What Is a Parity Product?
A parity product is a brand of good that has enough similarities with other brands of the same good type that it can easily be substituted. A parity product is functionally equivalent to a product offered by a competitor. The existence of parity products means that a monopoly does not exist. Many common household goods, from aluminum foil to spatulas to detergent would be considered parity products.
Examples of parity products include common household items, such as tape, silverware, toothpaste, peanut butter, and contact lens solution.
Understanding Parity Products
A business selling a parity product will in most cases be unable to command premium pricing for it, because of the substitution effect. If the business raises its price while competitors do not raise theirs, consumers will buy less of its product and instead purchase the competing parity products.
In this sense, the cross elasticity of demand for the competing goods will be positive, since an increase in the price of one brand's product will result in an increase in demand for another brand's product. This is because a parity product is a broad product that many companies make, and because of the products' similarities across different manufacturers, they can be used interchangeably. Substitution is possible because each product has similar functions, ingredients, or both.
The existence of parity products reduces the chances of monopolization while keeping prices low across the product category. The battle for sales thus comes down to marketing and branding strategies that are designed to elevate a company's product over the competition. Sometimes, this is the only way to create differentiation among parity products, though such strategies can be very successful depending on how well they're executed.
Points of parity refer to those elements which are mandatory for a brand to be considered a legitimate competitor in a specific product category. They are the elements that make consumers consider buying your brand, along with those of your competitors. By contrast, points of differentiation are the attributes that make your brand unique and distinctive from your competitors. Points of differentiation are your competitive advantage.
If a company is to successfully employ a brand or marketing strategy to grab a larger share of a parity product market, the first order of business is to address the points of parity—i.e., places where you need to show you are as good as your competitors (not necessarily better). This is necessary, so you can first level the playing field between your product and the competing parity products.
Once that has been accomplished, the next step is to highlight areas that make a product unique compared to the competition.
- A parity product is more or less equivalent to a similar product offered by a competitor and can thus be easily substituted.
- Producers of parity products have little leeway in terms of premium pricing; raise your prices too much and consumers will just buy your competitor's similar product.
- However, these producers can benefit from a competitor's decision to modestly lift prices, as it will lift the product's price point across the board.
- In order to compete in this kind of environment, a company must show that its product is as good as its competitors, as well as more unique.
Example Parity Product
A good example of how companies have differentiated themselves from competitive parity products can be found in the cell phone industry, specifically in the smartphone wars between Apple and Samsung.
While both Apple and Samsung smartphones offer most of the same features and benefits, one of Apple's points of differentiation is their phone design and the usability of the iOS operating system. Samsung, meanwhile, has made a point to elevate their points of differentiation, which have lately been higher performance components, such as a higher performance camera.