What Is Product Differentiation? (With Types And Examples)

By Indeed Editorial Team

Published 8 August 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Marketing teams use many approaches to promote products and services and encourage consumers to buy them. One of these strategies is product differentiation, which involves evaluating other products in the market to determine how to compete with them. Learning about this method can help you understand its importance, how it works and why you might incorporate it into your marketing plans. In this article, we answer the question, 'What is product differentiation?' and explore other aspects of the process, including its benefits, types, factors, steps for developing it and ways to achieve it.

What Is Product Differentiation And How Does It Work?

Answering the question, 'What is product differentiation?' is the first step in understanding how it works and how it may benefit a company. Product differentiation is a marketing process used to distinguish a product or service from others in the market to appeal to a target demographic. It involves highlighting the features of a product or service that make it unique and valuable to customers. When implemented successfully, product differentiation builds a competitive advantage because customers view a product as superior to other substitutes. It may also serve as a catalyst in a buyer's decision-making process.

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Benefits Of Product Differentiation

Product differentiation helps organisations create products or services that distinguish them from their competitors. Competition among industries can divide demand among many companies, making it important for a business to convince their customers why their products and services are better. Other potential benefits of product differentiation include:

  • Increased brand loyalty and brand equity

  • Informed customers understand how product attributes are benefits

  • Increased product recognition, which promotes sales

  • Strategic pricing above the market baseline

  • Ability to compete successfully in the market

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Types Of Product Differentiation

There are different types of product differentiation, with each type focusing on specific aspects of a product. Here are the differentiation approaches you can consider when developing a marketing strategy for a product:

Horizontal differentiation

Horizontal differentiation refers to making distinctions in products consumers choose based more on preference than quality or price. Products associated with horizontal differentiation offer the same primary features at similar price points. Factors that influence horizontal differentiation may include packaging, shapes, flavours and colours.

Example: A soft drinks company may create a horizontal differentiation strategy that involves producing the product in its original release packaging for a limited time to emphasise its long-term success in the market and appeal to customers' nostalgia. Its competitor may adopt the opposite strategy by introducing modern packaging, brightly coloured advertisements and new flavours to appeal to a younger target market.

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Vertical differentiation

Vertical differentiation refers to distinctions in products customers make based on measurable qualities like price or quality. Some customers choose certain products based on how well they compete with other brands, as those with high levels of recognition may indicate quality. Other customers choose the same products based on their price and may feel more inclined to buy a product with a lower price than competing products.

Example: A grocery store offers a variety of foods, beverages, hygiene and home products in many popular brands. The sales team gathers data on purchasing trends to determine products that have high sales and that customers often buy at a lower price point. They then relay this information to the production team so they can produce a store brand to complete with similar low-priced times. When the product becomes available, marketing teams develop a strategy for promoting it as a low-cost alternative.

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Mixed differentiation

This type of differentiation is a combination of horizontal and vertical. You may find this type of differentiation in a product that customers may consider at a higher price point if the product offers certain benefits. Customers may choose a product based on mixed differentiation at a medium or high price point if the product meets specific preferences. They often consider both price and quality when deciding on major purchases they intend to use for long periods.

Example: A high-end laptop may be priced higher than the market baseline price because of the benefits it offers to customers. The marketing team knows customers purchasing products they expect to perform well for an extended time may buy products at a higher price if they offer long-term quality. To encourage customers to consider the high-end product, the marketing team focuses on mixed differentiation by emphasising how the laptop's features can meet specific needs, which justifies its price.

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Factors Of Product Differentiation

You can differentiate a product from its competition in the marketplace by developing a strategy based on several factors. Here are some common ways to differentiate your product or service:

  • Performance and quality: A product with exceptional quality may appeal to customers more than a low- or standard-quality product.

  • Features: Distinct product characteristics like as organic ingredients, unconventional appearance and convenient sizing can help differentiate products that are in the same price spectrum.

  • Distribution channels: Channels of distribution, such as items sold directly to consumers with free and quick shipping, can help a product compete with similar products.

  • Location: The location of a business, such as a hometown brand with an established reputation, can help differentiate a product from its rivals.

  • Price: Price is an essential determinant of what the target market may pay for a product based on quality and competitor pricing.

  • Reliability: Product reliability provides customers with an estimated time frame in which the product may perform as expected.

  • Complexity: Ease of use has an important role in differentiating some products from their competition, especially in the technology industry.

  • After-sale services: This factor determines the impression a product leaves on a customer and whether it establishes trust in the brand and strengthens the consumer's relationship with the company.

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How To Develop A Product Differentiation Strategy

Having an effective strategy is critical to successful product differentiation. Here are the steps you can take to develop one:

1. Know your market

Researching consumer trends can tell you what consumers are buying, the factors they consider before making a purchase and how much they pay for different products. To identify the market you want to target, you can create a persona based on who may feel most inclined to purchase your product. Consider demographics like age group, occupation and income level when developing a persona so you have a thorough understanding of your target market.

Related: What Is Market Segmentation? (With Types And Benefits)

2. Gather ideas

Once you have defined your market, you can explore products competitors offer to the same consumers. This allows you to identify marketing gaps, which refer to areas in the market where competitors are not meeting consumers' needs. Once you have collected information about these gaps, you can collaborate with your team to share ideas about how to address them.

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3. Identify a strategy

After considering the different perspectives of team members, you can develop a product differentiation strategy that provides opportunities for highlighting product features that can fill the gap. You might also promote other features that might benefit the consumer, particularly if they relate to the primary focus of your strategy. This phase may also be an ideal time to evaluate where these opportunities belong in the company's strategic product roadmap.

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Ways To Achieve Product Differentiation

Achieving product differentiation allows your company to provide superior value to customers at an affordable rate, which can improve the overall profitability and viability of your business. Here are some methods that may help you develop and maintain a successful product differentiation strategy:

  • Size differentiation: Offering sizing options for certain products can help you cater to customers who want a product in a smaller or larger version than what companies typically offer.

  • Brand differentiation: Creating a strategy that associates the brand with superior quality may encourage customers to switch from your competitors.

  • Package differentiation: Using different packaging than your competitors, like biodegradable materials or brightly coloured boxes, may influence customers to choose your product.

  • Feature differentiation: Providing customers with features competitor products do not offer or giving them customisation options can help you successfully differentiate a product.

  • Bonus differentiation: Bonus differentiation involves giving customers a bonus feature or product customers may find valuable.

  • Consumer analysis differentiation: Consumer analysis differentiation allows you to develop a differentiation strategy based on customer reviews of competitor products.

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