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Product Differentiation

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Business Studies

Without differentiation, you have no brand.”

- Bernard Kelvin Clive

What is differentiation and why is it important in business? Once we explore this topic in more detail, you will understand how common product differentiation is among brands, and also why you buy certain products from one particular brand rather than another.

Product differentiation definition

Brands often struggle with trying to make their products or services unique from that of other brands'. Product differentiation helps brands achieve this uniqueness.

Product differentiation is the process of adding a few variations to products or services to help them stand out.

Product differentiation can be as simple as a price difference (e.g. offering a lower price) or it can be a unique feature that is added to the basic product or service and cannot be found in other brands' products. The unique features of a product are called its unique selling proposition or USP.

The USP is how the business and its customers can distinguish the brand and its products from competitors. The unique features of the product are what attract customers to the brand, increase their satisfaction, and lead to customer loyalty.

These differences in products and services help increase the demand for them, driving up sales and growth for the company. When differentiating a product or service, the business should keep in mind that the unique features should add value to the customers' lives. This makes the product more appealing to the target group.

Product Differentiation: Unique Selling Proposition

The unique selling proposition or unique selling point (USP) of a product plays an important role in distinguishing a product in the market and contributes to its product differentiation. USPs play a crucial role in setting a product apart from its substitutes in the market.

A unique selling proposition (USP) is a specific feature that is unique to a product or service and distinguishes it from its competitors.

The best USP for a product or service is one that is a combination of what customers want and what the brand does best. The brand's USP is the main reason why people choose the brand. This is what the brand promises its customer while availing themselves of the business's services, or while purchasing their goods.

Paul's ice-cream parlour offers free ice-cream toppings, while other ice-cream parlours in the neighbourhood charge a small price for toppings. This helps Paul attract more customers to his store.

Satch manufactures attractive pencil cases with pencil holders that have more dividers and allow for better organisation of the items in the case. These features tempt students to choose this brand over others.

Therefore, USPs play an important role in differentiating an item in the market and are directly linked to product differentiation.

Product differentiation strategies

The variation used in a product depends upon the brand, its customers, and the market. Therefore, brands may adopt various strategies to create product differentiation.

Product differentiation strategies are the steps taken to differentiate a brand's basic product from that of its competitor.

The different product strategies are shown in Figure 1 and are as follows:

  • Pricing strategy - one of the most apparent techniques to stand out from competitors is by setting a different pricing standard. This does not necessarily mean offering your products or services at a lower price. Depending on the market and your product's quality, selling at a higher price can stir desirability among the target audience when purchasing a luxury item.

  • Innovation strategy - adding an innovative function or design to the basic product to make it more attractive.

  • Experience - creating a unique experience for your customers through exceptional customer service or better usability of the product are a few simple factors that can differentiate a brand from others.

  • Emotional connection - customers connect with and stay loyal to brands that have been successful in building an emotional connection with their customers. This connection can be achieved by constant communication with customers, and also through marketing campaigns that connect with people.

Product Differentiation Product differentiation strategies StudySmarter Figure 1. Product differentiation strategies, StudySmarter

Product differentiation examples

All successful companies follow differentiation strategies, and a few are explained below:

  • Apple - the company has always stood out as a result of its product innovation and unique product design.

  • Amazon - this brand is an example of a company using both pricing and exceptional service strategy. Its users can easily find the items they are looking for at low prices and the platform has a simple and automated customer service function.

  • Airbnb - this company's ad campaigns have been focused on building an emotional connection with customers through storytelling. Their ads feature Airbnb hosts talking about their personal lives and backgrounds and why they want to connect with the guests they host.

Product Differentiation: Brand image

Product differentiation helps brands set themselves apart from their competitors. A product's characteristics have a huge influence on how a customer perceives a brand.

Brand image involves the customers' perception of the brand based on their interactions and experiences with the brand.

It is important to make sure that the features that differentiate the product from its competitors are distinct and memorable for customers, as a positive brand image helps customers connect with the brand.

Forming a brand image is very similar to forming an image of a person after having interacted with them. A brand has limited control over how it is perceived by the customer.

A brand image is not be confused with the brand identity. Brand identity is the way a company presents and identifies itself. This is how the brand wants customers to perceive them and is completely controlled by the brand.

Product Differentiation: Examples of brand image

Brand images can be happy, fun, outdoorsy, sporty, luxurious, inexpensive, festive, and so on.

  • Dairymilk chocolates - customers associate this brand with happiness - these products are usually shared among friends or family in joyous occasions.

  • Zara - this clothing brand is considered an inexpensive fashion brand by customers.

  • Nike - this brand is perceived as a very outdoorsy and sporty brand by customers.

