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Product Differentiation

Updated on April 12, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What is Product Differentiation?

Product differentiation refers to a marketing strategy of making a product look attractive and different from other products in the same class. Marketers highlight the distinguishing features in the product commonly through packaging or a good design, which helps communicate the benefitting factors to the shoppers.

An effective differentiation strategy of making the product sparkle helps the producers gain a competitive advantage and increase sales. Furthermore, they can set a high price for the product according to the intensity of innovation or diversity. At the same time, consumers benefit from the excellent value derived from enhanced products.

Key Takeaways

  • Product differentiation definition explains it as a technique used by producers and marketers to make the offering memorable or unique so that the shoppers choose it from a group of similar products.
  • This marketing strategy aims to create and maintain a competitive edge and increase sales.
  • It is commonly categorized into vertical, horizontal, and mixed differentiation.
  • It is an integral part of monopolistic competition, ensuring rich diversity in product presentation and availability of a substitute but not a perfect substitute.

How Product Differentiation Strategy Works?

Product differentiation strategy is primarily about grabbing the attraction of the shoppers. In shops, similar or closely related products are placed together, and from them, shoppers select the required product, mostly it will be the one they use frequently. Otherwise, the product designed to stand out should influence the shopper’s purchase decision through factors like aesthetic packaging, ingredients, health benefits.

Using aesthetics packaging to differentiate is one of the most effective methods. The visual appeal adds tremendous value to a product and makes it unique. In addition, the elements like unique presentation, shape, and transparency in ingredients listed on a product’s label can bias the consumer’s judgment. Furthermore, when a product is more distinctive and renowned, the consumer’s price sensitivityPrice SensitivityPrice Sensitivity, also known and calculated by Price Elasticity of Demand, is a measure of change (in percentage term) in the demand of the product or service compared to the changes in the price. It is used widely in the business world to decide the pricing of a product or study consumer behavior.read more lowers.

Product Differentiation Example

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Making a product much easier to use is also an excellent differentiation technique. Brands highlighting the benefits, rare flavors, natural ingredients, and other qualities of the product are usual in the market. The chance of customers perceiving it as a superior product compared to a competitor’s product increases.

It can also work by focusing on a niche market. For example, a company can identify a value-adding service that most other companies do not offer in a highly competitive environment, for instance, introducing vegan products. They can then opt to provide this service and identify the niche that would most benefit from this.

A product or service may require the addition of value to make it more attractive to specific clients. Identifying such qualities sets the product above the competition, even if the rivals offer lower prices. If the differentiation is successful, it will result in brand loyalty, charging premium price altogether a competitive advantageCompetitive AdvantageCompetitive advantage refers to an advantage availed by a company that has remained successful in outdoing its competitors belonging to the same industry by designing and implementing effective strategies that allow the same in offering quality goods or services, quoting reasonable prices to its customers, maximizing the wealth of its stakeholders and so on and as a result of which the company can make more profits, build a positive brand reputation, make more sales, maximize return on assets, etc.read more.

Types of Product Differentiation

The differentiation technique is classified into vertical, horizontal, and mixed differentiation. 

  1. Vertical differentiation: The method focuses on improving and highlighting the customer’s features for comparing similar items of a different brand based on objective analysis. A moisturizing cream that is antiseptic can win over regular moisturizing cream.
  2. Horizontal differentiation: The method focuses on winning the customers who select goods based on a subjective analysis of its features. Customers are driven by their likes and preferences. Adding fragrance to wet wipes is an example.
  3. Mixed differentiation: The method focuses on integrating vertical and horizontal differentiation techniques. For instance, the latest version of mobile phones focuses on providing features like the best battery lifespan and new camera features with diverse colors. 

Practical Examples

Differentiating the item is an ongoing process. Manufacturers advance with continuous product improvement to stay ahead of the competition and make it comparable to a game of leapfrog. Let’s look into the following product differentiation examples:

  1. Perfume industry: The perfume industry is ever-changing, and companies constantly need to diversify. Along with aesthetic packaging, they use new and exotic ingredients as leverages to effectively market the products. Also, the application of the easy-to-use concept is seen in the form of portable fragrance delivery applications such as rollerballs. To apply the differentiation technique, they look up to different market segments. For instance, a single brand may create different scents for men and women. Some brands introduce new perfume scents replacing the old ones.
  2. Bakery Industry: When shopping for baked products, consumers hunt for one or more unique ingredients. While multi-grain or vegan components are the most popular, including vitamins, minerals, and other nutrients appeals to a significant section of buyers, especially health-conscious parents who want more from the food for their kids. Markets that have developed, such as bakeries and confectionery, frequently merge into separate sectors as competitors distinguish their products and earn customer attention.

Product Differentiation in Monopolistic Competition

Product differentiation ensures the unique characteristics of similar products and services in a monopolistic competition. It makes offerings distinguishable from its close substitutes stating they are not perfect substitutes. Brands in monopolistic competitionMonopolistic CompetitionBeauty products are classic examples of monopolistic competition, with a large number of sellers and similar but not identical products sold by each company. Moreover, the entry and exit barriers to this business are relatively low.read more try to differentiate their offering by utilizing the factors like appearance, packaging, price, and quality. Hence differentiation is a significant element in monopolistic competition, presenting a wide array of choices for shoppers.

Frequently asked Questions (FAQs)

Explain product differentiation meaning in marketing?

It is the strategy marketers use to make their product appreciable compared to other products in the same class. Hence, creating brand loyalty and increasing sales.

How do you differentiate between products?

There is an ample number of factors to differentiate between items. Generally, customers identify the different brands available for a particular product. They distinguish the difference in features like packaging, size, color, origin, and ingredients.

What are the 3 main types of product differentiation?

1. Vertical differentiation: Technique highlights the measurable qualities of the product or service when the shoppers follow the objective decision to choose from the options.
2. Horizontal differentiation: Focus on factors influencing the likes and preferences of the shoppers, which are often not measurable, and buying decisions are based on subjective analysis.
3. Mixed differentiation: Technique integrates vertical and horizontal differentiation factors.
4. Spatial differentiation: Specific geographical location acts as the differentiating element.

This has been a guide to What is Product Differentiation & its Definition. Here we discuss how product differentiation strategy works and types and practical examples. You can learn more about from the following articles –