product differentiation

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Product Differentiation

A source of competitive advantage that depends on producing some item that is regarded to have unique and valuable characteristics.

Product Differentiation

Any marketing strategy that seeks to highlight differences between products. That is, in addition to advertising the lowest price for a product, a company may differentiate its products by advertising that is has the best quality, the most convenience, or even the best packaging. Product differentiation is especially important where competition is stiff and companies cannot afford to charge much less than they do. See also: Brand Loyalty.

product differentiation

the means by which suppliers attempt to distinguish their own products from those offered by competitors. There are two basic ways in which products can be differentiated:
  1. by variations in the physical appearance and attributes of the product based on differences in design, styling, colouring and packaging, and differences in quality composition, innovatory features and performance results;
  2. broadly similar products may be differentiated in the minds of buyers by the use of ADVERTISING and sales promotion techniques which emphasize imputed or subjective aspects of the product: for example ‘better than’, ‘cleaner and whiter than’.

The purpose of product differentiation is to create and sustain a demand for the firm's products by nurturing consumer BRAND LOYALTY. Product differentiation is an important means of establishing COMPETITIVE ADVANTAGE over rival suppliers, and in some market structures, most notably OLIGOPOLY, it is regarded as constituting a more effective competitive strategy than price competition. The attraction of product-differentiation competition over price competition lies in the fact that whereas price cuts, for example, can be quickly and completely matched by competitors, a successful advertising campaign or the introduction of an innovatory product is less easily imitated. Moreover, whereas price competition lowers firms' profitability, product differentiation tends to preserve and even enhance profit returns. In particular, the establishment of product uniqueness may allow firms to command premium prices over competitors' offerings. Finally, product differentiation may serve to act as a BARRIER TO ENTRY, thereby protecting existing market shares against new competition.

See BRAND PROLIFERATION, MARKET CONDUCT, RESEARCH AND DEVELOPMENT, PRODUCT MIX, MARKETING MIX, DIFFERENTIATED MARKETING STRATEGY, PRODUCT POSITIONING.

product differentiation

an element of MARKET CONDUCT that denotes the ways in which suppliers attempt to distinguish their own products from those of competitors. Product differentiation is a form of nonprice competition (see MARKET COMPETITION). On the ‘supply side’, products may be differentiated according to differences in quality, performance, innovatory or novelty features, design, styling and packaging. On the ‘demand side’, ‘imaginary’ difference may be cultivated between products by the use of ADVERTISING emphasizing imputed or subjective qualities: ‘better than …‘, ‘cleaner and whiter than …‘, etc. The more ignorant buyers are of the relative qualities and performance of competing brands, the more susceptible they are likely to be to persuasive advertising.

The purpose of such differentiating activity is to secure an initial demand for the firm's products and, by cultivating BRAND LOYALTIES, to ensure that sales are increased or at least maintained. The significance of product differentiation is that it widens the parameters of competitive action, with firms competing against each other in quality advertising, etc., rather than on price alone.

Product differentiation is an important means of establishing COMPETITIVE ADVANTAGE over rival suppliers, and in some market structures, most notably OLIGOPOLY, it is regarded as constituting a more effective competitive strategy than price competition.

The attraction of product differentiation competition over price competition lies in the fact that whereas price cuts, for example, can be quickly and completely matched by competitors, a successful advertising campaign or the introduction of an innovatory product is less easily imitated. Moreover, whereas price competition lowers firms’ profitability, product differentiation tends to preserve and even enhance profit returns. In particular, the establishment of product uniqueness may allow firms to command premium prices over competitors’ offerings. Finally, product differentiation may serve to act as a BARRIER TO ENTRY, thereby protecting existing market shares against new competition.

Although product differentiation is often referred to as a form of‘market imperfection’, this should not be interpreted to mean that heterogeneity is bad. Genuine differences among products, in particular, imply greater diversity and more choice for consumers. See also MARKET-MIX, PRODUCT CHARACTERISTICS MODEL, MONOPOLISTIC COMPETITION, HOMOGENEOUS PRODUCTS, MARKET STRUCTURE, PRODUCT DEVELOPMENT, RESEARCH AND DEVELOPMENT, COMPETITIVE METHODS, INTELLECTUAL PROPERTY RIGHTS, PRODUCT PROLIFERATION, MARKET SEGMENTATION.