Become a Financial Modeling & Valuation Analyst (FMVA)®. Enroll today to advance your career!
Login to your new FMVA dashboard today!

Product Differentiation

The introduction of unique, distinctive characteristics or features to a product

What is Product Differentiation?

Product differentiation is the introduction of unique, distinctive characteristics or features to a product to ensure USP (unique selling proposition) of the product. The differentiation allows a company to achieve a competitive advantage over other companies offering similar product substitutes. It is an essential marketing process that is of vital economic importance to a business.

 

Product Differentiation

 

Product differentiation serves as a catalyst in a consumer’s purchase decision-making process. It basically sets one product apart from the rest and serves as the deciding factor in purchase decisions.

 

Breaking Down Product Differentiation

The product differentiation process may be as simple as redesigning of packaging to introducing a brand new functional feature in a product. The different factors on which the process is implemented include:

 

1. Price differentiation

Products in the market are differentiated solely on the price factor. It establishes a price hierarchy for a particular product from lower to higher cost.

 

2. Non-price differentiation

Products, in this case, are differentiated by form, shape, feature, function, color, customization, durability, quality, services, etc.

 

Types of Product Differentiation

1. Vertical Differentiation

Vertical differentiation focuses on differentiation in a product based on quality. In any market, a quality hierarchy exists for a particular type of product that ranks products of one kind from a position of low quality to the highest quality product.

Essentially, vertical differentiation is aimed at differentiating the product in order to move up the hierarchy towards higher quality and use the trait as a competitive advantage to sell the product.

 

2. Horizontal Differentiation

Horizontal differentiation is when products are differentiated according to a specific feature. The differentiation can be about colors, packaging, shapes, flavors, etc.

 

Advantages of Product Differentiation

 

1. Provides economic benefits

Product differentiation is economically advantageous to a company. It provides a reason for consumers as to why their product is worth investing in, as opposed to all the other substitute products available in the market. A successful differentiation campaign boosts sales for a company by a significant margin and gives it a competitive advantage in the market as to why they deserve a consumer’s investment more than the others.

 

2. Helps achieve a higher price point

In addition, product differentiation helps a company operate at a higher price point just because of that additional benefit or feature introduced in a product. When that one distinct feature or difference introduced in the product makes it better than its substitutes, consumers more often than not perceive it to be worth the increased price.

 

3. Promotes brand loyalty

Another implication of product differentiation is that very often, it brings brand loyalty into the picture. When a company efficiently differentiates its products, and few essential products stand out, it usually brings out brand loyalty on the consumer’s part.

It is because once a consumer is satisfied with a few products of a brand, they tend to just start buying other products from that one particular brand. The consumer believes that the company’s other products are as good and stand out just as much as the ones they use.

 

Case Study: Blackberry in the 2000s

In the early 2000s, Canadian company Blackberry Ltd. stood out exceptionally through product differentiation. Blackberry was the only smartphone brand that offered an in-device instant messaging feature called BBM. It helped the company stand out significantly in the market.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • 5 P’s of Marketing
  • Bargaining Power of Buyers
  • Buyer Types
  • Value Proposition

CFI's Corporate & Business Strategy Course

Learn to perform Strategic Analysis in CFI’s online Business Strategy Course! The comprehensive course covers all the most important topics in corporate strategy!