Career Development

Differentiation Strategy: Definition, Benefits and Creation

August 31, 2020

Many businesses choose to restructure over time and use varying strategies to advance and distinguish themselves in the marketplace. If you want to increase profits without high risk or lowering your prices, consider creating a differentiation strategy. In this article, we discuss what a differentiation strategy is, how to create one and how a differentiation strategy can benefit your business.

What is a differentiation strategy?

A differentiation strategy is an approach businesses develop by providing customers with something unique, different and distinct from items their competitors may offer in the marketplace. The main objective of implementing a differentiation strategy is to increase competitive advantage. A business will usually accomplish this by analyzing its strengths and weaknesses, the needs of its customers and the overall value they can provide.

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Benefits of creating a differentiation strategy

Differentiation strategies have several advantages that may help you develop a unique niche within your industry. Here are the possible benefits of creating a differentiation strategy:

  1. Reduced price competition. Differentiation strategy allows a company to compete in the market with something other than lower prices. For example, a candy company may differentiate their candy by improving the taste or using healthier ingredients. Although its competitors have cheaper candy, they can’t provide the taste that consumers may want from that specific candy company. 

  2. Unique products. This benefit of a differentiation strategy is that it builds on the unique qualities of a product. Your company may create a list of characteristics its products contain that your competitors lack. Those characteristics will differentiate your product, and you may communicate this through effective marketing and advertising. 

  3. Better profit margins. When products are differentiated and turned into higher-quality products, it offers more opportunity for larger profit margins. For example, if your target market is willing to pay a higher price for top quality or better value, you may generate more revenue with fewer sales.

  4. Consumer brand loyalty. Effective differentiation may create brand loyalty in customers if a business maintains the perceived quality of your products. For example, if you have a brand that is marketed by a sports figure, it will likely increase brand loyalty because it enhances the value of your brand.

  5. No perceived substitutes. A strategy that successfully differentiates may present the idea that there is no other product available on the market to substitute it with. A business may gain an advantage in the market even when there are similar products available because customers will not be willing to replace your product for another one. Companies try to differentiate themselves by providing consumers with unique products that are frequently revolutionized.

Read more: How to Create a Cost Leadership Strategy

How to create a differentiation strategy

There are two main types of differentiation strategies that a business may carry out:

  1. Broad differentiation strategy. A broad differentiation strategy consists of building a brand or business that is different in some way from its competition. It is applied to the industry and will appeal to a vast range of consumers.

  2. Focused differentiation strategy. A focused differentiation strategy requires the business to offer unique features to a product or service, and it must fulfill the requirements of a niche or narrow market.

Businesses looking to build a broad or focused differentiation strategy will need to produce or design extremely unique or distinctive products or services that create increased value for the consumer. There are several ways an organization can create a differentiation-based competitive advantage for a single product or the company as a whole. Here are some steps to create a differentiation strategy:

1. Decide what you want to be known for

You must have an idea of your expertise in your business. You’ll need to evaluate what is important to you and your business and the areas your organization succeeds in. This way, you will be able to provide a narrow differentiator to your customers. Write down the strengths and weaknesses of your overall brand or specific products.

2. Research your target audience 

Research will help you align your business’ offerings with the wants and needs of current and potential customers. This will also inform your selection of differentiators to make your expertise more appealing. For instance, you may decide to send a survey to those who purchase your products or use your services and gather data to gain an accurate idea of what they are looking for.

3. Develop differentiators

This step is important so you can find things that make your brand or products different. Each differentiator may be broad at first, so you may try writing down your differentiators and then create smaller subsections that narrow them down. Here are some common differentiations:

  • Price
  • Image or reputation
  • Relationship
  • Service
  • Product
  • Distribution

4. Tell your story

When you tell your business’s unique story, it may automatically assist with your differentiation strategy since your competitors likely won’t have a story like yours. Evaluate your mission, vision and values, and you’ll be able to craft an overall story about what sets you apart, which turns your target audience into customers. 

Telling your story to your target audience is best executed with a bio section on your company website. You can also use social media channels to have a running dialogue with your customers as you share products and services with them on a more personal level.

5. Create a brand image

Implement your strategy and create a brand image by ensuring better quality. Try to be creative and rebrand, if necessary, to capture new clients and customers within your target audience.

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Differentiation strategy examples

Here are five differentiators well-known companies and brands used to increase their value and separate themselves from their competition:

  • Committed to ethical buying and maintained the purity that comes from purchasing unique handmade items.

  • Focused on image, community and quality with expensive products that are built to last and maintain value.

  • Hosted events, ran multiple blogs and created an app that shows innovation in everyday tasks.

  • Made fast-food service better through the use of high-quality ingredients.

  • Pushed the limits of products and services and positioned their brand to become a necessity through advertising campaigns and product placement.