Product Differentiation Explained: Pros & Cons, Types, And Strategies

Table of contents

Open Table of contents

• What is product differentiation? 
• Why is product differentiation important? 
• Benefits and challenges of product differentiation
  • Benefits
  • Challenges 
• Types of differentiation 
  • Internal VS External differentiation
  • Simple (or Mixed) Differentiation
  • Horizontal Differentiation
  • Vertical Differentiation
• Product Differentiation Strategies 
  • 1. Price
  • 2. Quality 
  • 3. Features 
  • 4. Location 
  • 5. Promotion and marketing 
  • 6. Complexity 
  • 7. Looks 
  • 8. Reliability 
  • 9. Distribution 
  • 10. After-purchase service 
• Bottom line

What is product differentiation? 

Product differentiation is used in marketing to differentiate a product or service from the others in the market by offering something valuable to the target audience. 

The differentiation process requires defining this unique point of difference that your products have compared to the others on the market and clearly communicating that difference with the customers. 

Another phrase that is used for these types of points of difference is uniques selling propositions or USPs for shorts. 

Using those, you can market your products and appeal to your customers to choose your product over similar ones in the industry. 

Relevant: You would also like to read about the types and examples of competitive advantage here

Why is product differentiation important? 

Due to technological advances and the Internet, many industries today have a much lower barrier for entry which makes it easier for new businesses to arise.

And although that might be good for the people and the economy, it’s not very helpful for the companies that are already on the market. 

The bigger the number of companies on the market, the higher the competition between them. 

This is where product differentiation comes into place.  For many companies, product differentiation is necessary for their survival. 

Products that have no differentiation strategy in place are at risk of being lost in the sea of similar products and inevitably failing to keep their place on the market. 

Benefits and challenges of product differentiation

Benefits

1. Creates additional value: this means that customers will get extra value and not just a product that satisfies their needs. The added value can come from the product itself, but it can also come from the brand overall. For instance, random sneakers of $20 will do the job too, but you will choose Nike or Adidas for the added value of having brand-name sneakers. 
2. Creates brand loyalty: when customers meet your products in-store or outside of it, they will know what the products represent. If they are familiar with the brand, they will be more likely to choose your product over the rest of them. For instance, if you see a random brand for clothes and H&M or Zara store, you’re more likely to go to brands that you know what to expect from. 
3. Boost competition: the basic competition between businesses on the market is the price. And price is not always a correct indicator. With USPs, businesses can compete with more creative things unrelated to the price.
4. Justifies the high price: if you offer something really unique that people love, you can justify your high priced products with your point of difference. 

Challenges 

1. No guarantees for increased revenue: you can spend a lot of time, money, and efforts into choosing the right differentiation strategy but it doesn’t mean that it will bring added value for sure to the customers. Bad predictions happen too. 
2. More resources: choosing a differentiation strategy can really put a strain on resources like money, effort, and time. This can burden your employees and resources. This is especially the case with smaller businesses with small numbers of employees.
3. Value can decline: the USPs can decline with time and you can lose the main selling point of the product. Think of a long-time differentiation strategy, and modify it with time. 
4. Higher product prices: the products can end up having a higher price from the competition’s products when you add all the efforts for product differentiation. 

Types of differentiation 

Internal VS External differentiation

Internal differentiation is differentiation within your product portfolio. It means how one certain product differentiates from the others horizontally and vertically. 

External differentiation means how your product is differentiated on the market among your competition. With external differentiation, there are three different types of differentiation: simple, vertical, and horizontal. 

Simple (or Mixed) Differentiation

The simple or mixed differentiation is differentiation that is a result of many mixed factors and characteristics which in the end set your product apart from the rest on the market. 

Some say that this is the easiest type of differentiation for a consumer to spot, like for example in the coffee industry when coffee pots are compared to espresso machines,

They do the same thing, but there are so many differences between them that it’s very easy to differentiate. 

Horizontal Differentiation

Horizontal differentiation is when people make their purchasing decision subjectively. 

The reason for that is that they don’t have a measurable difference and can’t be classified as better or worse from one another. 

Examples of this are mineral waters or ice cream. Whether your personal preference is to get vanilla or chocolate, it’s totally subjective. 

If the product has the same quality, features, and price, the decision is made based on the preference of the customer. 

Vertical Differentiation

Vertical differentiation, on the other hand, is when people make their purchasing decisions objectively using measurable characteristics like quality or price. 

It’s important to notice that even though the measurements are objective, the customers still have different values placed on them. 

For example, if the product is an expensive car that is very safe, one customer might feel like it’s important to give more money but to be safer, and another person might feel like they would rather buy a cheaper car even though it’s less safe. 

The safety of the car has more value for the first customer, and the price has more value for the second customer. 

Product Differentiation Strategies 

Your product differentiation strategy can be based on one or more of the following areas: 

1. Price

Price is the most common area that differentiates products on the market. The usual perception of the customers is that high-quality premium products are the ones that are more expensive, and the cheap ones are lower-quality products. 

2. Quality 

High-quality can be the thing that differentiates your product. For example, people might choose a Rolex watch over a medium or low-quality watch if they value quality the most. 

3. Features 

In one price spectrum, differentiation can happen in the area of features like size, ingredients, origin, etc. Brands can also justify their higher prices with feature differentiation. For example, a customer might choose to buy meat from humane farms, even if he has to pay a bit higher price. 

4. Location 

The location of the manufacturing of the product may also be considered to be a point of difference. For example, a person from one country that wants to support that country will choose a product manufactured there. 

5. Promotion and marketing 

Marketing efforts produce a brand image which is a very strong differentiation among customers. Additionally, things like promotions, add-ons, etc also fall into this category. 

6. Complexity 

The level of complexity can be a great differentiator especially in industries like the technology sector, etc. 

7. Looks 

How the product looks can be also a point of difference. Mostly this happens with luxury goods or apparel.

8. Reliability 

Some products are more reliable than others. They are known for being less prone to malfunctions or damages and this can also make a difference in the choice of the customer.

9. Distribution 

Channels of distribution can play a role in product differentiation too. 

10. After-purchase service 

Services granted to customers after the purchase is done are also good for differentiating a product among customers. 

One example of a good differentiation is the company called LUSH. You can find it on the top of the list in any good product differentiation post that you might read.

And there’s a good reason for that. They combine a very social, ethical, and personal approach in their selling processes. 

Their points of difference are handmade products with vegetarian ingredients that are animal-cruelty free. 

They advocate for ethical manufacturing and buying, supporting the brand’s core social and corporate responsibility needs. 

Their brand is genuine and simple, and because of that, they have a massive following of loyal customers. 

Bottom line

A point of difference strategy can bring a lot of respect and loyalty to your brand. 

In my opinion, the risks connected to it are well worth it because if done successfully, your brand can grow and get a good share of the market. 

Think very thoroughly about your brand, your values, what you offer, and what you want your customers to recognize you by. 

This is not always an easy task, but it’s one that potentially can bring a lot of positive things for your company. 

If you learned something from this post, check out these other useful blog posts next:

• The best eCommerce platforms for small businesses
• 15 best WordPress plugins
• 3 Psychology Tricks You Should Implement in Your Marketing Strategy

Which product differentiation do you think it’s the best? Let me know in the comments below.

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This guide is part of alejandrorioja.com — written by Alejandro Rioja, who now builds AI agent systems for founders. Including the agent that keeps this site current. How it works →