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Why differentiation in business matters

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Last editedAug 20203 min read

In business, blending in with the crowd should be the last thing on your agenda. Within a highly competitive market, your organization needs to make an impression. That’s why differentiation in business is vital.

Find out more about differentiation strategies in business with our comprehensive guide. First off, let’s explore the definition of differentiation in business.

Definition of differentiation in business

Essentially, differentiation in business refers to the principle of setting your company apart from the competition through a specific element, such as your distribution network or price-point. It provides a superior level of value to your customers and helps your company to distinguish itself in the marketplace. As such, the main aim of any differentiation strategy is to increase your business’s competitive advantage.

The importance of differentiation in business

The importance of differentiation in business is clear – it helps companies develop unique niches within competitive industries or markets, thereby enabling them to thrive. Many business owners try to create companies that mean all things to all men, but that’s a largely impossible aim. Instead, creating a more focused path for your business can be extremely beneficial, providing several distinct advantages:

  • Compete without lowering prices – Differentiation strategies in business can give you a way to compete against other firms without getting into a price war. Whether you’re making a commitment to ethical business practices or focusing on high-quality products that are built to last, you’ll have a USP that other companies won’t that doesn’t simply involve lowering your prices until you’re dealing with unsustainable, razor-thin margins.

  • Develop unique products – In addition, differentiation in business can help you build a unique product/service, even if there isn’t much to distinguish your products from your competitors. For example, bottled water companies (which largely produce the same product), can distinguish themselves from the competition and develop brand loyalists through differentiation strategies, such as focusing on a lower price-point, advertising the fact that the business is family owned, and so on.

  • Increase customer loyalty – The importance of differentiation in business also extends to customer loyalty. By improving the perceived quality of your products, you can increase brand loyalty even at a higher price-point, which can help your business to prosper.

Bottom line – focusing on a specific niche within your industry can help propel you to the next stage of growth, helping to make your brand stand out and deliver value-added service to customers.

Top 5 differentiation strategies in business

When it comes to the application of differentiation in business, you need a solid game plan. From price to product, image to distribution, there are many differentiation strategies in business to explore. Look at these options to find one that’s right for your company:

Price differentiation

For many businesses, the first port-of-call is price differentiation. When you differentiate by price, you’ll split up your potential customers into segments and maximize your potential revenue by offering each segment a differentiated product/service at a different price-point. While price differentiation can be effective and recognizes the fact that the value of goods is largely subjective, it can mean that you’ll need to reduce prices.

Product differentiation

Another popular differentiation strategy in business is product differentiation. This is probably the most visible form of differentiation as it revolves around both actual and perceived differences in your products compared to the competition, such as features, performance, aesthetics, and so on. However, product differentiation tends to be short-lived and innovations are relatively easy to duplicate.

Distribution differentiation

The application of differentiation in business can also extend to your channels of distribution. By offering greater coverage or availability, your business can become the de-facto choice for customers within your industry. In addition, improving your distribution is a time-staking process and it can be intensely difficult for your competitors to duplicate this level of differentiation, meaning that it may be more effective than standard forms of product differentiation. 

Image differentiation

Next, there’s image or reputational differentiation. Simply put, this refers to the practice of making your brand stand for something in the mind of your customers, from ethical buying processes to community outreach. A great example of this sort of differentiation in business is the Dove Campaign for Real Beauty, which has helped to associate a multinational personal care brand with social justice and body image campaigns in the eyes of many consumers around the world.

Relationship differentiation

One final form of differentiation in business is relationship differentiation, a description of the process whereby your company sets itself apart through its reliability, responsiveness, credibility, and so on.

As you can see, there are numerous ways to differentiate your business from the competition. Work out what you want to be known for and research your target audience before deciding which of these differentiation strategies in business is best suited to your company.

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