  • Cartier - customers associate this brand with luxury and quality.

Types of product differentiation

There are three different types of product differentiation (see Figure 2 below). They are horizontal, vertical and mixed product differentiation.

  • Horizontal differentiation - this is the method of distinguishing products based on subjective aspects that satisfy the customer. It does not depend on the quality of the product or service. For example, some customers may choose a particular dish soap because it has a better fragrance. If all the other market conditions, such as cost and quality, are the same for similar products, customers make purchase decisions based on their preferences.

  • Vertical differentiation - distinguishing products based on measurable factors is known as vertical differentiation. For example, a customer will prefer a product with more functions that's worth the price over a competitor's product that performs fewer functions.

  • Mixed differentiation - the method of considering both subjective and objective aspects of a product or service when purchasing is known as mixed differentiation. More important purchase decisions are based on mixed differentiation. For example, the purchase of a vehicle depends on objective factors such as price, mileage, and so on, and also depends on subjective factors such as colour and design.

Product Differentiation Product differentiation types StudySmarter Figure 2. Types of product differentiation, StudySmarter

Benefits of product differentiation

Product differentiation is important for remaining relevant and memorable among customers. It also has other benefits such as:

  • Brand loyalty - when a company successfully differentiates a product and stands out in the market, it attracts customers. When they are satisfied with one product from the brand, they tend to try more products from the brand, increasing the loyalty of customers towards the brand.

  • Economic benefits - a successfully differentiated product gives its customers a reason to choose a particular brand over others, thereby boosting sales.

  • Higher price - a company can demand a higher price from its customers when its product has more features or functions in comparison to its substitutes in the market. The added functionality convinces customers that it is worth the higher price.

Therefore, product differentiation plays an important role in staying in the market, giving the brands a competitive edge, and driving up sales.

Product differentiation - Key takeaways

  • Product differentiation is the process of adding a few variations to products or services to help them stand out in the market.
  • A unique selling proposition (USP) is a specific feature unique to a product or service that distinguishes it from its competitors.
  • Production differentiation strategies are the steps taken to differentiate a brands' basic product from that of its competitor.
  • Pricing, innovation, experience, and emotional connection are product differentiation strategies.
  • Horizontal, vertical, and mixed are the three types of product differentiation.
  • The benefits of product differentiation include brand loyalty, economic benefits, and the possibility of increasing the product price.

Product Differentiation

Product differentiation is the process of adding a few variations to products or services to help them stand out.


Product differentiation can be as simple as a price difference (eg. offering a lower price) or it can be a unique feature that is added to the basic product or service and cannot be found in other brands' products. The unique features of a product are called its unique selling proposition or USP. This is how the business and its customers can distinguish the brand and its products from competitors. The unique features of the product are what attracts customers to the brand, increase their satisfaction and lead to customer loyalty. 


These differences in products and services help increase the demand for them, driving up sales and growth for the company. When differentiating a product or service, the business should be kept in mind that the unique features should add value to the customers' lives. This makes the product more appealing to the target group. 

The unique features of the product that are brought about through product differentiation are what attracts customers to the brand, increases their satisfaction and leads to customer loyalty. These differences in products and services help increase their demand, driving up sales and growth for the company. When differentiating a product or service, it should be kept in mind that the unique features should add value to the customers' lives. This makes the product more appealing to the target group. 

An example of product differentiation can be outlined through the company, Apple. Apple has always stood out as a result of its product innovation and unique product design.

The 3 main types of product differentiation are horizontal, vertical and mixed product differentiation. 


  • Horizontal differentiation - this is the method of distinguishing products based on subjective aspects that satisfy the customer. It does not depend on the quality of the product or service. For example, some customers may choose a particular dish soap because it has a better fragrance. If all the other market conditions such as the cost and quality are the same for similar products, customers make purchase decisions based on their preferences.

  • Vertical differentiation - distinguishing products based on measurable factors is known as vertical differentiation.  For example, a customer will prefer a product with more functions that's worth the price over a competitor's product that performs fewer functions. 

  • Mixed differentiation - the method of considering both subjective and objective aspects of a product or service when purchasing is known as mixed differentiation. More important purchase decisions are based on a mixed differentiation. For example, the purchase of a vehicle depends both on objective factors such as the price, mileage, and so on, and also depends on subjective factors such as colour and design.

The benefits of product differentiation include:


  • Brand loyalty - when a company successfully differentiates a product and stands out in the market, it attracts customers. When they are satisfied with one product from the brand, they tend to try more products from the brand, increasing the loyalty of customers towards the brand. 

  • Economic benefits - a successfully differentiated product gives its customers a reason to choose a particular brand over others, thereby boosting sales.

