A Complete Guide To Product Differentiation

There is no doubt today that many products face a lot of competition. That’s why it’s more important than ever for teams to keep discovering ways to ensure their products are truly innovative. After all, it’s either they drive success or launch forgettable products because they look like something customers have seen before.

It’s a mistake to assume there are enough people in the world who will pay for your product, and I used to work for an organization filled with people who had this mindset. I’m a product manager who, in the past, failed to convince colleagues and leadership that the features in our eLearning product needed to be distinctly innovative in order to sell. In the process, my recommendations were overruled, only to see the product fail on the market.

Differentiation Is Proof Of The Product’s Unique Selling Proposition (USP)

I recall a time when we organized a product demo of our eLearning content onboarding capability for current and potential customers. The capability was designed to provide a structured way for users to enter content by helping them navigate the onboarding environment while supplying useful resources. As we demonstrated the features, customers expressed that while the user experience (UX) and visual design looked great–they didn’t see the innovation.

“This product does the same thing as many others I’ve used, so why should I switch? Based on what I’ve read in your unique selling proposition (USP), I’ve yet to see the innovations that make it possible.” a potential customer said. 

A USP is designed to describe what makes a product different and better than others. It’s also designed to describe how and why customers can benefit from using the product as opposed to others.

While we succeeded in crafting a compelling USP statement and created a visually appealing UX design–the product was still viewed as similar to others on the market. 

The product didn’t stand out, because as a team, we didn’t demonstrate how and why our product can offer something others couldn’t. We failed in implementing a winning product differentiation strategy.

What Is Product Differentiation?

Product differentiation is a strategy used to motivate customers to use a service regularly because they feel it meets their unique wants and needs, and as a result, it stands out among the competition.

Whether it’s the way the product is presented, or how it works for users, how much it costs, how it functions, how it feels, how it’s designed, how it fits your preferences, or the way we (product and marketing) talk about how customers use it—product differentiation is all about demonstrating how and why a product is the one that you the customer should use.

Why Is Product Differentiation Important?

As humans, we are a part of a group, but as individuals, when we shop around for products, we want to feel that the products we choose are perfect for our unique wants and needs. Product managers understand this feeling, and the way they respond is to build innovative products or “innovations”–which is to build things that show changes or improvements to services that exist, especially by introducing new or improved methods, ideas, or new products.

1. It helps you to create innovative products

In product development, differentiation is merely one way to generate innovations. For example–when the phone was invented, it was an innovation that showed a different way to communicate and send messages, but the device needed to be connected to wires while using it. When the wireless phone was invented, it was an innovation that showed a different way to communicate without the need of wires, but it couldn’t do anything else except make phone calls. When the iPhone was invented, it was an innovation that showed a different way to use a wireless phone, and provide access to the internet, e-mail, and access to services like file storage and music listening, all in one device.

All these innovations have differences that position them to provide unique services, and these differences are designed to show you, the customer, that a product fits your unique wants and needs. Differentiation is the catalyst that makes you decide that a particular product is the one you want, and it’s what contributes to building customer loyalty.

2. It builds customer loyalty

Regarding wants and needs, some customers care about price. Others care less about price but care more about quality of service. Others care about the quality of materials being used to make a product. Others care about being able to customize and choose options to find a desirable combination of all the before mentioned. Regardless of the combination, for customers it’s about finding the “best value” for the “best deal”, and the deals need to be consistent, for that is what leads to having a loyal customer.

Successful businesses understand the importance of this reality and analyze these unique behaviors in order to generate the right marketing and pricing differentiators, build innovative products, build customer loyalty, and ultimately gain a competitive market advantage.

3. It provides built-in resilience in the face of market changes

Differentiation is also a way for businesses to respond to market changes. For example, if a business sells a product that appeals to only one customer segment, and for unforeseen reasons, many customers in that segment lose interest in light of a competitor emerging on the market. As a result, business loses market share and is at risk of discontinuing the product line.

However, if the business applies a differentiation strategy by offering instead, different versions with less or more features at different price points, or, versions where customers can choose features for special rates-then the business can expand their service capabilities. The business becomes able to raise brand visibility and attract wider cross-sections of the target customer.

