Think about the most successful businesses in our modern world. Consider Apple, Nike, Airstream, Lush. What do these companies have in common, other than success? They are all unique. This is no accident. Although these companies are all very different, their business strategy approaches can be summed up in one word: differentiation. Each of these companies made it a point in their development to provide customers something they can't get anywhere else and market it as such. This is known as a differentiation strategy. Let's take a deep dive into differentiation strategy, what it is, when it works, the pros, and the cons.
What is a Differentiation Strategy?
A differentiation strategy is an approach to business development whereby a business offers its audience a product or service that is one-of-a-kind, different, and distinct from what the competition offers. For more established companies with the funds to launch costly advertising campaigns, this may be the obvious strategy. This strategy is more of a gamble for smaller companies with a tighter budget and a less clearly defined niche in the marketplace.
The main goal of implementing a differentiation strategy is to increase competitive advantage. To successfully pull this off, some differentiation strategy education needs to take place. There's quite a bit of research and work that goes into creating a winning differentiation strategy. A company needs to analyze:
- Their strengths
- Their weaknesses
- Customers' needs
- The value they can bring to the table
Furthermore, to be sure a difference is worth establishing, one of the following criteria must apply:
- Valuable: Perceived benefits outweighs cost
- Essential: Something that's needed to succeed is delivered
- Unique: Offered in a distinctive way
- Exceptional: Better, faster technology
- Emotional: Tap into emotions
- Communication: Visible and understandable
- Forward-thinking: Something that cannot easily be duplicated
- Affordability: Price doesn't deter customers
- Profitable: You make money
By analyzing and fully understanding these research points and identifying worthy differences, any company can determine whether it has the potential to gain a competitive advantage in the marketplace. If the potential is there, a differentiation strategy is the right approach.
Types of Differentiation
There are two primary types of differentiation strategies. Figuring out which one is right for your business just might be the difference between your company simply making a profit and your company becoming genuinely profitable.
- Broad Differentiation Strategy: This strategy means building a brand that is different from its competition in a meaningful way. The difference must be industry-wide and appeal to an extensive range of customers.
- Focused Differentiation Strategy: This strategy means that a business provides unique features for a particular product or service that increase value for customers. The audience needs to be niche or focused.
Additional subsets of differentiation strategy include:
- Product differentiation
- Service differentiation
- Channel differentiation
- Relationship differentiation
- Reputation differentiation
- Price differentiation
As you can see, there are many ways to differentiate your business and find a way to give yourself the competitive advantage you need to rise above your competition.
Weighing the Pros and Cons
Implementing a business differentiation strategy may seem like a win-win scenario, as long you have something that is significantly different. This isn't always the case. Differentiation strategy has several advantages and disadvantages.
Pros of Differentiation Strategy
The pros of creating a differentiation strategy for your business are:
- Price is no longer the only competitive factor: Differentiation allows factors other than price to come to the forefront. Just because a competitor is cheaper doesn't mean they will always come out on top.
- Original products: Differentiation strategy is built on authenticity and uniqueness. Customers are drawn to unique branding. Creating a marketing campaign to showcase what makes you authentic may even bring in new customers.
- Higher margins of profit: If customers perceive your products as the highest-quality, you gain access to much larger profit margins. Many people will pay more money for better products. If you lose any customers, it will be made up for in the higher profit margins.
- Increased brand loyalty: A strategy that identifies your company as exceptionally high-quality, beloved by famous actors or athletes, or family-owned for generations, increases brand loyalty. The more valuable your brand, the more loyal customers are.
- No clear substitutes: Even if there are technically similar products available, a successful differentiation strategy conveys the idea that there is no real substitute. Your product is it.
- Clear marketing efforts: Once you establish what makes you different, you can use that to focus your marketing efforts. Digital marketing campaigns thrive when there is a clear and concise story to tell a specific audience.
Cons of Differentiation Strategy
The following list details the cons of differentiation strategy:
- Nothing is guaranteed: Even if your product is superior in every way, your audience may not go for quality over price.
- It's all about perception: Perception is key here. Your product may be perceived as the best now, but as consumers become smarter and technology advances, that is subject to change.
- Resources can be strained: Differentiation strategy requires time, effort, and resources. This can burden every aspect of a business. If your small business is gambling on a differentiation strategy, it may not work out. It could even drive you to take out more loans or go into debt.
- Excludes buyers: Too much specificity and marketing to a niche audience can exclude a majority of the market, which may exclude previously loyal customers and hurt revenue.
How to Create Your Own Differentiation Strategy
A differentiation strategy works best when a business can zero in on which piece of their business is worth highlighting as a unique selling point that will appeal to their audience. In addition to doing regular industry research, like keeping up on the best business blogs, you've got to make sure you continually analyze your business. Strategy is not stagnant. No matter what industry you're in, there are always advancements being made and new competitors entering the market. Strategy that worked in yesterday's market may not work in tomorrow's.
For more helpful tips and advice for small businesses, visit our blog. It's AdvancePoint Capital's excellent resource for all things business-related, from financial assistance and legal advice to business resources and industry news.