What Is Product Differentiation?

Today, many companies offer the same products and services. It may seem pointless to try to compete in an environment in which numerous other companies are already offering the same product or service you wish to sell. However, new companies often do come into the market place and successfully sell products and services that already existed in that market place. They are able to compete because they use product differentiation.

Product differentiation is a specific kind of business and marketing strategy. It focuses on a target market in which competitors already offer similar products or services. A company that uses product differentiation tries to create the perception among certain target customers that the company’s version of this product or service is some how different and thus has added value that is not available from competitors.

Product differentiation is extremely important to running any kind of business. This is due to economic principals that have been demonstrated time and time again in nearly every market place. If the public perceives no difference between two competing products, then the only possible means of competition is through pricing.

In a situation such as this, products are viewed by customers as very easy substitutes for one another. If one product is more expensive than the other, the customer will simply purchase the cheaper product. She does this because she views no difference between them.

To compete, the company with the higher price will lower its price to the same level as the competition. Eventually, another company may ignore the standard price in the market and offer the same product at an even lower price. The other competitors have no choice but to lower their prices as well. They have to or they will lose their business. Eventually, this leads to a situation in which the prices are lowered to the point where no business in the market can make a profit off of that product.

Situations such as these present themselves in markets where products are relatively similar. For example, people generally don’t consider one brand of peas inherently superior to another. Due to this fact, they are likely to just purchase the cheapest brand. Entering into a business such of this doesn’t seem like a lucrative proposition. Gaining market share and producing a sizable profit will be very difficult.

The answer to this problem based on economic principals is to make your product seem different from the competition. If the customers do perceive a difference, one product is less likely to be a perfect substitute for another.

The ways a product can be differentiated from the competition are numerous. However, actual physical alteration of the product is not always necessary. For example, with the previous pea example, there seems to be little space for altering the actual product. A pea will generally be the same no matter where or how it’s harvested.

However, today, many consumers are highly conscious of the environment. They may, for example, be against the use of chemical pesticides and fertilizers in farming due to the effect that those chemicals can have on animals, plants, and human beings. These consumers tend to prefer purchasing what is known as organic vegetables that are harvested without the use of these synthetic chemicals.

If a grocer offers peas that are labeled as having been organically grown, product differentiation from peas that do not carry this label has been achieved. One may be hard pressed to find a difference by simply comparing the appearance of an organic pea to a non-organic grown pea. However, since the consumer perceives a difference between the peas due to this organic label, the non-organically grown peas cannot be a substitute. In this situation, the shopper who must have organically grown vegetables is much more likely to pay a premium for those organic peas.

Thus, through this product differentiation, the businesses that grow and sell these peas have escaped a situation in which they would only be competing in the market on the basis of price alone. Making a sizable profit in a crowded market place is once again possible.

Products can be differentiated through many different ways. This differentiation may for example take the form of different packaging. For example, certain beer drinkers may be receptive to a different can design with a wider mouth. It can also take the form of marketing. For example, a cell phone company may offer the same services to all age groups. However, it may target certain kinds of cell phones to teenagers and others to senior citizens.

The possibilities are nearly limitless. As long as a business can come up with a creative way to differentiate its product or service, gaining a competitive advantage is possible.