Loading the player...

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.

Examples of Product Differentiation

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.

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.

RELATED TERMS
  1. Basis Differential

    Basis Differential is the difference between the spot price of ...
  2. Quality Spread Differential (QSD)

    Quality spread differential (QSD) is used to calculate the difference ...
  3. Marketing

    Marketing refers to the activities of a company associated with ...
  4. Liquidation Differential

    The liquidation differential is the loss in value of an asset ...
  5. Product Family

    A product family is a group of related goods manufactured by ...
  6. Comparative Advertising

    Comparative advertising is a marketing strategy in which a company's ...
Related Articles
  1. Small Business

    Value chain analysis: The basics

    Value chain analysis establishes an action plan to understand and implement activities that create values to a firm's clients, resulting in firm profits.
  2. Tech

    Why It’s Probably Too Late to Start a Robo-Advisor

    Those looking to launch a robo-advisor face tough competition from a growing number of established startups and blue-chip financial services firms.
  3. Small Business

    3 secrets of successful companies

    Make smart investments by using these three secrets to spot up-and-coming companies to invest in before they become household names.
  4. Insights

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  5. Insights

    Warren Buffett's Moat: How Sustainable Is Trader Joe's Competitive Advantage?

    Understand the factors that have led to retail grocer Trader Joe's competitive advantage over some of its notable competitors, including Whole Foods.
  6. Trading

    Forex: Identifying Trending And Range-Bound Currencies

    Gain a trading edge by learning how macroeconomic forces play out differently for various pairs in the forex market.
  7. Trading

    An Introduction to Structured Products

    Use structured products to bring the benefits of derivatives into your traditional investment portfolio.
  8. Personal Finance

    Lead The Charge With Product Development

    Product development is having a huge impact in the field of finical services. Learn about it here.
  9. Investing

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
RELATED FAQS
  1. What is the difference between product differentiation and price discrimination?

    Learn about product differentiation and price discrimination, how the two strategies are used in marketing and economics, ... Read Answer >>
  2. What strategies do companies use to regain market share they have lost?

    Learn about the three simplest ways companies can regain lost market share: pricing changes, promotional changes and product ... Read Answer >>
  3. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
  4. What is the difference between cost and price?

    Cost is typically the expense incurred for a product or service being sold by a company. Price is the amount a customer is ... Read Answer >>
  5. What's the difference between a commodity and a product?

    Understand the difference between commodities and products, and learn how they are connected to each other and to market ... Read Answer >>
  6. What are the benefits of R&D (research and development)?

    Learn about the many benefits of research and development (R&D) efforts for companies in competitive markets, including the ... Read Answer >>
Trading Center