What Is A Differentiation Strategy? Its Types, Benefits, and Examples
For modern businesses, the crux of survival and success depends on constantly doing something new. Organizations choose to restructure over time and use various business strategies to advance. If you want to increase profits without reducing your prices, you must consider a differentiation strategy.
You can build a positive brand image with these three factors:
- By selling your products at the lowest price
- Reducing the profit margin
- Maximizing market penetration.
You can use many tactics to boost productivity and revenues. But, we will focus on one vital method: differentiation strategy.
This article will explore the definition of differentiation strategy, its benefits, and examples. At first, let’s begin with:
What is a Differentiation Strategy?
Differentiation strategy is nothing but an approach that pushes organizations to develop a unique product or service compared to their competitors.
This strategy's primary goal is to gain a competitive edge and earn greater reputation in the target market. The business must know its strengths, weaknesses, and customer needs to accomplish this.
But is this easy to accomplish? Undoubtedly, no.
Several corporate giants would want to get ahead of you. Thus, knowing the underlying needs of your target audience is the key to developing a unique product or service.
Benefits of Differentiation Strategy in the Workplace
Implementing a differentiation strategy for business growth comes with many benefits. Let’s take a look at them in detail:
1. Reduction in Price Competition
Following a differentiation strategy helps companies to lower their price commission in the industry. Suppose a firm provides a quality product, their competitors will struggle to succeed even after dropping their prices. When people receive quality products, they don’t mind paying higher prices.
2. Product Uniqueness
As said, product differentiation is the most popular type of differentiation strategy. When a company opts for this strategy, they achieve tremendous success because their competitors cannot deliver the same quality. That makes these companies one of a kind in the industry.
3. Increased Profit Margins
If a company aims for a competitive advantage in the industry because of its high-quality product, it can set higher price points. Thus, resulting in increased profit margin, and the company can earn higher revenue with minimum sales.
4. Customer Loyalty
When you satisfy your customers with their desired product, you can earn brand loyalty. Differentiation is a market strategy, and you must remain empathetic towards your customer to create a product they require.
5. Minimum or No Substitutes
Implementing a differentiation strategy helps in creating products with no or minimum substitutes. For example, your company has made a product with unique features. The customers will have to choose your product unless a competitor delivers the same product at a similar or lower price.
How to Differentiate Your Business?
Suppose a company wants to try out a differentiation strategy for business growth with a unique Idea.
What are the options available? In general, there are two ways to select a differentiation strategy, they are:
- Broad differentiation strategy
- Focused differentiation strategy
What is a Broad Differentiation Strategy?
When a company wants to target a wide range of customers, it will adopt a broad differentiation strategy.
This implies that the company intends to cover a large market with similar needs and develop similar products. They would also upgrade an existing product but with enhanced features.
For example, A cement industry will offer its product to a broad market with a brand name. The company will target distributors, whole-sellers, and retailers. They assure their cement can withstand the earthquake or natural hazards. That makes it different from other brands.
What is a Focused Differentiation Strategy?
If the former strategy is not applicable for some companies, they can opt for a focused differentiation strategy. A firm choosing this strategy targets a specific/niche segment of the market. They can target one or more market segments at the same time. But, they will have to produce custom products for different markets.
Coca-Cola is a perfect example of this differentiation strategy. For instance, they offer diet cola, canned, and bottled drinks. Thus, serving three different markets at the same time.
6 Types of Differentiation Strategy With Examples
Other than the two strategies mentioned, there are more specific types of differentiation strategies you must know. They are as follows:
- Product Differentiation
- Service Differentiation
- Distribution/Channel Differentiation
- Relationship Differentiation
- Image Differentiation
- Price Differentiation
Now, let’s get to know each of these strategies in detail:
1. Product Differentiation
Product differentiation is the most evident and noticeable type of differentiation strategy. Customers tend to differentiate a product by its physical appearance.
Organizations use this strategy to make their product design unique. A few common ways to differentiate a product are:
- Unique product features
- Product performance
- Product efficacy
- Consumer opinion
This strategy is popular in B2C markets. Companies target their products to the end-users. But, it is also prominent in the B2B market.
Let’s take Coca-Cola, for example. They have established a brand name and have created a beverage with a unique taste. Despite having so many other cola beverages in the market, one can easily differentiate the taste of coca-cola.
2. Service Differentiation
In simple words, service differentiation means creating an unusual way to serve customers.
Every company's motto is "serve the customer." So what makes this one unusual? But customer service has evolved drastically. People want you to present impeccable service with no wait time.
There are many factors involved in servicing your customers like order processing, customer service method, etc.
McDonald’s is the perfect example of service differentiation. Setting aside a few exceptions, they serve the same way in every outlet of theirs. Their service differentiation is “consistent quality.” Whether you are in New York or Bangalore, the taste and presentation of food remain the same. For instance, their french fries will have the same amount of salt, size and be served fresh everywhere.
3. Distribution Differentiation
This is a strategy for companies to differentiate themselves from a group of competitors.
Companies can create a personal distribution channel and manufacture products to make them available to dealers, distributors, and retailers using this strategy.
A company that focuses on distribution differentiation must concentrate on the supply chain as well. This helps in maintaining standardized distribution channels to create a competitive advantage.
Let’s understand this strategy by taking Amazon as an example. Amazon has evolved drastically, and it is because of its distribution differentiation. They don’t have an offline store, so they provide 1-day delivery with their own courier service. With this, Amazon has become one of the valuable companies.
4. Relationship Differentiation
Companies creating excellent customer relationships is the best way to differentiate themselves from their competitors. Using a relationship differentiation strategy, companies can build a good relationship with sales representatives, employees, and technical representatives.
Vantage Circle is an employee benefits platform and work towards employee rewards and recognition. This is a perfect example of relationship differentiation because they work towards employee engagement.
5. Image Differentiation
Image differentiation is a combination of multiple differentiation strategies.
It simply means to innovate a reputed brand image. A company must master all departments such as product quality, customer service, and product performance to build a different and unique brand image.
Example: Google, the world-famous search engine website, is the perfect example of image differentiation. Its rebranding enhances the user and advertiser experience as a whole.
6. Price Differentiation
Price differentiation strategy, a.k.a price discrimination, refers to charging different prices for the same product. Companies use this strategic planning skill to target broader markets. But, they adjust their prices as per the customers’ price preference.
This is a great way to penetrate deeper into the market and boost company revenues.
We can consider Amazon if we were to understand this strategy with an example. The biggest online retail industry readjusts the product prices according to their competitors and the buyers’ purchasing ability. Amazon does not have a retail store; hence they win the price war easily.
In this saturated business world, every company must learn to differentiate from its competitors. Leaders cannot just sit back and enjoy customers’ brand loyalty. They must use various types of differentiation strategies to win over the competition.
Thus, there are many benefits and ways to implement a differentiation strategy; you must choose the one that suits your business.