmental awareness and eco-friendly products, then focusing all your marketing on these values can enhance your brand differentiation. As a result, customers who share similar values feel connected to your company and purchase your products.

Related: How to Write a Position Statement (With Steps and Examples)

Feature differentiation

You can make your product stand out from the competition by including specific features, such as an ingredient, functionality or customization. The possibilities of highlighting features are endless, so this is one of the easiest ways to achieve product differentiation. For example, if you are selling a skin cream, unique features can include a particular ingredient, how the customer applies the cream, how long it takes to see results or how it works with other products. Other examples of feature differentiation include colour, water resistance or customizable options.

Related: How to Craft a Proposition of Value (With Definition)

Packaging differentiation

Packaging often provides the first impression to the consumer, so using the product's packaging as a point of differentiation is an intelligent decision. In addition, a product's packaging can significantly influence the customer's buying choice, so focusing on creative differences makes an impact. For example, you can provide biodegradable or recyclable packaging. If your brand is environmentally friendly, you may even choose to offer refillable packaging for zero waste.

Place of origin differentiation

Another influential factor for customers is the product's place of origin. Many customers will choose one product over another because of where its ingredients come from or the location of its creation. For example, stating that your product is "Handmade in Canada" makes it stand out from other similar products in its category. Another example is that the ingredients in a product were "Ethically sourced and sustainably harvested in Peru" can influence customers to purchase your product over another because of this distinction.

Sizing differentiation

The last factor to consider in product differentiation is sizing options. Providing sizing options that meet the needs and desires of your customers can set you apart in the marketplace. Clothing and shoe manufacturers can use this factor to produce odd or uncommon sizes to meet a particular demand in the market. For example, if your company sells coffee mugs and you create a specific travel mug that fits vehicle cup holders and holds more coffee than your competitor, you use size to your advantage.

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