Differentiation Strategy Definition
Differentiation strategy involves providing a better product or service at attractive premium pricing. Distinct from a low-cost strategy, product differentiation actually incurs greater unit cost in delivering a sustainably unique product feature or brand where customers are loyally willing to pay up again and again.
Differentiation, properly executed, endures longer than a low-cost strategy, especially when rivals cannot duplicate the company’s product, process, or brand value. While cost leadership typically exploits market-share efficiencies and economies of scale, effective differentiation can secure profits both in select niches or in saturated, industry-wide markets regardless of size. When applied, the differentiation mantra is: make it better, and charge more.
Differentiation Strategy Examples
“Better ingredients. Better pizza. Papa John’s!” For a number of years, Papa John’s (PJ) had been able to successfully charge a few dollars more per pizza for premium ingredients and recipe. Recently, however, Domino’s and Pizza Hut have been able to improve taste while trimming unit costs another dollar or two.
PJ may have to re-differentiate and/or reprice toward a better value proposition for pizza eaters who do not wish to pay several extra dollars for PJ (it’s not that good).
Proprietary methods and equipment can form a differentiation strategy. Ruth’s Chris Steak House uses custom-built ovens highly automated for exact control of time and 3D temperature-level distribution. These ovens are not available for sale and are very expensive to construct. Well-heeled diners are willing to pay a huge premium for Ruth’s Chris entrees.
A more subtle, psychological form of differentiation involves portraying a product brand in association with positive imagery and status. Ads featuring attractive young people on the beach with a premium beverage in hand invite consumers to join the party. Business history has shown image differentiation to be effective in commanding a higher price. Consumers pay up for a brand image. Even when effective, though, advertising may not prove difficult for rivals to clone, and commercials need frequent refreshing.
Domino’s and Pizza Hut have been able to make it better and charge a bit less! This a hybrid approach, one formerly thought to be a contradiction in focus since upgrades in quality often raise production costs. The concept here is not lowest cost or best quality, but best quality per cost. The lesson? Agile forms of multidimensional strategy that include differentiation in quality, process and brand seem indispensable in today’s arena of evolving customer tastes. Rather than survival of the fittest, fattest or fastest, business success may well hinge on survival of companies flexible in strategic direction.