What is a differentiation strategy?

A differentiation strategy is the opposite of a cost strategy. Rather

than providing customers with the same product as the competition
but at a lower cost, the company provides a different product.
This approach involves either a more sophisticated product or a
simpler product. To successfully use a differentiation strategy, your
customers must feel the difference in price is acceptable whether
value has been added to or taken away from the product. The
problem is working out what that difference should be.

What is a differentiation strategy?

Determining the leading product
• For a given category of products, the leading product is the product consumers implicitly expect to see for
a given market at a given moment.
So the leading product for wine is generally a 750 ml bottle with a cork; and the leading product for breakfast
cereal is generally a 375 g packet.
• Two main factors determine a leading product:
-- its price
-- the value the customer attributes to it.

Differentiation strategies
With a leading product in mind, companies can obtain their competitive advantage in two ways.
• By designing a product of identical value to the leading product, but with a lower sale price—the cost strategy.
• Or by providing customers with a product which differs in both value and price from the leading product—the
differentiation strategy.
A differentiation strategy can be profitable only if it is accepted by the market. A true differentiation strategy is one
for which the product has differences other than pricing when compared with the leading product. The differences
must be perceived as such by a significant proportion of the market.

Differentiation: how and why?

Going upmarket
This is when you produce a higher-value product than the leading product, at a higher price.
Here is what makes a differentiation strategy successful:
• Increasing prices more than costs. An increase in value generally causes costs to rise. The increase must be offset
by an increase in price or higher volumes.
• The characteristics of the product or service (quality, performance and design) must be perceived as superior
to those of competing products or services. Customers must accept this implicitly by agreeing to pay a premium
to obtain those characteristics. Because of its superiority, an upmarket product also gives the buyer a feeling of
prestige: it becomes a status symbol.

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 A higher-value product
Value at a higher price.
“Upmarket” strategy

Value

Price Price

Going downmarket
This involves selling a product for which the perceived value is lower than that of competing products.
A downmarket strategy is essentially aimed at customers who cannot or will not buy a higher-value product.
To succeed, a downmarket strategy should:
• Involve products with a sufficiently lower price so as to justify the lower value. As an example, prices in hard-
discount retail outlets are seen by customers as being low enough to justify restricted choice and no service.
• Reduce costs more than prices. Cost differentials generated by a differentiation strategy should be beneficial to
the company.
There is a difference between a cost strategy and a downmarket strategy.
• A cost strategy maintains the level of value perceived by the customer, but reduces prices via a reduction in
costs.
• A downmarket strategy is founded on the simultaneous but non-symmetrical reduction of price and value.

Value

Cost
strategy

“Downmarket”
strategy
Value

Price Price

The alternative: low price/high value

• There is an alternative to sophistication and simplification: providing a value premium at a lower price.
• If done well, this alternative strategy can lead to a competitive advantage that competitors will find extremely
difficult to match.

The contents of this page are the property of CrossKnowledge.

2/
Any reproduction or representation for non-private use is strictly forbidden. 2