Differentiation can build resilience within a business and less of a dependency on winning in a monopolistic competition by providing a service that no other business has. By becoming a more resilient business, they can weather the storm in the event of losing market share and can adjust by addressing the underperforming variants.

Which Tactics Are Used to Differentiate Products?

These are tactics product managers explore when they are devising a unique selling proposition (USP) for their products. Although each tactic is focused on a facet of the product, each one presents endless opportunities for companies looking to connect with their customers.

Combined with seeking out opportunities to differentiate by examining products at competing businesses–decisions made based on the following tactics require good timing and attention to detail, because, when done right, the resulting differentiation strategy can be powerful:

• Quality of Services and Materials
• Service Design
• Price
• User Experience (UX)
• Packaging and Delivery
• Sharing Stories about the Product Design Processes
• Standard Features and Functionality
• Customization Plans to Select Optional Features
• Optimized Access to Customer Service
• Product Spin-offs
• Economy models, Standard models, and Premium models
• Catering Products to Specific Countries, Languages, and Cultures
• Bonus Features and Functionality
• Coupons
• Promotional Codes
• Special Third-Party Service Offers

In What Industries or Fields Is Product Differentiation Applicable? 

Perhaps the key benefit of a well-planned differentiation campaign is a well-orchestrated set of development, pricing, and marketing strategies designed to maximize visibility of products that are arguably similar to others.

Examples that benefit from product differentiation strategies can be found in companies that manufacture products such as (but are not limited to):

• Cereal
• Coffee
• Automobiles
• Clothing
• Footwear
• Hotels
• Travel Booking
• Music Streaming
• Computers
• Soft Drinks
• Software
• Smartphones, etc.

Companies that engage in releasing variants of products like these also contribute to the popularity of their brands in respective markets. This makes product differentiation planning an even more critical skill for product managers to develop because their respective brands are vying to control the greatest portion of their market by launching superior variants that customers love.

Coke versus Pepsi

For example, let’s take a look at two brands that have historically competed for the hearts and minds of soft drink lovers everywhere-Coke and Pepsi. Coke, according to beveragedaily.com, is still the most consumed soft drink in the world. Pepsi comes in second place. 

Branding, Marketing, Advertising, Packaging

Thanks to the strong campaigns in marketing, advertising, packaging, the unmistakable Coke logo and branding, and the high sugar and higher caffeine content-Coke remains superior. 

Even after the famous Pepsi Challenge, when according to Greenbook.org, it was revealed that Pepsi contained more sugar than Coke, and more challenge takers admitted that Pepsi tasted ‘sweeter’ than Coke-it did not remove Coke from its number one spot. Why is that? What really makes Coke that different from Pepsi? It apparently comes down to messaging and storytelling.

Messaging and Storytelling

Coke does a better job at positioning their brand and winning over the attention of more paying consumers. Coke’s product messaging is all about building relationships and drinking ‘happiness’ which appeals to families and more mature consumers, while Pepsi tends to focus on highlighting entertainment and sports in their advertising, which seems to appeal to a younger consumer base.

Both strategies are profitable in their own right, and by Coke being an older thus more established brand, perhaps that also gives them an edge in the market over Pepsi. Nevertheless, according to sources, Coke still wins.

Microsoft 365 versus Google Workspace

Let’s examine the world of software, particularly how Microsoft and Google approach differentiation regarding their productivity platforms, Microsoft 365 and Google Workspace. Both services are successful, and if you dive deeper into how they’ve established innovative offerings and adoption with their respective customers–certain common traits emerge: 

Both Microsoft and Google understand their own service capabilities 

In their own ways, Microsoft and Google focus on what they do best. Microsoft is dominant in the world of operating systems with Windows and desktop publishing applications with Microsoft Office. With the established success in these areas, they used that success to their advantage designing Microsoft 365 to integrate seamlessly with the Windows desktop environment.

This means that users can still work on their Office documents comfortably on the desktop/laptop devices, and have the option to upload and sync to the Microsoft 365 cloud environment. It’s a great example of taking something customers are familiar with and extending that capability to online services.

Google is a big player in the world of search technology and data management. Google has also proven to have a robust web browser, Google Chrome, while Microsoft managed to hold on in the browser market with Microsoft Edge, largely because Edge is included with Windows. 

