Product Differentiation: What It Is and How It Works

What Is Product Differentiation?

Product differentiation distinguishes one company's products or services from its competition. Successful product differentiation leads to brand loyalty and sales. A product differentiation strategy identifies and communicates the unique qualities of a product or company while highlighting the differences between that product or company and its competitors. Product differentiation can create a competitive advantage for the product's seller and build brand awareness.

Marketing Strategy

Product differentiation is a marketing strategy to encourage consumers to choose one brand or product over another. It identifies the qualities that set one product apart from similar products and uses those differences to drive consumer choice. Differentiation marketing may also focus on a niche market.

Differentiating qualities may be reflected in a product's packaging, marketing promotion, or brand name. A strategy may require adding new functional features or might be as simple as redesigning packaging. Sometimes, differentiation marketing does not require any changes to the product but a new advertising campaign or other promotions.

The differences between products can be physical or measurable, such as the lowest-price gym in a region. However, the differences between the products could be more abstract such as a car company claiming their cars are the most luxurious. Product differentiation aims to alter a consumer's interpretation of the benefits of one item compared to another. The actual difference in the product compared with competing products might be small or nonexistent.

Types of Differentiation

• Price: Companies can charge the lowest price compared to competitors to attract cost-conscious buyers. However, companies may also charge higher prices to imply quality and that a product is a luxury or high-end item.
• Performance: Products can be differentiated based on their reliability and durability. Some batteries, for example, are reputed to have a longer life than others, and some consumers may buy the brand based on this factor.
• Location or Service: Local businesses may differentiate themselves from larger national competitors by emphasizing that they support the local community. A local restaurant, for example, may source its food and ingredients from local farmers and purveyors.

How Consumers Choose

• Vertical Product Differentiation: Consumers rank products based on an objective, measurable factor, such as price or quality, and then choose the most highly ranked item. Although the measurements are objective, each customer chooses to measure a different factor. For example, a restaurant might top one customer's list because their meals are vegetarian. Another customer might choose a different restaurant because the meals are less expensive.
• Horizontal Differentiation: Consumers choose between products based on personal preference and subjectively. For example, a customer who buys a vanilla milkshake over chocolate depends on their taste. The milkshakes are objectively priced the same with similar ingredients, but the consumer chooses based on personal preference first.
• Mixed Differentiation: More complex purchases tend to consider a mix of vertical and horizontal differentiation. When buying a car, for example, a consumer may consider safety metrics and gas mileage, both objective measures and examples of vertical integration. However, the consumer will likely want a specific color, an example of horizontal differentiation.

The Bottom Line

Product differentiation allows products and brands to command market share based on consumer preferences. Customers choose products for price, brand image, quality, durability, taste, color, or a temporary trend. If a product can differentiate itself from its competitors and appeal to consumers, it will have a competitive advantage.