Products or services that have an impact on the value of a firms products or services

Product differentiation definition

Product differentiation is the characteristic or characteristics that make your product or service stand out to your target audience. It’s how you distinguish what you sell from what your competitors do, and it increases brand loyalty, sales, and growth. For example, if your software company provides customer support account managers but your competitors don’t, that’s a differentiator. Or, if your athletic wear company offers customization unlike competitors, you’d want to highlight this as a product differentiator.

Why is product differentiation important?

The goal of product differentiation is to create a competitive advantage or to make your product superior to alternatives on the market. In other words, you don’t just want to stand out from the competition, you want to stand above it.

It’s important to differentiate your product in any industry, but especially if you’re in a crowded market with lots of competitors. The goal is to show potential customers what you can offer that other businesses can’t—and why that’s valuable to them.

What are the advantages of product differentiation?

Communicating the distinct features and benefits of your product is the secret to successful marketing. Here’s how it can help strengthen your business.

1. Building brand loyalty

Strong product differentiation makes your business memorable. Customers will associate elements of your brand—like your logo, voice and tone, and social media presence—with your product or service and all of its benefits.

The more differentiated your product is and the better it meets your target audience’s wants and needs, the more likely they are to become repeat customers.

2. Achieving higher price points

You can increase your profits, sometimes by a significant margin, through product differentiation.

You can typically sell a differentiated product for a higher price because people will pay for durability, appearance, and customer service. They will also pay more for packaging they like or an experience that excites. (But for some businesses, of course, your strategy may be to differentiate by setting lower prices than what’s on the market.)

3. Narrowing down your target audience

Product differentiation helps you refine your target audience as well.

The more research you do and the more you differentiate, the better you’ll understand who’s actually buying your product or service. Then you can repeat the process to streamline your target audience even more. Focusing on a niche group of consumers often leads to better sales and return on investment (ROI) for marketing spend than trying to market to the general public.

How do you differentiate a product?

Focusing on your customers is a good start to successful product differentiation. What do they want? What is no one else providing them? What delights them? What frustrates them? What makes them feel good? What would make them feel even better? The answers to these questions can kickstart ideas for differentiation.

Fortunately, differentiation can occur at any stage of your business—you don’t have to start from scratch. What’s special about your product could be a new added feature or capability. Or your product could offer fewer features than the products already on the market, focusing instead on a simple, streamlined experience.

Other differentiators include price, packaging, quality, customer service, and overall customer experience when buying or using your product. For example, a makeup company might provide an online tool to help customers find the right shade of foundation. A tennis shoe producer might give buyers the option to customize their shoes by choosing the color for each component. Customers are more willing to pay for products that come with a unique, useful experience.

How do you know if your product is differentiated?

Your target audience ultimately decides which products in the market are most valuable to them. Looking at sales and engagement will give you insight into whether your product or service is well-differentiated.

If you’re not seeing the numbers you want, don’t worry. You can always do more research, add or change a feature, or try a new marketing strategy. Make small, gradual changes to your product, brand identity, and marketing efforts so know what works and what doesn’t.

Types of product differentiation

Here are a few ways customers use product differentiation to make buying decisions.

1. Vertical differentiation

Vertical differentiation is when customers choose a product by ranking their options from best to the worst using an objective measurement, like price or quality.

While the measurements are objective, the value each customer places on them might vary. For example, 1 meal at a restaurant may be lower in calories than another meal. To a customer who is watching their weight, the lower-calorie meal represents a "better" option. Another customer might place a higher value on price and choose the higher-calorie meal if it costs less.

2. Horizontal differentiation

Horizontal differentiation is when customers choose between products subjectively, because they have no objective measurement to distinguish between best or worst.

For example, there is no qualitative measurement to rank ice cream flavors. Whether you choose chocolate, vanilla, or strawberry is entirely a matter of personal taste.

If most of the products on the market cost about the same and have many of the same features or qualities, the purchase decision comes down to subjective preference.

3. Mixed differentiation

Customers making more complex purchases tend to use a mix of vertical and horizontal differentiation when making purchase decisions.

Let’s say you’re shopping for a car. You might consider 2 similarly priced four-door sedans from 2 separate manufacturers. You’ll likely use mixed differentiation to make a decision. Objective measurements to vertically differentiate between them include gas mileage and safety ranking. Horizontal differentiation, between subjective preferences like design aesthetic and impression of the car brand, also plays a role in the decision.

As with both horizontal and vertical differentiation individually, each customer will value the combination of these factors differently.

Product differentiation FAQs

What are the main types of product differentiation?

Vertical, horizontal, and mixed are the main types of product differentiation. Each one has its advantages and challenges and ultimately, how customers evaluate products is unique to them. Determining how you want to differentiate your product or brand depends on your target audience and their typical buying behaviors.

To recap:

• Vertical differentiation focuses on objective measurements such as price or quality.
• Horizontal differentiation relates to subjective opinions, like preferring chocolate to vanilla ice cream.
• Mixed differentiation blends vertical and horizontal perspectives.

How do you differentiate your product in the market?

It depends! There are many ways businesses can choose to differentiate their product depending on who they’re trying to reach.

If your wholesale business is able to offer significantly lower prices than brick and mortar competitors, price may be a great differentiator for you. On the other hand, an artisan bakery may position quality as their differentiator.

How can you advertise your product differentiators?

So, you’ve identified your differentiators…now what? Product differentiation can help drive your marketing messages and interactions with customers. From weaving them into content to highlighting them in promotions, there are many ways to leverage your uniqueness.

Investing in your future

Building a distinct product or service and finding its place in the market takes a lot of work. But over time, your investments can pay off in a major way.

By differentiating your products, you can find your customers, create the products they want, show them what makes you unique, and ultimately grow your business.