Both understand their market advantages and disadvantages

While Google does not have a desktop operating system of its own, they leveraged the power of the internet in 2006, according to Engadget, to develop a document publishing environment that can run online. Not only did creating documents online become a reality–they also made it possible for users to collaborate online on the same documents. Microsoft did not respond to this innovation until four years later with Office 2010, Engadget reported.

The distinct advantage of Microsoft 365 over Google Workspace is that Microsoft Office applications can still be used without internet access, which makes it a reliable option for larger companies that most likely still use many of Microsoft’s products. However, Google Workspace is the more economical option. The subscription rates are cheaper, and it’s faster to set up for use, which makes it a better option for small businesses and startups.

Both have demonstrated via storytelling how to use what they are known for to get consumer attention.

Microsoft markets Microsoft 365 as a productivity service which includes “More than just apps like Word, Excel, PowerPoint,” according to the Microsoft website. It’s a clever approach because they use the products we are familiar with to attract consumers.

Google does something similar, except they mention communication apps such as Gmail and Google Meet to attract consumers. Both companies use the products they are widely known for to connect with consumers and sell comparable services.

Music Streaming Services

If there’s a differentiated service that makes it circumstantial in choosing the right one for you–it’s music streaming. There are a few things users consider when they choose a streaming service, such as the price, the app user interfaces (UI) the user experience (UX), whether it’s compatible with their devices, and whether they offer free access. 

But as streaming continues to grab the attention of more users, they are now influenced by not just which service they prefer–but also which ones their friends, family, and their social circles at large prefer. Yes, it’s true all the services offer free access in their own ways, but if customers and their chosen communities want full access to any streaming service, there are other differentiators companies use to attract customers, such as:

• Enhanced audio quality
• Volume of the music library
• Types of music collections that are available
• Number of artists that are featured
• Playlist sharing with other users
• Types of other audio content and features included
• Free and premium subscriptions
• Temporary subscription discounts
• Access to content with internet access (i.e. offline)
• Include streaming subscriptions with other third-party online services
• Access to lyrics and transcripts
• Access to select collections based on subscription level, etc.

With these differentiation techniques, streaming services will continue to work to discover the kinds of streaming experiences that are valuable for customers, especially in terms of what customers feel is convenient for their lifestyle, and what makes it possible for them to connect with like-minded people, family, and friends.

Who Is Involved in Product Differentiation?

For differentiation to work–customers need to get involved because they are your first priority. Focus on learning as much as possible about your customers’ desires and frustrations. When they discover your services, what do they want? What makes them feel satisfied? 

What problems do your customers have that nobody else has provided a solution for yet? Based on what you know about the market, what kinds of customer desires are not being met? Gathering answers to these questions is the first step towards building a differentiation strategy.

Product managers can play a pivotal role in establishing an effective strategy. Depending on the kind of company and products they make, in order for the strategy to truly work-product managers must access data via cross-functional collaboration with business areas including:

• Research and Development
• Consistent Branding
• Packaging
• Product Design
• Engineering
• Manufacturing
• Operations
• Information Technology
• Marketing
• Advertising
• Sales
• Distribution
• Customer Service
• Customer Success

Please ensure that you identify and include the right people from these areas that have the power to execute on the agreed upon strategy. More importantly, include the right stakeholders who have the power to stop execution–to ensure that you consult with them in regard to their concerns, the risks and how to mitigate them. The goal is to get stakeholder buy-in on the strategy as early as possible.

In collaboration with these business areas, it’s important to include in your differentiation strategy how the company will address and manage the following distinctions:

• Horizontal Differentiation
• Vertical Differentiation
• Mixed Differentiation
• Brand Variant Differentiation
• Brand (BX) and Customer Experiences (CX)

Horizontal Differentiation

Horizontal differentiation is when customers get to choose a product based on what they prefer. It doesn’t matter if there is factual data that says what is the best or the worst. Customers simply choose what they like. For example when it comes to hamburgers, whether you prefer Mcdonald’s, Wendy’s, or Five Guys, it’s all a matter of personal preference.

Products like hamburger meals tend to have the same features, like fries and a drink, and tend to fall in the same price range–so in cases like this, the decision would come down to which one you feel tastes the best.

Vertical Differentiation

Vertical differentiation is when we motivate customers to choose based on something that’s definitive to them, such as the best price, or best design or made with the best quality materials. Sometimes, customers choose based on the cheapest price or most affordable.

