Differentiated Products: Purpose, How it Works and Benefits

By | Januari 11, 2022

What: Product differentiated ( differentiated products ) refers to goods or services unique, made apart from the competition and have a different perception of value with other products. The product satisfies consumers in a different way and is an imperfect substitute 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 will likely have different perceptions.

The difference between a differentiated product and a homogeneous product

Differentiated products contrast with homogeneous products. Two homogeneous products perfectly substitute for each other and satisfy consumers 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 raises the price, consumers will switch to a competitor’s product.

Homogeneous products appear under perfect competition. Consumers do not face switching costs so they can easily switch to other products. That is one of the reasons why in this market structure, companies do not have market power.

Homogeneous products may also appear in oligopoly markets. Because there are few players in the market and identical products, companies rely on pricing strategies to compete. Low prices are important to attract customers, dominate the market and generate high sales volume. If successful, the company can improve profits through higher economies of scale. Thus, the company can have a lower cost structure than competitors. 

Meanwhile, differentiated products are present in imperfectly competitive markets. 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 limited uniqueness, for example only through packaging.

The company’s goal is to differentiate products

First , the purpose of product differentiation is to generate more profit. Differentiation makes the product more attractive to consumers in the target market. 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 ultimately contributes to a high net profit.

Second , differentiation also aims to build loyalty. Companies try to make products unique and better than competitors’ products. That way, consumers have a reason to continue to buy the company’s products.

If the company is able to maintain these advantages 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

The company differentiates its products from others in several ways. That is possible through tangible features and characteristics such as packaging and design. Or, it’s 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 competitor’s product.
  • Performance and reliability . For example for a smartphone, it has a longer service life. In addition, the battery is also more durable.
  • design . For example, the product has a minimalist, modern and lighter design.
  • Location and distribution channels . For example, the company sells products near the customer’s location. That way, the product is available when consumers need it without incurring expensive efforts (such as time and transportation costs).
  • Packaging. For example, the company uses recyclable packaging materials. It appeals to environmentally conscious customers.
  • Branding ( branding ). For example, the company matches the personality of the brand with the personality of the customer in the target market. When the two match, they will be loyal. 
  • Product Bundles . For example, the company sells two complementary products at a lower price.
  • Customization. The company modifies the product according to the tastes of each customer.
  • Customer service . The company may offer free after-sales service. Customers love it because they don’t 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, if the functional aspects are relatively similar between products in the market, the company can highlight non-functional features (eg design or style) to differentiate its product from competitors’ products.

The above options contribute to influencing customer perception. If customers believe that a product is unique and provides higher satisfaction, they will consistently buy it.

Differentiated product advantage

First , sources of competitive advantage. In Porter’s generic strategy, differentiation strategy is one way to achieve competitive advantage, in addition to cost leadership. Companies can apply it in the main market or niche market. 

Second , higher profits. Companies design uniqueness so that consumers are willing to pay a higher price. As a result, the company enjoys higher margins per unit. 

For the total profit, we just multiply the margin per unit by the volume sold. Due to the high margin, the higher the sales volume, the higher the company’s profit.

Third , higher customer loyalty. Uniqueness makes consumers prefer products over competing products. If the company is able to maintain it over time, consumers will continue to buy from the company. That means the money will continue to flow in.

Fourth , demand is more inelastic. Customers are relatively less sensitive to price changes. Thus, the company can increase the selling price to increase profits without losing a lot of sales.

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