A Simple Primer on Product Differentiation
Introduction
This simple primer reviews the product differentiation concept, according to the Blackblot PMTK Methdology™.
Product Differentiation Theory
The theory of product differentiation emerged in the early 1930s to explain why certain customer segments prefer one product over the other.
The idea was that a successful product may have specific features or characteristics not found in competing products or alternatives that appeal to a particular group of customers.
Identifying those specific features is useful, particularly for product planning and marketing activities.
The theory of product differentiation was initially related to marketing and economics and encompassed all direct and indirect factors relating to the product.
Direct factors are primarily product functionality, material characteristics, and performance.
Indirect factors are peripheral to the product itself and include price, distribution, warranty, guarantee, availability (location), origin (country of manufacture), service and support, suggested quality, and perceived value.
Product Differentiation in PMTK
From a product management perspective, and according to the Blackblot PMTK Methdology™, Product Differentiation is a three-phase process for designating a product's distinctive features or material characteristics over its alternatives:
- Product Differences —outlining how the product is different from the competition.
- Competitive Advantage — identifying how the product is different from the competition and doing something better.
- Unique Selling Proposition (USP) — establishing how the product is different from the competition and doing something better that cannot be copied.
Companies begin by outlining Product Differences (how the product is different), identifying a Competitive Advantage (the product is different and doing something better), and, lastly, establishing a Unique Selling Proposition (USP) (the product is different and doing something better that cannot be replicated).
At each phase, the product's distinctive features or material characteristics present different meanings.
Product Differentiation in PMTK is a process, not a tactic or strategy, that only addresses a product's direct factors (e.g., a product's features and material characteristics).
The product's indirect factors (price, distribution, warranty, guarantee, etc.) are business-related and thus do not contribute to the product differentiation process.
Product Differences
Product Differences are a state, an objective condition, in which a product presents distinct features (capabilities) or material characteristics over its alternatives.
Product differences only mean that the product is unalike in some way/s from other products.
Product differences do not mean that the difference in the product is somehow better, unique, beneficial, or desired.
For example, a soft drink that is excessively sweet can be only that.
The ultra sweetness is not necessarily better, may not be profoundly distant from other beverages, is not necessarily beneficial health-wise, and may not be desired by customers.
Accordingly, product differences only indicate a dissimilarity.
The dissimilarity is not necessarily better, markedly unique, useful, or of value.
Outlining Product Differences is the first phase in the Product Differentiation process.
The next phase, and a step above Product Differences, is identifying a Competitive Advantage.
Competitive Advantage
Competitive Advantage is a state in which the customer perceives or is aware (after being presented with proof) that the product is different and doing something better than the competition.
In lay terms, the product possesses all the capabilities of its competitors and offers an exclusive advantage over the alternatives.
For example, a passenger car equipped with multiple airbags would be deemed safer for the occupants in the event of a collision, more so than a passenger car equipped with only one or two airbags.
However, a competitive advantage is not necessarily sustainable.
A competitive advantage could be temporary and lost if the competition is able to offer the same capabilities.
Identifying a Competitive Advantage is the second phase in the Product Differentiation process.
The next phase, and a step above Competitive Advantage, is establishing a Unique Selling Proposition (USP).
Unique Selling Proposition (USP)
The Unique Selling Proposition (USP) describes a sustainable competitive advantage that embodies value to customers.
This means that the competitive advantage is beneficial or desired and unique, such that the competition either cannot or does not offer it.
The USP is the ultimate manifestation of product differentiation, which is represented as a sustainable competitive advantage.
For example, electric vehicles made by Tesla, a US-based automotive manufacturer, arguably offer a USP in terms of shorter charging times and longer driving ranges.
The USP helps customers easily and definitively comprehend that the product would benefit them and is conceivably better than the competition's product.
A buyer's knowledge of a product's USP will influence their purchasing decisions, increase brand awareness, and build brand loyalty.
The existence of a product USP creates a notion of value and superiority, which justifies a company's asking for more money and pricing the product higher.
Establishing a Unique Selling Proposition (USP) is the third and last phase in the Product Differentiation process.
Lack of USP
The existence of a Unique Selling Proposition (USP) is critical to a product's marketplace success.
Not having a product USP can be detrimental.
Through market dynamics, competing products without a USP will eventually converge to the same feature set and price points.
This means no price or feature differentiation among the competing products.
Price Wars are continuous retaliatory price reductions to reach a price point that drives competitors out of the market.
Products that lack a USP are known as Commodities and will be subject to price wars, a problematic situation for vendors to compete in.
External and Internal Product Differentiation
In PMTK, the Product Differentiation process is applied externally and internally.
The external application of the Product Differentiation process is relative to other companies' competing products.
The internal application of the Product Differentiation process is relative to the product's diversified offering, e.g., Lite, Standard, Professional, and Enterprise versions.
The internal application of the Product Differentiation process on a product's diversified offering is meant to create a set of similar products but with substantive product differences.
The outcome of an internal Product Differentiation process is a set of somewhat similar products, where each product presents a progressive feature set and prices that appeal to discrete market segments.
Conducting an internal Product Differentiation process is also meant to facilitate clear and differentiated marketing initiatives, reduce market confusion, and prevent product sales cannibalization.
Summary
The objective of the Product Differentiation process is to make the product stand out and apart by highlighting its differentiating qualities, resulting in increased sales and market share.
This simple primer reviews the product differentiation concept, according to the Blackblot PMTK Methdology™.