Product differentiation
Encyclopedia
In economics
and marketing
, product differentiation (also known simply as "differentiation
") is the process of distinguishing a product
or offering from others, to make it more attractive to a particular target market
. This involves differentiating it from competitors
' products as well as a firm's own product offerings. The concept was proposed by Edward Chamberlin
in his 1933 Theory of Monopolistic Competition.
may result in changing a product in order to improve differentiation, the changes themselves are not differentiation. Marketing or product differentiation is the process of describing the differences between products or services, or the resulting list of differences. This is done in order to demonstrate the unique aspects of a firm's product and create a sense of value. Marketing textbooks are firm on the point that any differentiation must be valued by buyers (e.g.). The term unique selling proposition
refers to advertising to communicate a product's differentiation.
In economics
, successful product differentiation leads to monopolistic competition
and is inconsistent with the conditions for perfect competition
, which include the requirement that the products of competing firms should be perfect substitutes
. There are three types of product differentiation:
1. Simple: based on a variety of characteristics
2. Horizontal : based on a single characteristic but consumers are not clear on quality
3. Vertical : based on a single characteristic and consumers are clear on its quality
The brand differences are usually minor; they can be merely a difference in packaging or an advertising
theme. The physical product need not change, but it could. Differentiation is due to buyers perceiving a difference, hence causes of differentiation may be functional aspects of the product or service, how it is distributed and marketed, or who buys it. The major sources of product differentiation are as follows.
The objective of differentiation is to develop a position
that potential customers see as unique. The term is used frequently when dealing with freemium
business models, in which businesses market a free and paid version of a given product. Given they target a same group of customers, it is imperative that free and paid versions be effectively differentiated.
Differentiation primarily impacts performance through reducing directness of competition: As the product becomes more different, categorization becomes more difficult and hence draws fewer comparisons with its competition. A successful product differentiation strategy will move your product from competing based primarily on price
to competing on non-price factors (such as product characteristics, distribution strategy
, or promotional variables
).
Most people would say that the implication of differentiation is the possibility of charging a price premium; however, this is a gross simplification. If customers value the firm's offer, they will be less sensitive to aspects of competing offers; price may not be one of these aspects. Differentiation makes customers in a given segment have a lower sensitivity to other features (non-price) of the product.
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
and marketing
Marketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
, product differentiation (also known simply as "differentiation
Differentiation (economics)
Differentiation is a concept used in business strategy and describes one of the three ways to establish competitive advantage.Differentiation advantage occurs when a firm delivers greater services for a non-unlimited higher price than its competitors...
") is the process of distinguishing a product
Product (business)
In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...
or offering from others, to make it more attractive to a particular target market
Target market
A target market is a group of customers that the business has decided to aim its marketing efforts and ultimately its merchandise. A well-defined target market is the first element to a marketing strategy...
. This involves differentiating it from competitors
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
' products as well as a firm's own product offerings. The concept was proposed by Edward Chamberlin
Edward Chamberlin
Edward Hastings Chamberlin was an American economist. He was born in La Conner, Washington.Chamberlin studied first at the University of Iowa , then pursued graduate-level studies at the University of Michigan, eventually receiving his Ph.D...
in his 1933 Theory of Monopolistic Competition.
Rationale
Differentiation can be a source of competitive advantage. Although research in a niche marketNiche market
A niche market is the subset of the market on which a specific product is focusing; therefore the market niche defines the specific product features aimed at satisfying specific market needs, as well as the price range, production quality and the demographics that is intended to impact...
may result in changing a product in order to improve differentiation, the changes themselves are not differentiation. Marketing or product differentiation is the process of describing the differences between products or services, or the resulting list of differences. This is done in order to demonstrate the unique aspects of a firm's product and create a sense of value. Marketing textbooks are firm on the point that any differentiation must be valued by buyers (e.g.). The term unique selling proposition
Unique selling proposition
The Unique Selling Proposition is a marketing concept that was first proposed as a theory to explain a pattern among successful advertising campaigns of the early 1940s. It states that such campaigns made unique propositions to the customer and that this convinced them to switch brands...
refers to advertising to communicate a product's differentiation.
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...
, successful product differentiation leads to monopolistic competition
Monopolistic competition
Monopolistic competition is imperfect competition where many competing producers sell products that are differentiated from one another...
and is inconsistent with the conditions for perfect competition
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...
