What Is A Differentiation Strategy? (With Examples)

By Amanda Covaleski
Aug. 8, 2022
Skills Based Articles

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No matter what stage your business is in, you want to stand out and prove that your product or service has a unique advantage. This can help you at all points, from attracting investors to getting your company started to getting customers to buy, and the best way to do this is by developing a strong differentiation strategy.

In this article, we’re going to take a closer look at what differentiation strategies are, some great examples you can model your strategy after, and how to build your own.

Key Takeaways

  • A differentiation strategy focuses on what makes your business unique from others in the same industry or market.

  • Having a good differentiation strategy creates more stable brand loyalty, reduces price competition, increases profit margins, and lowers customers’ ability to substitute your product with something else.

  • Three areas of differentiation include the company, the cost of the product or service, and the product or service itself.

What is a Differentiation Strategy?

What Is a Differentiation Strategy?

A differentiation strategy is a business strategy that revolves around making your company, product, or service unique, so it stands out from other businesses in your industry or market segment.

While you should strive to provide something totally new and novel to your customer, no matter what industry or market you’re selling in, it’s most important to differentiate yourself within your industry. You want to make sure that your product is different (and better) than any direct competitors’ products.

Examples of Differentiation Strategies

It can be hard to think of ways to differentiate your company without examples and models to look to. But, differentiated companies are everywhere, and you might not even realize that your favorite places to shop or eat at have done a great job of making their products and services unique.

One way to tell that a company succeeded in differentiating itself is to look for imitators. If a bunch of new companies sprang up and tried to copy the product or concept of another company, you can be safe in assuming that the original company had a great idea.

Let’s take a look at some popular examples of differentiated companies:

  • Apple. While there are tons of tech companies out there, Apple has successfully differentiated its products over the years through innovation and product design. Their unique operating systems make them stand out from their competitors, while all of their products have a more elevated and sleek design than their counterparts.

  • Amazon. The ecommerce giant is at the top of everyone’s list when you need something. They’ve distinguished themselves as a company that sells nearly everything at the lowest prices and with extremely fast service.

  • Lush. The cosmetics brand stands out because of its DIY and handmade approach to beauty. They established their products as ethical and handmade, whereas their competitors provide manufactured and impersonal products.

    They also worked to create a unique and hands-on customer experience in their stores where you can try things out and get to know the products before you buy.

  • Emirates. There’s lots of competition for airlines, but Emirates made themselves stand out while also charging high prices. They built their brand on amazing customer service and access to the latest in-flight technology.

    Customers are willing to pay the extra few hundred dollars to fly with them instead of a cheaper competitor.

  • Chipotle. Chipotle revolutionized fast food and created the fast-casual trend. Their commitment to providing fresh food in a quick and relaxed atmosphere was then copied by companies around the world.

  • Hermes. This luxury brand is home to some of the most expensive clothes and accessories, but that doesn’t stop thousands of people from buying their products. They made sure to create products that are always up to an extremely high-quality standard, making their high cost seem worth it.

    They also worked to create exclusivity and make their products a status symbol since so few people can get their hands on their handbags each year.

Benefits of a Differentiation Strategy

A few of the benefits of a strong differentiation strategy are:

  • Reduced price competition

  • More stable brand loyalty

  • Better profit margins

  • Reduced product substitution

Because of all of these great benefits, implementing a good differentiation strategy isn’t as easy as brainstorming why your company or product is better. But, your hard work can pay off in the long run when you outsell your competition.

Typically, it takes months to form your differentiation strategy, which requires extensive research, testing, implementation, and moving away from your current strategy.

You’ll want to research your sales and analyze where you outperform your competitors. You also need to consider any customer feedback and how you provide a service that other companies don’t. The best differentiation strategies are based on thorough research and analysis.

You should also test out your differentiation strategy if possible. This could mean holding focus groups or even asking friends and family for feedback on new slogans, product design, or anything you decided to change about your product.

