Differentiation allows you to provide superior value to customers at an affordable price, creating a win-win scenario that can boost the overall profitability and viability of your small business.
Factors to Consider for Differentiation
A difference is worth establishing when it meets at least one of the following criteria:
- Valuable: the perceived benefit exceeds the cost
- Important: delivers a benefit critical to success
- Distinctive: unique or offered in a distinctive way
- Superior: better technology, faster
- Emotional: ties to a core emotion — love, hate, desire
- Communicates: understood and visible
- Preemptive: cannot be easily copied
- Affordable: customers can pay the higher price
- Profitable: contribution (margin times volume) exceeds the cost of difference
There are six primary ways to differentiate, including product offerings, service, channels of distribution, relationships, reputation/image, and price. However, not all differentiation strategies are equally effective, and some methods may be more important to invest in than others in order to stand out from the competition. Read on to learn more about these different strategies and the key advantages and disadvantages associated with each one.
Product differentiation is probably the most visible. It includes actual physical and perceived differences, of which the latter can be acquired through advertising. Successful product differentiation may take the form of features, performance, efficacy (or the ability of the product to do what it is purported to do), meeting specifications, or a number of other criteria. This is the general area that most B2B marketers — and probably most consumer marketers as well — spend the majority of their time and dollars.
The problem, though, is that product differentiation is short-lived even in niche markets. It is remarkably easy to duplicate almost any product innovation. Of course, the western world has a sophisticated intellectual property rights ethic and legal system that provides copyright and patent protection. From a practical standpoint, though, these do not present challenges. In fact, many businesses choose strategically not to patent since it tells competitors exactly how to duplicate the advantage. At best, a product innovation is protected for the life of the patent. At worst, when a patent does not exist, anyone with enough capital to buy a machine may be a competitor in a matter of days or weeks. Competitive advantages through product differentiation requires a long term strategy focused on innovation and developments.
Differentiation of service includes not only delivery and customer service, but all other supporting elements of a business such as training, installation, and ease of ordering. To many, these seem like the simple components of a business — the blocking and tackling or the foundational elements that do not require sophistication. But think about a business like McDonald’s. Like their Big Mac or not, they know how to differentiate on service. With very few exceptions, you will get the same product and the same service at a McDonald’s in Texas that you will get in Georgia, Connecticut, or California. And in each location, the fries will be cooked the same, have the same amount of salt, and be served up equally as fresh from the fryer.
Channels of distribution can also be an effective means of differentiation. Distribution can provide coverage or availability, immediate access to expertise, and greater ease of ordering, and higher levels of customer or technical service.
For many manufacturers facing a fragmented market, it is not feasible to reach the end user without the distribution function. Building materials, for example, have to somehow move from factory plant to contractor. Such products typically move through two stages of distribution including master distributors, specialty dealers, and retailers.
With sufficient support — that is training, joint sales calls, supporting literature, lead sharing, etc. — a distributor can become a staunch ally and partner of the manufacturer.
Even in a non-exclusive relationship, a committed distributor can create advantage through joint promotions, bundling, warranty and service support, and technical service. It is time-consuming and extremely expensive for a competitor to preempt or duplicate this level of differentiation.
An often overlooked means of differentiation is through company personnel. Employees, associates, or team members with customer interface can provide and demonstrate competence, courtesy, credibility, reliability, and responsiveness. Responsible for executing day-to-day client-facing communication, they are the linkage between the product and customer. If that linkage breaks down, the business is destroyed.
In many businesses, the sales representative, CSR, or the technical service representative becomes a trusted member of the customer’s team, ensuring that the product is delivered on time and works as it is supposed to, while resolving any issues quickly and accurately. Performance like this creates emotional bonds between the vendor and customer.
This avenue of differentiation is closely related to service, but focuses specifically on the people. Customers want to conduct business with people, not an institution. Building this relationship takes time, but establishes a highly differentiated position.
Some businesses set themselves apart by their image either as part of another differentiation avenue or as a separate strategic path. Normally, image is created by other forms of differentiation such as high levels of service, superior product quality, or performance.
Image is controlled and managed by symbols used in communications, advertising, and all types of media — written, digital, and audio, as well as the atmosphere of the physical place where customers encounter the business. This is not limited to retail businesses only.
An image or reputation can be a daunting hurdle for potential new entrants. DuPont, for example, generally has a strong image as a technical powerhouse in almost all markets in which they participate. The company employs a large number of engineers, scientists, and product development experts. Their sales reps often have a strong technical education or background, and their products are positioned as being leading edge. Milliken and Company has a similar image.
For the potential new start-ups wishing to compete against such a juggernaut, often the only option is a type of guerrilla warfare. Focusing on relationships to differentiate your business helps to get customers to not just invest in your startup, but in the people.
Differentiating your brand does not automatically differentiate a company from its competitors. The brand has to stand for something, be recognized by the target audience, and communicate something unique and different from the competition. That takes a large marketing budget to pull off successfully. It is understood that it takes seven repetitions of any message to even be heard. Branding is much more than just creating a logo. It is the ongoing communication of your value proposition in a meaningful and effective way.
With a small marketing budget, the smartest, most effective strategy is to move away from a branding strategy and towards a customer-driven strategy. Pick a handful of customers that can drive the success of your business. That could be anywhere from 3 to 4 or 15 to 20, but it is not hundreds. Then focus all of your budget on these companies. Give them exactly what they want, and do it better than anyone else can. You will increase your share of their business, and they will become loyal advocates and promoters of your business.
Successfully competing on price requires recognition that every customer has a different price they would be willing to pay for your product. Segmentation and differentiation allows a business to come close to maximizing the potential revenue by offering each segment a differentiated product at a different price.
Price differentiation (or discrimination) recognizes that the value of goods is a subjective reality, which varies by target market, use occasion, and operating environment. In the B2B world, most prices are subject to some kind of negotiation, and some customers are prepared to pay more than the prevailing market price. In short, price discrimination allows a business to capture consumer surplus — the difference between the amount consumers are willing to pay for a good or service and the amount that they actually pay.