, which include the requirement that the products of competing firms should be perfect substitutes
Substitute good
In economics, one way we classify goods is by examining the relationship of the demand schedules when the price of one good changes. This relationship between demand schedules leads economists to classify goods as either substitutes or complements. Substitute goods are goods which, as a result...
. There are three types of product differentiation:
1. Simple: based on a variety of characteristics
2. Horizontal : based on a single characteristic but consumers are not clear on quality
3. Vertical : based on a single characteristic and consumers are clear on its quality
The brand differences are usually minor; they can be merely a difference in packaging or an advertising
Advertising
Advertising is a form of communication used to persuade an audience to take some action with respect to products, ideas, or services. Most commonly, the desired result is to drive consumer behavior with respect to a commercial offering, although political and ideological advertising is also common...
theme. The physical product need not change, but it could. Differentiation is due to buyers perceiving a difference, hence causes of differentiation may be functional aspects of the product or service, how it is distributed and marketed, or who buys it. The major sources of product differentiation are as follows.
- Differences in quality which are usually accompanied by differences in price
- Differences in functional features or design
- IgnoranceIgnoranceIgnorance is a state of being uninformed . The word ignorant is an adjective describing a person in the state of being unaware and is often used as an insult...
of buyers regarding the essential characteristics and qualities of goods they are purchasing - Sales promotionPromotion (marketing)Promotion is one of the four elements of marketing mix . It is the communication link between sellers and buyers for the purpose of influencing, informing, or persuading a potential buyer's purchasing decision....
activities of sellers and, in particular, advertising - Differences in availability (e.g. timing and location).
The objective of differentiation is to develop a position
Positioning (marketing)
In marketing, positioning has come to mean the process by which marketers try to create an image or identity in the minds of their target market for its product, brand, or organization....
that potential customers see as unique. The term is used frequently when dealing with freemium
Freemium
Freemium is a business model that works by offering a product or service free of charge while charging a premium for advanced features, functionality, or related products and services...
business models, in which businesses market a free and paid version of a given product. Given they target a same group of customers, it is imperative that free and paid versions be effectively differentiated.
Differentiation primarily impacts performance through reducing directness of competition: As the product becomes more different, categorization becomes more difficult and hence draws fewer comparisons with its competition. A successful product differentiation strategy will move your product from competing based primarily on price
Price
-Definition:In ordinary usage, price is the quantity of payment or compensation given by one party to another in return for goods or services.In modern economies, prices are generally expressed in units of some form of currency...
to competing on non-price factors (such as product characteristics, distribution strategy
Distribution (business)
Product distribution is one of the four elements of the marketing mix. An organization or set of organizations involved in the process of making a product or service available for use or consumption by a consumer or business user.The other three parts of the marketing mix are product, pricing,...
, or promotional variables
Promotion (marketing)
Promotion is one of the four elements of marketing mix . It is the communication link between sellers and buyers for the purpose of influencing, informing, or persuading a potential buyer's purchasing decision....
).
Most people would say that the implication of differentiation is the possibility of charging a price premium; however, this is a gross simplification. If customers value the firm's offer, they will be less sensitive to aspects of competing offers; price may not be one of these aspects. Differentiation makes customers in a given segment have a lower sensitivity to other features (non-price) of the product.
Ethical concerns
Some product differentiation approaches raise ethical concerns. These include techniques based on customers' ignorance, rebranding existing products to sell them as new or introducing anti-features that create artificial limitations to otherwise fully functional goods.See also
- Non-price competitionNon-price competitionNon-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship"...
- MarketingMarketingMarketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
- Market segmentation
- Product managementProduct managementProduct management is an organizational lifecycle function within a company dealing with the planning, forecasting, or marketing of a product or products at all stages of the product lifecycle....
- BrandBrandThe American Marketing Association defines a brand as a "Name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers."...
- Country of originCountry of originCountry of origin , is the country of manufacture, production, or growth where an article or product comes from...
- Marketing planMarketing planA marketing plan may be part of an overall business plan.Solid marketing strategy is the foundation of a well-written marketing plan. While a marketing plan contains a list of actions, a marketing plan without a sound strategic foundation is of little use....
- Mass customizationMass customizationMass customization, in marketing, manufacturing, call centres and management, is the use of flexible computer-aided manufacturing systems to produce custom output...
- FreemiumFreemiumFreemium is a business model that works by offering a product or service free of charge while charging a premium for advanced features, functionality, or related products and services...
- PositioningPositioning (marketing)In marketing, positioning has come to mean the process by which marketers try to create an image or identity in the minds of their target market for its product, brand, or organization....