After evaluation and testing, you can implement your differentiation strategy. You should make sure you’re keeping tabs on any changes in sales and analyzing the data to make sure your changes positively impact the company.

Basis of Differentiation

There are three main ways you can achieve differentiation. While the three levels of differentiation are all related, you’ll need to take different approaches to achieve differentiation on all three levels.

Just because you aim to be different on one level doesn’t mean you can’t change things up on all three. Great companies have differentiation at all levels to make them truly unique and one of a kind.

  1. Company. One way to stand out is to make your company unique. Companies that rely heavily on their brand name, brand loyalty, location advantage, or customer support tend to have high company differentiation.

    This means that the company is one of a kind in how they treat their customers, how their brand functions, or that they’re the only competitor in the industry. Customer service is becoming a huge differentiator as companies shift their focus to creating happy customers to turn them into returning customers.

    Finding a way to provide the best customer service in your industry can be one of the best differentiators to use.

  2. Cost. Another way to differentiate your product is to adjust the pricing depending on your customers’ needs and expectations. Commonly, companies will make sure they’re the cheapest product so consumers will choose theirs.

    For example, Amazon became popular because people know they can find the lowest prices for any product they’re looking for.

    Other strategies involve maximizing prices, so customers feel like they’re getting an elevated experience. Luxury brands use high prices because the price tag is part of the experience that they’re selling. Both strategies have their pros and cons; it just depends on what kind of company you are and the product you’re selling.

  3. Product or service. Finally, you can differentiate the product or service you’re selling so that it’s totally different from anything else available. Providing innovative and unique products can be a great way to stand out from others, but it can be costly in terms of time and resources since you need to determine what that unique product is and take time to develop it.

    You don’t have to reinvent the wheel and make something completely new, but you do need to have a product that meets customer needs better than anything else available.

    Typically, having a differentiated product is the most costly route, but it can also have the highest return on investment since you’ll have a unique product in the market until others copy you.

Testing Your Differentiators

Once you’ve come up with what sets your company apart, you need to test those differentiators to make sure they’re worth developing into a strategy. If they don’t check these three boxes, you need to either make adjustments so they do or choose different differentiators to focus on:

  1. Is it true? You can’t fabricate or even exaggerate your differentiators. Customers will quickly see through your claims, and these false differentiators will end up hurting your company rather than helping it.

  2. Is it relevant? In other words, do your target customers care that your company values sustainability or offers free returns? Make sure your differentiators will actually impact customers’ decision-making rather than just making an interesting “fun facts” list.

  3. Is it provable? You have to be able to back up your differentiation claims to customers. If you say you offer the best customer service, for example, you need to have a hefty list of positive customer reviews, some unique customer service policies, and intense training for your customer service reps to back up your claims.

How to Make a Differentiation Strategy

To successfully differentiate your product, you’ll need to go through a lot of research, analysis, and testing to find what works for your company, product, consumer, and industry. There’s no one-size-fits-all approach to differentiation since that would defeat the purpose of creating unique companies or products.

Here’s a general checklist to keep in mind:

  1. Know your target audience. You can get started on differentiating yourself by creating a product that uniquely addresses consumer pain points, providing a product that is innovative and new, adjusting the price of the product based on consumer value and budget, and creating a solid brand identity.

    To get to all of these, you’ll need to spend time researching your industry, client, and alternatives to your product. Keeping your customer central to your differentiation strategy is vital. At the end of the day, consumers choose to buy your product, and all of your efforts should be centered around their needs, budgets, and opinions.

    Doing lots of research on who your ideal customer is, what they look like or behave like, and how they feel about your product will give you a better differentiation strategy than if you try to create it in a vacuum without understanding your consumer.

  2. Consider your differentiator. Now that you know your audience, you need to decide on what your company’s specialty will be and how you’ll provide some unique value on the market. Think about where you’re strong and how you can leverage that or lean into it to create a unique brand identity.

    Use some of the differentiating factors found in this article to get you started.

