Differentiation strategy

economic-dictionary

A differentiation strategy is a strategy used by a company that seeks to produce and sell products that are perceived as unique and original, that are difficult to imitate and that allow it to achieve a competitive advantage through differentiation from the competition.

Indeed, when a company uses the differentiation strategy, it makes its customers perceive its products as unique and exclusive. This situation gives it a great advantage, because customers will be willing to pay high prices for these products that are perceived as something that offers them superior value.

As a consequence, companies can differentiate their products by their quality and their exclusive design. But also because of the incorporated technology or the service they provide, among some of the factors that can be mentioned.

Similarly, for this strategy to be profitable, the company must try not to increase its costs unnecessarily. Since even though you can charge higher prices, the set price should not exceed what the customer is willing to pay.

Important points of the differentiation strategy

Of course, when a company applies the differentiation strategy it must consider the following points:

  • The company has to give more value to its customers, but this could lead to higher costs.
  • Differentiation gives you a superior advantage, but you cannot have high market share. Since this product targets specific segments.
  • The company has to invest a lot of money in research and development. To give your products an exclusive design, optimal quality conditions and also excellent customer service.

Advantages of applying a differentiation strategy

The main advantages that a company obtains when implementing a differentiation strategy are:

  • Brand loyalty is generated among its customers, who, when they are satisfied with the products, carry out a continuous repurchase process.
  • The product can be sold at a higher price than the competition. This, since customers are willing to pay the high price, in exchange for the benefits received.
  • It can create a barrier against competition, due to the differentiation and loyalty that is achieved within the market in which it competes.

Disadvantages of applying a differentiation strategy

The most important disadvantages of using a differentiation strategy are:

  • The perception that the product is unique and exclusive cannot be maintained for long, because competitors always emerge with other improved and innovated products.
  • There are many copycats on the market, who are looking to make cheaper copies of these original products.
  • They have to incur high costs, which could sometimes cause the customer to no longer be willing to pay such high prices. This makes the company unprofitable.

Finally, a company will be able to maintain its differentiation in the market by making use of innovation in both its production and marketing processes, which allows it to give its customers a superior product and service compared to that offered by the competition. The type of customer that this strategy is aimed at is a customer who is not sensitive to price, but who greatly appreciates the added value of the product and service they acquire in the market. The company makes a profit not because of the volume of market share, but because of the high price it can charge.

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