Regardless of how they make their choice, it’s driven by what they feel is valuable information designed to classify what’s best for their lifestyle. This means there will be cases when they consider something that’s a little more expensive, but it may be a healthier and better choice–such as organic foods over processed foods, or a luxury car over an economy car, or name-brand clothing over generic-brand clothing.

Mixed Differentiation

With mixed differentiation, which is a combination of horizontal and vertical differentiation-its for anticipating situations where customers need to choose a service based on more complex factors. 

Let’s say you’re in the market for a new smartphone. You’ve narrowed down your choices to two smartphones with similar service plans, offered by two different cell phone carriers, T-Mobile and Verizon.

Your next step would be to review all the features and prices based on decisions driven by mixed differentiation. Both carriers offer unlimited service plans with lots of internet data, robust speeds, and 5G access. 

You might prefer T-Mobile because you get more data for lower prices, but you might choose Verizon because as a customer you’ll get extra perks, like special subscription offers to video services like Netflix and Disney Plus.

Brand Variant Differentiation

For every product variant that’s created, each one shares a distinct brand and many of the resources behind it. For example–under the ‘Coke’ brand, you have Coke, Diet-Coke, Cherry Coke, Coke Zero, and the list goes on. For the Apple iPhone, you have iPhone 13, iPhone 13 mini, iPhone 13 Pro, iPhone Pro Max, iPhone SE, and it goes on.

That’s why as product managers when we proceed with a strategy for a new product variant, we must consider that we are also creating a variant of the brand itself; and for every brand variant that’s created, there are implications to consider, especially matters regarding access to source materials, experts, sales and distribution channels, funding, and most importantly–the impact on the overall brand.

Product managers need to work closely with brand management and marketing teams to ensure the brand positioning remains strong during the implementation of new differentiation initiatives. It’s because ideally, the business would like to ensure that variants are not competing against each other to the point where it negatively impacts sales objectives.

As a product manager, find out from your sales and marketing counterparts what they understand about customers in regard to the different variants. Find out what makes each variant stand out. Find out which are at risk of underperforming. Find out which variants if any have failed in the past, and the reasons why. Read the customer logs and interview transcripts they can provide so that you can extrapolate feedback patterns in the data. The answers and insights can help you to navigate pathways to success for existing and future variants.

Brand (BX) and Customer Experiences (CX)

Innovations in developing better differentiation techniques have revealed that businesses can discover ingenious ideas for attracting customers by leveraging the power of their brand (BX) and customer experiences (CX). 

Brand experience (BX) is all about the impressions, perceptions, thoughts, feelings, and responses you have when you interact or connect with a brand. Think of the BX as the moment where the selling experience begins (i.e. where the business begins selling to customers). 

Customer experience (CX) is all about how a person thinks, feels, understands and responds as they interact with a brand’s products, people and other services. The CX is where the customer shopping experience begins (i.e. where the customer notices the brand and wants to know more), and it ideally transforms into the customer buying experience in light of their purchase and satisfaction (customer is sold, then buys and uses the product).

To also distinguish between BX and CX, imagine the difference between how you feel about how a hotel looks when you hear its name, see its logo, pictures of the rooms, visit the website, read the reviews that’s the BX.

Now imagine how you feel about the hotel when you reserved the room online, when you arrived at the hotel and the concierge greeted you, when they checked you in, helped you with your bags to your room, provided towels, room service, wished you safe travels when you checked out of the hotel, and sent you a ‘thank you for your stay’ email message with the option to share your feedback that’s the CX.

BX and CX Present Opportunities for Differentiation

According to a Harvard Business Review (“HBR”) report, businesses today have the opportunity to differentiate their services from the moments when customers come in contact with their brand and explore using their offerings–to the moment when customers believe they no longer want or need the services.

Understanding the experience at any step in the customer journey presents companies the opportunity to explore ideas to design services and features that stand out. The next steps logically would be for product management to bring together the talents of other business areas to brainstorm, design, test, refine and build upon the right ideas for product variants.

“The task then becomes selecting from among this wealth of possibilities; considering how each idea meshes with a company’s particular skills, assets, and systems; and focusing only on those that can generate a competitive [market] advantage,” wrote Harvard Business Review (“HBR”).

