If I had to pick one concept in marketing theory that is the most misunderstood and poorly executed, across a range of industries, it would be differentiation; you know the drill, make your product or service different and therefore uniquely appealing to at least one group of customers and they will logically buy from you rather than your competition.
Once you are differentiated you can reap the rewards and escape the gravitational pull towards the death star of price competition – easy, right? It is such an appealing and simple idea that just about every marketing textbook promotes it, every marketing consultant endorses it and every business attempts it.
Differentiate or die is the battle cry. Yet, despite their best efforts, many businesses struggle to achieve meaningful differentiation and ultimately end up offering similar products at similar prices to their competition.
The problem with differentiation, though, is not with the core idea. The problem is how we do it. It’s time for a rethink.
The two types of differentiation
When companies think of differentiation they typically think of product differentiation or ‘building the better mousetrap’. They find a feature of their product or service that the customer truly values and then set about improving it; simply make the product demonstrably better and customers will beat a path to their door.
Product differentiation is one kind of differentiation, and obviously a very important one, but there is another kind. One that is equally important but often overlooked. We can think of these two types of differentiation (not very imaginatively) as type one and type two.
Type one differentiation occurs in a market where the several goods that compete with each other can be ranked, objectively, in performance and quality from highest to lowest. There is one product unarguably, indisputably ‘better’ than the others and should each product offered at the same price, the vast majority of customers would choose the ‘better’ one. This is the essence of product differentiation.
Type two differentiation occurs in a market where competing products are different in ways that cannot be objectively ranked. There is an element of customer preference, individual perception or personal taste that drives buyer behaviour. If both products were priced the same, some customers would choose one product and some would choose the other. Think of Pepsi v Coke.
This, of course, is a simplification. An aspect of today’s world that particularly annoys me is the frequency of simple solutions or binary options being offered as solutions to complex problems (yes, Brexit, I’m looking at you). So Whenever somebody states “there are only two types…” you know they are broadly generalising and vastly oversimplifying and this article is no exception.
In reality many products are better on some features and worse on others, and are typically offered at a range of prices. This creates conflicts and trade-offs as firms compete to promote the importance of those features they are stronger in and to downplay the importance of those features they are not so strong in. It gets messy. For the purposes of this discussion, though, which is about understanding the fundamental principles, let’s stick with (for now) the simplified view that differentiation can either be type one (objective) or type two (subjective).
As stated earlier, many businesses, especially in the B2B, technology and industrial sectors focus mainly on type one differentiation. They strive to make their products objectively and demonstrably better than the competition.
What they often overlook or ignore is the harder to measure, type two differentiation, such as awareness, availability, trust, liking, simplicity, credibility, authenticity, etc. These are just as important as the more tangible points of difference. In fact, when products are more or less the same (which is the case more often than not) they become more important.
This isn’t to suggest you should spend less time on traditional, type one differentiation. If anything, you should increase your efforts. You have no choice but to innovate and push the bar ever higher in terms of product performance and function. It does suggest, though, that more effort might need to put into analysing the more subjective, type two differentiation.
In practice simply adding type two differentiation to the existing analysis of type one differentiation is unsatisfactory. It leads to confusion and is prone to muddying the waters. A better way is to evaluate both types separately and then combine the results to give a more insightful output.
Calculate your relative performance against your competition, for both type one and type two differentiation, independently of each other. The detail on how you do this will be covered in a future article or video, but for now just stick with the principles. Essentially you need to break down each type of differentiation into its component parts and understand the relative importance your customer places on each component and how relatively strong (or weak) they see you in delivering it compared to your competition.
Once you have the results of the analysis, plot the output on a two dimensional matrix, with type one differentiation on the vertical axis, and type two on the horizontal. This will show your current position in one of four quadrants. If your customers judge you as being behind your competition on both dimensions then you are in the danger zone, if they see you as ahead on both, you are in the strong zone. Winning on just one dimension puts you in the weak zone. Once you understand where you are currently positioned, you create a specific action plan to either improve or consolidate your position.
Whether you choose to conduct a full blown analysis, create a working hypothesis or just spend a little time thinking of how your business or product is perceived by your customers, don’t focus exclusively on type one differentiation, you need to consider type two as well. Achieving robust and sustainable differentiation requires you to be differentiated objectively and subjectively. Both dimensions are important but remember this; type two differentiation lasts, type one doesn’t.