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What is 'Product Differentiation'

Product differentiation is a marketing process that showcases the differences between products. Differentiation looks to make a product more attractive by contrasting its unique qualities with other competing products. Successful product differentiation creates a competitive advantage for the product's seller, as customers view these products as being unique or superior.

BREAKING DOWN 'Product Differentiation'

Product differentiation can be as simple as packaging the goods in a creative way, or as elaborate as incorporating new functional features. Sometimes differentiation does not involve changing the product at all, but creating a new advertising campaign or other sales promotions instead.

Product differentiation determines what sets one product apart from other similar products, and it uses that difference to drive consumer interest. Product differentiation is often subjective, aiming primarily at altering customer perspective on one item when compared to another, even if the actual differences are minuscule or entirely aesthetic. Ideally, it demonstrates that the product cannot only do everything the competitor items can, but that there is an additional benefit, such as additional features, higher overall quality or a lower cost.

Lower Costs As a Differentiating Factor

Lower costs can relate to the initial purchase price or any operating and upkeep costs associated with the item. For example, if Company X produces a coffee maker with the same features as Company Y, Company X may choose to offer a lower selling price for its coffee maker to differentiate it from the competitor. If the accessories or disposable parts of Company X’s offering cost less than Company Y’s, that can differentiate between the two products.

Non-Functional Product Differentiation

When functional aspects of two products are identical, other non-functional features can be highlighted. This can be a simple as a change in design or styling, such as the product's color. At times, the most effective way to make one product stand out from another is with unique advertising. In that regard, it may be possible to differentiate one brand from another when no discernible differences in the products actually exist.

Effect of Product Differentiation

Aside from bringing in consumer interest, product differentiation may increase brand loyalty and even allow for a higher price point. If a product is perceived to be better than a competitors, whether that belief is based on fact or more speculative means, it may encourage consumers to purchase the brand due to its image. Certain images may even allow for a higher selling price if the item is seen as highly desirable.

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