Equilibrium between Public Relations and Customer Service

Differentiating products and services can also contribute to an equilibrium between the business itself and its public relations activities–and the specific customer support provided regarding the products they sell. In other words–businesses can better balance management of the customer and public perception of the business itself–with the customer perception of the products and services as they see fit.

Amazon.com for example, offers to partner sellers a “Seller Fulfilled Prime” program which is designed to help them differentiate themselves from other partner sellers who don’t sell products that are “Prime-Eligible”. When a partner seller is Prime-Eligible, Amazon offers a differentiated brand by allowing them to display the “Prime” badge on their products. 

Amazon customers are more inclined to buy Prime products, because the products are guaranteed faster delivery according to Amazon policies. To ensure a consistent experience for buyers, Prime-Eligible sellers must, “agree to all shipping, returns, and customer service requirements applicable to Prime products,” according to the Amazon Seller Central website. 

Not only does the policy serve as a catalyst for sellers to make more money by being Prime-Eligible, it also ensures the Amazon brand is protected from liability in the event that a Prime-Eligible seller fails to maintain their part of the agreement. If a seller doesn’t live up to the Amazon Prime guarantee, it won’t be Amazon’s fault, but the fault of the partner seller. Amazon will then connect with the customer to ensure their issue is resolved, and the customer will view Amazon as the business that places a premium on quality customer service.

Prioritizing Ideas on the Product Roadmap

As you collaborate with other business areas to identify viable differentiation stratagems, as a product manager you can recommend where these ideas and opportunities can be included in your product roadmap. When presenting your recommendations, use your storytelling skills to articulate the following:

• Recap the relevant roadmap objectives and how the recommendations contribute to achieving them
• Describe for your designers and/or engineers the ‘Definition of Done’ for the recommended features and services you want in your variants to ensure buy-in
• With your recommendations, don’t strive to define the perfect set of differentiated features or services, instead
• Define just enough for a review of the variant concept among stakeholders, in order to get buy-in, and, to make decisions for how and when to execute on the recommendations in the roadmap
• Highlight when which business areas need to be consulted when respective differentiation activities are being carried out
• Highlight which distribution channels will be impacted and require enhanced support
• Take note of any implications and risks that could impact the product variants to ensure adequate responses and support are provided
• Ensure that quality assurance and testing is happening as often as possible
• Ensure that sales and customer services have access to experts and knowledge bases in order to provide customer support for product variant releases
• Collect feedback as early as possible by arranging user interviews and focus groups
• Create and/or update personas for customer segments as early and as often as needed
• Highlight the metrics and customer segments the recommendations will impact
• Define how to track the progress of the recommendations and report to stakeholders

Differentiate—but Don’t Differentiate Too Much

No matter the market category–keep in mind that as you’re building that new variant, do not exclude key elements that make it feel familiar to customers. While being distinctly unique is the objective, you have to balance it with including features that customers understand.

This is why products like Google Docs and Microsoft Word have familiar menu labels such as “File, New, Open, Edit, View, Insert, etc”. The respective navigation structures may be designed differently, but many of the labels are familiar and make it quicker for users to understand how the products work. Differentiation is about being like the competition while being distinctly more attractive than the competition.

Discover Your Real Customers via Differentiation

Product managers today are in a great position to coordinate the differentiation strategy between business areas and the executive team. Through this exchange, the company overall grows their understanding of market competition, and learns about the sales, marketing, and customer adoption trends.

The more your business learns about who is buying products, the more they can learn about why the customers buy them, and find out how to differentiate-by creating more products based on what they want. That’s ultimately why building a differentiated product is a powerful way to find the real customers who actually love your services.

Take a Look at Products You Love

Let’s take a look at the products you use regularly. Have you ever wondered about what kind of differentiation strategy they used in order for the product to capture your attention? When you chose the product, was it because of the price, the features, the higher quality, or the design, or how it worked for you, or did the product come with a special offer, or all of the above-or perhaps something else?

As a product manager, have you witnessed examples of how product differentiation strategies worked well in companies? If yes, did they use other tactics that we didn’t mention? If yes, let us know in the comments, and please don’t forget to subscribe to our Product Manager newsletter for more stories, insights and guides.