Per Michael Porter there are two ways to compete, by charging lower prices or by developing differentiated products and offerings. In this context product differentiation is the only way to avoid a race to the bottom.
What are Differentiated Products? Product differentiation is a company’s ability to effectively communicate to its target customer why its product is superior. Please see the video that follows for more detail. We have also included a list of examples just beneath the video player.
Examples of Differentiated Products:
- Chipotle: Became known for healthy fast food by marketing high quality ingredients.
- Dollar Shave Club: Separated itself from the competition with a direct-to-consumer model and hilarious advertising. It was the first subscription-based service in its space, which was otherwise dominated by giants.
- Porsche: Established itself as a premium sports car that could also be an everyday car. The company is associated with performance and quality, but the reliability separates it from high-end competition that requires considerable maintenance.
Per the video, product differentiation does not have to be sleek or sexy. Ideas that come immediately to mind are well established brands, but an article in The Economist argued that this could be applied to even the most mundane or commoditized products:
Philip Kotler gives the example of the brick industry, which is about as close to being a commodity business as is possible. Yet one company in the industry was able to differentiate itself by altering its method of delivering bricks. Instead of dumping them on the ground (and breaking several), it stacked them together on pallets and used a small crane to lift them off their truck. So successful was the firm with this method that before long it became standard industry practice. The firm then, of course, had to look for new ways of differentiating itself.