Differentiation strategy - this is one type of strategy aimed at gaining an advantage over competitors. At the same time, the enterprise’s activities are aimed at providing more benefits to consumers by offering goods made at a high level, along with the full range of additional services, while the prices are justifiably high.
A wide differentiation strategy is a combination of various strategies that allow a company to offer the market a unique product that can interest buyers. A bet can be made on a unique design or characteristics, on the addition of one additional function or feature, on attracting consumers with a price policy.
Definition
Companies have the ability to differentiate staff, product, image and service. The strategy of product differentiation is aimed at highlighting the product manufactured by the company in the market, filled with a mass of similar offers. In other words, a product is offered that has better characteristics than competitors.
A differentiation strategy is a breath of fresh air in a market filled with a lot of similar products. Companies that have chosen this path are putting all their efforts into creating and launching on the market a product that is more useful to consumers than competitors' products, but is in limited demand. The company whose product has the highest value for the consumer, which at the same time can be paid for by them, gets a greater competitive advantage.
Of course, the addition of certain properties to a product leads to an increase in the cost of its production. However, such costs for successful market conquest are borne by a higher price. The conquest of a larger market share brings more sales, and hence the additional profit of the company.
Steps to differentiate
A company that decides to pursue a competitive product differentiation strategy must comply with 3 conditions:
- determination of the necessary characteristics for the manufactured goods;
- analysis of all the properties and characteristics of products manufactured by competing companies;
- drawing up the necessary list of consumer properties of goods that are necessary for customers in each market segment.
Performing all 3 steps allows the company to find its niche and, using one of the differentiation strategies, release a product that will be in demand among consumers.
Vertical and horizontal differentiation
Specialists distinguish vertical and horizontal differentiation. Horizontal differentiation implies that the company develops various products for different groups of consumer needs, vertical differentiation, on the contrary, involves the release of products that satisfy one consumer need. A combination of both types of differentiation is possible in one company portfolio.
If a company chooses a strategy of using exclusively horizontal differentiation, then it releases a product for each specific consumer demand that is needed here and now. If the company focuses on vertical differentiation, then it produces goods that satisfy one specific need of customers.
Price differentiation
In this case, the differentiation strategy is putting up a product for sale that meets the same consumer needs as the products of competing manufacturers, but at a different price: lower or higher.
Price reduction is used to attract a mass group of customers who wish to save. The price increase is used to attract customers who pay attention to the prestige and status of the product, design and high speed of service.
For example, cosmetic companies often produce a particular product in a limited collection, collaborating with a well-known makeup artist or popular artist. Product properties remain the same, but the limited nature and prestige of the collection forces consumers who pay attention to these characteristics to purchase goods at a higher price.
Concentration in one market niche
The differentiation strategy is not only an attempt to satisfy the needs of different consumers in all market segments, but also the opportunity to choose one niche to increase sales in it. This approach is preferred by small companies.
Choosing a niche with consumers having specific needs, a company can devote all its efforts to producing a product that satisfies them. An “ideal” product is created that will cause a surge in the interest of consumers in one niche, but will not be interesting to the market as a whole.
Service differentiation
In this case, the differentiation strategy is an offer of a higher quality list of services that accompany the product being sold. This may be a longer period of warranty service of the goods, as well as the possibility of post-warranty service, the possibility of free or urgent paid delivery of goods to the client, regardless of the location of the latter. In addition, customers may be offered training and advice on the use of the purchased product.
Modern companies, especially those producing electronics, use the possibility of free updating of the product’s operating system as a service differentiation. When a new system is released, the client receives a notification, and he can independently update the software on his phone, laptop, etc. This is exactly what the American company Apple does.
Image differentiation
The differentiation strategy is the creation or improvement of the image of the company, or the products that the company produces. The goal is to increase customer loyalty. For example, Apple, thanks to its image, has a greater market share and higher consumer loyalty than competitors, while the products as a whole are similar for all manufacturers. Marlboro, a cigarette manufacturer, is equally successful. Given the similar characteristics and tastes of cigarettes from different manufacturers, it is Marlboro that has the most consumer loyalty and market share.
Differentiation of the image allows the company to produce various products presented in different segments and under different brands.
Staff differentiation
With the differentiation of personnel, personnel are trained, which subsequently works more effectively with customers than employees of a competing company. A friendly approach to customers, quality knowledge of the product sold, well-delivered speech - all this is distinguished by well-trained staff. Most often, such a strategy is applied in the service sector.
Differentiation through packaging
There is also differentiation through a change in the design and shape of the package. The company, creating a unique design of its own products, seeks to highlight the goods on the shelf of the store, to draw buyers' eyes to it. Unique packaging, catchy design - all this can increase sales and make the company more competitive.
An example is the company that produces a classic product that has popularity, in limited packaging for a particular event. For example, it can be smartphone covers packed in a new box with a new design dedicated to the World Cup in Russia in 2018. The properties of the product do not change, but the bright packaging and the appropriate design associated with current events increase the demand and recognition of consumers. For example, Nike often differentiates through packaging.
Differentiation Strategy Benefits
The advantages of using this strategy:
- increasing customer loyalty to company products;
- high entry barriers are provided by customer preferences;
- the influence of customers on products is reduced due to its unique properties;
- obtaining additional profit, due to this, relations with suppliers are facilitated;
- formation of a favorable image of the company.
Successfully implemented differentiation strategy of the company allows you to set a higher margin on manufactured products, as well as increase sales. Achieving customer loyalty can bring an increase in regular customers who tend to be attached to certain differentiating features.
Possible risks of the strategy
Using a differentiation strategy is also subject to certain risks, namely:
- it is possible to reduce the consumer's need for differentiated products, which will lead to company losses and production inefficiencies:
- excessive costs of creating and maintaining the image of the company;
- unique characteristics of products may not be understood by consumers and may be excessive for them, the buyer will not feel the difference between quality and price and will prefer competitors' products;
- Reducing the benefits of a differentiation strategy if the product is very similar to competitors.
Companies also need to remember that a special characteristic or property of a product can be copied by competing manufacturers after some time, and the manufactured product will lose its uniqueness. Having the opportunity to purchase a similar one from a competitor at a lower price, in most cases the consumer will use it. For a company that has embarked on the path of differentiation, it is important not to stop at one site and, having reached it, each time improve the image, service, characteristics and quality of the goods.