  3. Create a narrative. People don’t really like adjectives — or at least, they don’t trust them at face value. If you tell someone a company is “innovative” or “inexpensive,” they’ll come in with their own associations (like “innovation” is usually a BS term and “inexpensive” usually implies cheaply made).

    But if you instead tell a compelling story about how the founder was led to this great solution to a common problem and then figured out a way to deliver a high-quality answer for a low price — now you’ve got people interested.

    Being active on social media, creating a good “About Us” page, and engaging with the community are a few ways that companies shape their brand’s narrative and differentiate themselves from the competition.

  4. Be consistent (once it works). Imagine if Amazon suddenly dropped free 2-day shipping? Or if Walmart’s prices rose to the level of Whole Foods? Once you’ve got a system that works and consumers know why you’re different, stick to it.

    The tricky part is new companies who can’t really be sure if their differentiation strategy is working or not because the business is too new. Rebranding can be effective in these early days of business, but be wary of overdoing it, or customers will be confused as to what your company is all about.

When creating your differentiation strategy, there are two approaches you can take. One is a broad strategy where you try to stand out in your industry or differentiate yourself from your competition. This is similar to the company-level differentiation that we mentioned earlier. Broad strategies focus on providing a product or service that has a broad appeal so you can reach a wide market with your offerings.

The other strategy is a focused one where you appeal to a niche market and make sure your product is perfect for that small population. For this, you’ll want to have an idea of what you’ll be known for and have a lot of knowledge about your small target audience so you can optimize for their tastes and needs.

You can make yourself unique to a small audience based on all three levels of differentiation, and all three work well to help you stand out in your niche market. If you’re choosing a niche product or service, you may have less competition. Still, your competitors will be just as fierce and motivated as you, so good differentiation is critical in these markets.

Other Types of Differentiation Strategies

There are additional ways of categorizing differentiation strategies. One is broad vs. focused:

  • Broad differentiation strategy. A broad differentiation strategy is about appealing to a wide base with a brand that speaks to commonly-held values and expectations.

    Companies like Trader Joe’s and Whole Foods, for example, are all about organic food and a healthy lifestyle, both of which appeal to a wide range of consumers from different backgrounds.

  • Focused differentiation strategy. A focused differentiation strategy is about appealing to a narrow segment of the market by fulling their highly-specific requirements.

    An example might be a community bank that specializes in providing especially attractive small business loans or a resort that markets itself as the perfect romantic getaway from the kids.

Differentiation can also be categorized as horizontal or vertical:

  • Vertical differentiation. Vertical differentiation involves standing out for objective, factual reasons. Examples of vertical differentiation include:

    • Offering the lowest price

    • Using the highest-quality technology/parts/ingredients

    • Having the best-reviewed product

    • Winning awards from authoritative organizations

    • Having the most commonly used/popular product

  • Horizontal differentiation. Horizontal differentiation involves being different for more subjective, personal reasons. The most common example of horizontal differentiation is ice cream flavors: if a customer prefers strawberry ice cream, the brand won’t matter if you offer them the choice between chocolate and strawberry.

    It’s hard to implement horizontal differentiation in a way that we would traditionally think of as “standing out.” Rather, horizontal differentiation usually means offering the same product that everyone else in your market offers simply because it’s an expectation that your type of business should carry that product.

    Quality and price point don’t matter with horizontal differentiation, as all available products tend to be around the same quality and price. “Standing out” means that you just happen to be the favorite for a large enough segment of the market to thrive.

    Examples include:

    • Pepsi, Coke, Cola, et al.

    • Bottled water

    • Hand soap

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Amanda Covaleski

Amanda is a writer with experience in various industries, including travel, real estate, and career advice. After taking on internships and entry-level jobs, she is familiar with the job search process and landing that crucial first job. Included in her experience is work at an employer/intern matching startup where she marketed an intern database to employers and supported college interns looking for work experience.

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Topics: Skills, Soft Skills