Tuesday, January 31, 2012

Product differentiation

Recently a person asked be a basic question on product differentiation, since this is a common issue, I thought of documenting & publishing it.

In today's competitive world everyone is force to differentiate their products/services from the competition to make it good for their customers.

When it comes to differentiation, there are essentially three main levers one can exercise:

1. Pricing
2. Features
3. Service

These three levers are used to define the product position for the product. Typically a product/service offering can occupy two possible position vis-a-vis to its competition:

1. Superior Product
2. On-Par Product

A superior product is often characterized by a higher price, better features and superior service when compared with competition. For example think of BMW cars, BMW car is positioned as a superior car when compared to Toyota or Honda, and BMW commands a higher price, has many unique features and customers get a better service - when compared to Honda cars or Chevrolet cars. Similarly, Spyker cars on the other hand are positioned as superior car than BMW or Mercedes or Audi or Lexus.

Superior positioning is done to products where the manufacturer hopes to sell through the product superiority.

On-Par positioning is often used in mass markets - where there are not too much of product differentiation in terms of features/functionality, but the differentiation is done mainly done on price, convenience or service. For example Honda Accord does not differ greatly from Toyota Camry, but both manufacturers can differentiate the products through feature specifications - be it fuel economy or engine power or small features such as heated seats or small price differences etc. In such cases, product differentiation is done on narrow details of pricing, features and service.

A customer may find one feature more useful than the other, or prefer a nearby dealer location or may value a minor price difference while making the final decision.

A general rules of thumb in product differentiation is as follows:

1. If the product is positioned as a superior product, then the product must have better features & functionality and superior service quality

2. If the product is positioned as on-par product, then differentiation is often done with a lower price than the competition or differentiation must be achieved with service

Closing Thoughts

Product differentiation is the end result of product positioning. Product positioning is determined by product strategy and product delivery. Claiming a superior position with an inferior product/service will never work. The entire customer experience must reflect the product positioning strategy.

Similarly, Whole Foods market positions itself as a superior store when compared to Wal-Mart, while Wal-Mart positions itself as on-par with Target but offers lower price. If differentiation is possible to differentiate any product.

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