The differentiation trap

Marketing professionals, including this author, will advise firms to differentiate their offers to meet the needs of particular target customer groups.  This is the strategy of most household brands who will produce goods and services to meet the needs of different customers.  For instance, a supermarket chain will produce basic goods at discounted prices and they will produce premier goods such as Tesco’s finest range.  They will differentiate their offer to capture as many demographic groups as the can.

Differentiation is, after all, one of Porter’s generic marketing strategies.

Niche marketing is also one of Porter’s generic strategies and it his favoured option for small firms who may lack the resources required to undertake a differentiated strategy and who require higher margins than those available to firms offering a cost focus strategy.

If you are following a niche strategy, it is even more important to segment your market and to identify your niche customer.  A niche product, by its very nature, is different from those aimed at the mass market.  A niche product is different to those provided by potential competitors.  Differentiation is the practice of being different.

However, creating difference should not be viewed in terms of internal brand strengths.  Difference is created by finding out what the market thinks.

Too many firms believe all they need to do to be different is to put a name or logo on a product.  Their offering is otherwise undifferentiated from those of competitors.  To truly differentiate, you must create difference not only in terms of your offer but also in relation to the benefits perceived by your target customers.

The Chartered Institute of Marketing carried out research in 2003.  It found that:

  1.  97% of CEOs believed their priority was to create long-term value for their shareholders.
  2. There were two ways that value could be created; by cost advantage, and; by superior differentiation that supports a price premium.
  3. On average, differentiation was three times more influential than cost advantage in creating value.
  4. Differentiation provides three times the payback for the same (but differently directed) effort.

So what makes a good differentiated brand?

In his book Strategic Marketing, Paul Fifield describes four forms of differentiation based on the relevance of the differentiation to consumers and the level of differentiation from the market average.

You can make your offer different in two ways:

  1. Differentiated: Your products are different to those of your competitors in the minds of consumers. Those differences must be offered in terms consumers understand (not just clever technology they don’t understand). There is also the concept of substituted competition where a solution to a consumer’s problem can be found by radically different technologies. For example, I can choose to travel to London by rail, in my car or by bus. My family who live in Scotland have a further option, they can go to the airport and take a plane.
  2. Relevance: Your offer must be relevant to the needs and wants of consumers.  Technology of scientific knowledge is unlikely to be enough.

This provides four potential options:

  1.  Hygienes: These are products where differentiation is of high relevance to consumers but the product offered has low differentiation from others in the market.  The product features offered are important to customers but all suppliers in the market offer those features.
  2. Neutrals:  These products are in the market but their differentiated features are irrelevant to the consumer.
  3. Drivers: These products have differentiated features from those of competitors which are highly desirable to the targeted consumer group.
  4. Fool’s Gold: These products have highly differentiated features but those features do not drive target customers to the brand.

As you can see being different isn’t enough.  Too many brands fall into the fool’s gold category.  You must be different in ways which are valued by the target consumer.

Ideally, you want your products to be drivers.  These provide the real money!

Increasingly, the mass market is dead.  In fact many marketers no longer talk of differentiation into defined groups but of personalised goods and services targeted at individual consumers.  This is moving away from same, towards different and aspiring to be unique.  The further you move away from same, the more differentiated value you need to include.  Differentiation strategies are the practice of choosing segments where you know what consumers value and what they do not.

Differentiation is knowing where your customers see most value.  You need to differentiate to support the needs of the chosen segment and in the market position you want to own.

To differentiate you need to know where your competition sit in the market.  You need to undertake research and perceptual mapping to identify gaps in the market.  You also have to calculate the market value of those gaps.  They must be sustainable and produce sufficient earnings.

You need to understand where your offer is most and least credible.  There is no point adding features or aspects to a product if your target consumers do not see value in them.

You may need to differentiate into a market position that you can most easily maintain.  For instance, following the cataclysmic casino banking strategy introduced by Fred Goodwin, Royal bank of Scotland is retreating to the position of being a retail bank, its core competency.  Shifting to a new market position may be so costly it can destroy a firm.  Take the specialist retailer Maplin.  Its management have blamed the rising cost of raw materials but part of that firm’s failure may be its attempt to move its specialist products into prominent high street locations (at a time when most other specialist retailers have gone online).

You must defend your position where differentiation is most easily achieved.  This can be through the use of intellectual property such as trademarks, copyright and patents.  If your product is easily copied your differentiated advantage may not last very long.  Take couture fashion.  Within days of new designs appearing on the catwalk, features of those designs will begin to appear in high street fashion chains such as H&M.  The couture brands differential advantage will be eroded.

You must also protect against technological leapfrog.  This is where there are opportunities for differentiation through new technology which falls outside your expertise.  Kodak persevered in the 35mm film camera market and ignored the rise of digital camera technology.  The result, Kodak filed for bankruptcy protection.

For many years, I was responsible for the inspection of farm diversification businesses.  Amongst the most popular diversification was jam making.  Every farmer’s wife believed her jam was the best, after all it had won a prize at the Women’s Institute meeting and friends said good things about it.

The problem was that every farmer’s wife wanted to market their jams in the same way.  They were all competing in the same market segment and offering the same differentiations. The result was a market niche overflowing with homemade farmhouse jam where all products were undistinguishable and few of these businesses survived in the long-term or generated sufficient earnings.