Differentiation is a marketing and advertising process that describes or presents a product in a way that is perceived by the consumer as different from anything offered by competitors in that same product category. Through differentiation, a product or service is set apart from the offers of competitors in a way that creates a distinction that is valued by the consumer. Differentiation does not refer to the actual changes that are made to a product or service. Rather, differentiation is the way of presenting or describing a product to consumers that impacts the consumers’ perceptions about the product or service.
product differentiation, service differentiation, market differentiation
Market research accomplishes differentiation by first discovering what consumers value about a product or service that will be changed in order to make it more appealing to consumers. A product or service can be differentiated from the products and services of competitors, or from the other products and services in a company’s own product line or service line.
It is important to note that the changes to the product or service don’t constitute differentiation. Differentiation occurs in the mind of the consumer, who must value the unique attributes of a product or service. This is why differentiation is driven by market segmentation. Product and service attributes will not all be valued by the target markets to whom they are developed to appeal.
Differentiation and Economics
In advertising, the phrase “unique selling proposition” is a nod to product differentiation. Product differentiation is a bit more complicated when considered through the filters of the discipline of economics. The notion of perfect competition in economics is based on the equivalence of products and services offered by competing companies. Perfect completion between products or services mans that each company’s offering is a perfect substitute for the products or services offered by its competitors. Because perfect competition is a construct rather than a reality, economically speaking, when differentiation is successful, it results in monopolistic competition.
The application of differentiation to economic theory is interesting since a Professor of Economics at Harvard University named Edward Hasting Chamberlin coined the term differentiation. Chamberlin's research contributed importantly to theories about competition and consumer choice. Chamberlin argued that well executed differentiation would allow a differentiated product to be priced higher than it could be priced if perfect competition was in place.
Three Types of Product / Service Differentiation
Product or service differentiation occurs in three main varieties. Simple differentiation—the most straightforward type of differentiation—is built on a foundation of several attributes. Horizontal differentiation is based on a single product attribute or service aspect, but consumers don’t have a clear conception of how the characteristic impacts product or service quality. Vertical differentiation makes distinctions in quality clear, and it is also based on a single product attribute or service aspect.
Differentiation is categorically based on product and service characteristics like packaging, advertising and marketing, distribution type, consumer types, functions, and offerings. Several major areas of product or service differentiation are generally recognized.
- Quality differentiation, which is strongly associated with price.
- Design differentiation or differentiation in functional features.
- Consumer ignorance regarding essential attributes and qualities of goods and services.
- Differentiation based on advertising and sales promotions.
- Differentiation through availability and accessibility.
Differentiation is a concept held by consumers that is highly subject to change. Each new product or service in a category is a threat to established differentiation.
Freemium Business Models A freemium business model is based on two or more versions of a product or service offered by a company in which one version is marketed to consumers as free and the other version is marketed as a paid version that is differentiated. Essentially, the products or services in a freemium business model target the same group of consumers. It is easy to see, then, why effective differentiation of paid versions and the free version is so important.
As a product or service becomes more differentiated in the mind of consumers, comparisons with competitors’ products or services tend to fall away. One benefit of this reduction in direct competition is that a successfully differentiated product or service does not compete primarily on price. Rather, non-price variables dominate the comparisons consumers make, making product attributes and service aspects, or distribution strategy, or advertising and promotion characteristics more competitively salient.
Differentiation is not just about charging a price premium for a product or service. In actuality, a successfully differentiated product or service provides an offer that consumers value to a degree that they are less available to competing offers. Price may not even be a consideration. The key to differentiation is ensuring that consumers in different segments or target markets really do have different needs and wants, and that the products and services offered by competitors are not meeting these needs and wants. This is the true value basis for differentiation.