What’s it: Differentiated products refer to unique goods or services, made different from competitors’ products and have a different perceived value from other products. These products satisfy consumers in different ways and are imperfect substitutes for other products on the market.
Product differentiation is often subjective. It depends on the perception of each customer. Customers may have different judgments about the uniqueness and value of a product. For this reason, even if companies use the same marketing mix, customers are likely to have different perceptions.
Difference between differentiated products and homogeneous products
A homogeneous product is in contrast to a differentiated product. Two homogeneous products perfectly substitute each other and satisfy the consumer in exactly the same way.
For this reason, consumers have no reason to prefer or be loyal to one product over another. The only reason they buy is the price. If one producer increases the price, consumers will switch to competing products.
Homogeneous products arise under perfect competition. Consumers do not face switching costs and can easily switch to other products. That is the reason why, in this market structure, companies do not have market power.
Homogeneous products may also appear in oligopoly markets. Since there are few players and identical products, companies rely on pricing strategies to compete. Low prices are essential to attract customers, dominate the market, and generate high sales volume. If run successfully, the company can improve profits through higher economies of scale. Thus, the company can have a lower cost structure than its competitors.
Meanwhile, differentiated products arise in the imperfectly competitive market. The company offers uniqueness to attract consumers. It also acts as an imperfect substitute for other products.
Uniqueness varies between products. Some products are so unique that consumers are willing to pay a premium price. While others have relatively little uniqueness, for example, only through packaging.
Company goals for product differentiation
First, the purpose of product differentiation is to generate more profit. Differentiation makes products more attractive to consumers in target markets. For example, car manufacturers make high-speed cars to appeal to speed-loving consumers. That way, consumers are willing to pay a higher price.
Higher prices mean higher profit margins per unit. That, in turn, contributes to high net income.
Second, differentiation also aims to build loyalty. The company strives to make products unique and better than competitors’ products. That way, consumers have reasons to continue buying the company’s products.
If the company can maintain this advantage over time, it will lead to high customer loyalty. And, finally, loyal customers will continue to pour money into the company.
How to differentiate products
Companies differentiate their products from others in several ways. That is possible through tangible features and characteristics such as packaging and design. Or it is through intangible elements like branding.
The following are some examples of differentiation:
- Features and functions. For example, a product has better features because it can perform more functions than a competing product.
- Performance and durability. For example, a smartphone, it has a longer usage life. Also, the battery is more durable.
- Design. For example, a product has a minimalist, modern and lighter design.
- Location and distribution channels. Suppose a company sells a product near the customer’s location. That way, products are available when consumers need them without spending expensive efforts (such as time and transportation costs).
- Packaging. For example, the company uses recyclable packaging materials. It appeals to environmentally conscious customers.
- Branding. For example, the company matches its brand personality with customer personality in the target market. When the two matches, customers will be loyal.
- Product bundling. For example, the company sells two complementary products at a lower price.
- Customization. The company modifies the products according to the tastes of each customer.
- Customer service. Companies may offer a free after-sales service. Customers love it because they do not have to spend extra money.
Long story short, companies can differentiate products through a combination of marketing mix elements: product, price, promotion, and location. For example, suppose the functional aspects are relatively similar between products on the market. In that case, the company may highlight non-functional features (e.g., design or style) to differentiate its products from competitors’ products.
The options above contribute to influencing customer perception. If customers believe that the product is unique and provides higher satisfaction, they will consistently buy it.
Differentiated product advantages
First, it is a source of competitive advantage. In Porter’s generic strategy, differentiation strategy is one way to achieve a competitive advantage, in addition to cost leadership. Companies can apply in the primary market or market niche.
Second, profits are higher. Companies design uniqueness, so consumers are willing to pay a higher price. As a result, products have a higher margin per unit.
For total profit, we just need to multiply the margin per unit by the volume sold. Due to high margins, the higher the sales volume, the higher the company’s profits.
Third, customer loyalty is higher. Uniqueness makes consumers prefer products over competitors’ products. If the company can sustain it over time, consumers will continue to buy from the company. That means money will keep flowing in.
Fourth, demand is more inelastic. Customers are relatively less sensitive to price changes. So, companies can increase the selling price to increase profits without losing a lot of sales.