What is product differentiation? Definition and examples
Product differentiation is a marketing process in which a product is differentiated from others. Put simply; it is the process of distinguishing a good or service from others, i.e., making it stand out. Companies do this because they want to show customers their product’s attributes and uniqueness. This may include products within the company or of the same line.
In this context, ‘marketplace’ means the same as ‘market’ in its abstract sense. Some people simply say ‘differentiation‘ with the meaning ‘product differentiation.’
If the company implements it successfully, product differentiation can give a good a competitive advantage. Competitive advantage means having an edge over rivals in the provision of a certain product or service.
Product differentiation – small companies
For small companies, this can be great. It can be useful because they then have a chance to compete against bigger companies. It also gives them a better chance to compete against more popular products.
When differentiating a product from others, it does not necessarily have to be completely different or new.
Product differentiation may involve, promotions, product packaging, product design, quality, and extra features. Customer service, experience, and advertising campaigns are also relevant.
In a 1997 Harvard Business Review article, ‘Discovering New Points of Differentiation,’ Rita Gunther McGrath and Ian MacMillan wrote:
” offering customers something they value that competitors don’t have.”
Product differentiation types
There are three types of product differentiation.
Vertical differentiation exists when consumers compare a product according to one feature – quality.
When there is horizontal differentiation, consumers can say “Product A is better than Product B.”
For example, in the pharmaceutical industry, a person can decide whether to get a branded medication or a generic. They know the quality of each one.
A feature that also differentiates the two medications is ‘price.’ Brand names are much more expensive than generic medications.
With horizontal differentiation, the product is harder to classify because it has many features. Therefore, we only consider one characteristic.
Consumers are not certain about the quality of the products that they compare.
For example, when considering drinks, consumers may choose one because of its taste. However, they cannot determine which one is superior in quality.
When we choose between a Coke, Pepsi, or Dr. Pepper, for example, taste drives our decision. Regarding their quality, we have no idea which one is best.
SmallBusiness.Chron.com says the following regarding vertical differentiation and horizontal differentiation:
“Horizontal differentiation refers to distinctions in products that cannot be easily evaluated in terms of quality.”
“This stands in contrast to vertical differentiation, where the distinctions between products are objectively measurable and are based on the products’ respective level of quality.”
Mixed differentiation is a combination of both vertical and horizontal differentiation. It is common when consumers consider more complex products or marketing executives are looking at more sophisticated markets.
Video – what is product differentiation?
In this ehowfinance video, Alex Guerreros explains what differentiation is. He begins by talking about a company that created a fast car.
It made the car ‘fast’ because it wanted to appeal to a specific group of people. It was specifically appealing to consumer who like speed. The car’s speed distinguishes it from other cars in the market.