Updated On: April 29, 2022

I remember my first microeconomics class. The lesson was on supply and demand curves in a perfect market. I’ll spare you the yawn inducing details, but we were taught that a higher price correlated to lower supply and greater demand, and a lower price to the opposite. Yet, no matter the market, the point at which the two curves crossed was known as the equilibrium price, the perfect price point for that particular market. Sounds like wonderful, balanced bliss, doesn’t it?

Well, as many of you know, the real world of pricing does not occur in a perfect market, at least one that we can see since we don’t have perfect information at our disposal. If we did, pricing strategies would be exceptionally easy and profitable. The question then becomes, how can you take advantage of working within imperfect market forces? The answer exists in the main difference between a Microeconomics 101 textbook and the realities of doing business: Product differentiation.


Product differentiation: It’s all about being a unique snowflake (or at least appearing like one)

Why do you drink Snapple and not Minute Maid? Why do you buy shoes from Nordstrom and not from Sears? It might be because Snapple has cool facts on their caps, and Nordstrom has employees waiting on you hand and foot. These are all forms of product differentiation: the ability to make what you sell unique among the plethora of similar goods.  

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photo credit: J. Star

The goal is to entice consumers and create the perception that there isn't a perfect substitute for what you offer through price differentiation and price bundling. For example, I could buy a cup of coffee from almost anywhere, but the big comfy couches and gorgeous latte boy at the off the beaten path café drive me to their location over the local Starbucks. Even though either would probably do the trick of my morning jolt, those simple additions means I won't switch brands.

Only when products are different can there be varying prices. In simplistic examples of a perfect market, the main assumption is that every product is a perfect substitution for another. If that were the case, consumers would simply switch sellers when one raised its price. Perceived or actual difference, however, is what justifies sticking with something even though it might be a little more expensive.

More specifically, how do you differentiate?

Vertical differentiation

There are two types of product differentiation: vertical and horizontal. Vertical differentiation is based on superior versus inferior goods. The markers for this category include characteristics like quality, durability, reliability and service. There is a measurable scale for vertical differentiation: it's possible to quantify if Brand X of tires will last longer than Brand Y. Vertical differentiation is also marked by a positive price curve. If you're getting a better quality product, it makes more sense to pay more for it. So this type of differentiation segments the market into consumers who are looking for a bargain, ones will settle for nothing but the finest, and the multiple groups in between.

Horizontal differentiation

Horizontal differentiation is a separate category because its methods of differentiation can’t be measured through the same lens. This group mainly includes things like style, taste, and preference of functions. I may want a fuchsia cell phone instead of a black one, or I might like Ben & Jerry's Chunky Monkey ice cream better than the Half Baked flavor. That doesn't mean that an obnoxiously bright mobile device is superior, or that Half Baked is a worse concoction. Horizontal differentiation is more about personal preference than strict measurement of quality. 

Four ways to differentiate immediately 

An important note about product differentiation is that perceived value difference is what is important. There doesn’t really have to be a huge difference in function or quality between you and your competitor, but consumers need to have that perception. If you want to do even better, then take a look at your competitors’ offerings, cross reference them with your target customer’s needs, and build what your customers want that your competitors don’t have in their arsenal. Of course that takes some time, but here’s a good breakdown of what to attack for product differentiation:  

1. Target Untapped Customer Personas

Remember, there are entire spectrums of customers that want or need your product. Many competitors will focus on the premium pricing customers with Cadillac offerings, while others will focus on discount customers with freemium and inexpensive offerings. There are thousands of pockets of customers in between these two groups. Find them and build, market, and sell to them. Very few industries have a behemoth competitor being everything to all people.  

2. Soft skills (Design, service, etc.) go a long way

Large businesses have difficulty providing individualized service to their target personas. A lot of companies big and small have trouble looking pretty and keeping design top of mind. Take advantage of this and be the Twilio, Wistia, or Help Scout of your industry. All three of those companies are in fairly competitive industries, but they’ve taken to high-class service, design, and brand to carve out their niches.  

3. A little branding goes a long way, too

You don’t need to be Coke or Pepsi, but putting an afternoon’s worth of time into developing your brand can go a long way. Who are you to what group and why? You’d be surprised at how many companies we come into contact with can’t answer that question. As soon as you can, use the message to unify your messaging and go after the right market.

4. Understand your customers and Differentiate your features

We alluded to this above, but figure out what your customers need or what they don’t need and shape your product towards those needs, rather than those of your competitors. Help Scout has done beautifully with this approach by bringing the world an exceptionally simple help desk when their competitors have been developing Frankenstein monsters of products. It’s gotten so bad that Help Scout has been able to successfully use the tag line, “A help desk that does 99% less.” They know that their target customer wants simplicity, so they’ve built the product for them in that manner.

Product differentiation is crucial for any business. Most likely, given the ease of starting a business, you are entering into a market that already has strong competition. We’ve already discussed the pros and cons of competitor based pricing, and why competing on price is a poor strategy. Product differentiation and value based pricing is the healthiest alternative to boost revenue and grow your base. Just keep asking yourself: what can you offer or build that others can’t?  

To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software and solutions. We're here to help!


Tags: pricing strategy

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