  • Higher price - a company can demand a higher price from its customers when its product has more features or functions in comparison to its substitutes in the market. The added functionality convinces customers that it is worth the higher price.

Final Product Differentiation Quiz

Question

Define product differentiation.

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Answer

Product differentiation is the process of adding a few variations to products or services to help them stand out. 

Show question

Question

What are the product differentiation strategies? 

Show answer

Answer

  • Pricing, innovation, experience, and emotional connection are product differentiation strategies.

Show question

Question

Briefly describe the pricing strategy in differentiation.

Show answer

Answer

Pricing strategy is one of the most apparent techniques to stand out from competitors is by setting a different pricing standard. This does not necessarily mean offering your products or services at a lower price. Depending on the market and your product's quality, selling at a higher price can stir desirability among the target audience to purchase a luxury item. 

Show question

Question

What is innovation strategy in differentiation?

Show answer

Answer

Innovation strategy - adding an innovative function or design to the basic product so as to make it more attractive.

Show question

Question

How does experience play a role in differentiation?

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Answer

creating s unique experience for your customers through exceptional customer service, or better usability of the product are a few simple factors that can differentiate a brand from others.  

Show question

Question

How is emotional connection a product differentiation strategy?

Show answer

Answer

Customers connect with, and stay loyal to brands that have been successful in building an emotional connection with their customers. This can be achieved by constant communication with customers, and also through marketing campaigns that connect with people. 

Show question

Question

What are the types of product differentiation?


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Answer

Horizontal, vertical, and mixed

Show question

Question

Horizontal differentiation differentiates products based on objective factors. True or False?

Show answer

Answer

False. Horizontal differentiation differentiates products based on subjective factors 

Show question

Question

What is vertical differentiation?

Show answer

Answer

Distinguishing products based on measurable factors is known as a vertical differentiation .

Show question

Question

What is mixed differentiation?

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Answer

The method of considering both subjective and objective aspects of a product or service when purchasing is known as mixed differentiation. More important purchase decisions are based on a mixed differentiation.  

Show question

Question

What is an example of horizontal differentiation?

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Answer

Customers may choose a particular dish soap because it has a better fragrance. 

Show question

Question

What is one condition where people's preferences or horizontal differentiation come to become an important factor in purchase decisions?

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Answer

If all the other market conditions such as the cost and quality are the same for similar products, customers make purchase decisions based on their preferences. 

Show question

Question

State an example of vertical differentiation.

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Answer

A customer that prefers a product with more functions that's worth the price over a competitor's product that performs fewer functions.  

Show question

Question

What is an example of mixed differentiation?

Show answer

Answer

The purchase of a vehicle depends both on objective factors such as the price, mileage, and so on, and also depends on subjective factors such as colour. 

Show question

Question

What are the benefits of product differentiation?

Show answer

Answer

The benefits of product differentiation include brand loyalty, economic benefits, and the possibility of increasing the product price.

Show question

Question

How does product differentiation help increase brand loyalty?

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Answer

When a company successfully differentiates a product and stands out in the market, it attracts customers. When they are satisfied with one product from the brand, they tend to try more products from the brand, increasing the loyalty of customers towards the brand.  

Show question

Question

How can a company demand higher prices because of product differentiation?

Show answer

Answer

A company can demand more price from its customers when their product has more features or functions in comparison to its substitutes in the market. The added functionality convinces customers that it is worth the higher price.


Show question

Question

Define Unique Selling Proposition 

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Answer

A unique selling proposition is a specific feature unique to a product or service that distinguishes it from its competitors. 

Show question

Question

Expand USP

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Answer

Unique Selling Proposition 

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Question

Define brand image

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Answer

Brand image is a customer's perception of the brand based on their interactions and experiences with the brand. 

Show question

Question

Brand image is the way a company portrays itself. True or False?

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Answer

False. Brand image is a customer's perception of the brand based on their interactions and experiences with the brand. 

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Question

 The way a company presents and identifies itself is known as _____ ________.

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Answer

brand identity.

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Question

A customer's perception of the brand based on their interactions and experiences with the brand is known as

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Answer

brand image.

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Question

A/an ___ is a specific feature that is unique to a product or service and distinguishes it from its competitors.

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Answer

unique selling proposition (USP) 

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Question

___ strategies are the steps taken to differentiate a brand's basic product from that of its competitor.

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Answer

Product differentiation 

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Question

___ involves the customers' perception of the brand based on their interactions and experiences with the brand. 


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Answer

Brand image 

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Question

A brand image and brand identity are the same things.


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Answer

False

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Question

This is the way a company presents and identifies itself. It is how the brand wants customers to perceive them and is completely controlled by the brand. What is it?


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Answer

Brand identity 

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