Types of Profitable Differentiation Value
Differentiation is a key competitive strategy. Yet some people tell me that they don’t see much benefit to differentiation in their markets. While there are places that this may be true – high volume grains, anyone? – there are so many paths to differentiation that it’s worth examining a few of them to see if they might work in your markets.
A Differentiation type that almost never works
Firstly, there is a whole group of differentiation types that almost never work – those that your customers don’t find valuable. Sometimes, we confuse difficulty with value, and that can lead us to put a premium price on something that we may find operationally difficult (for example). While this is a good way to discourage customers from buying products or services that cause you headaches, the difficulty should not be confused with value for the customer. This is akin to cost-based pricing.
Enjoyment and ego value
The second group of differentiation types are more useful for consumer products than for business-to-business markets. These relate to enjoyment and ego association. It’s not unheard of to get some premium for these in B2B markets, but it’s far more difficult. In consumer markets, by way of comparison, ego association can drive huge margins in selling, for example, a $4,000 handbag. The main exception to this for B2B markets revolves around enjoyment and ego association that may pass through to the consumer customers of your customers. Because the value passes through to their market, you can often command some premium in the intermediate market as well. For example, certain passenger cabin components carry a sense of value for automotive customers, which in turn can enable some premium pricing. Even some very commodity-oriented buyers may be inclined to purchase a value-enhancement if they perceive it will also improve their profitability.
Quality Enhancement value
A third class of differentiation that is somewhat similar increases the actual (rather that merely perceived) value of the product itself. Teflon coating on pans, for example, makes the pan easier to use and clean, and may improve the quality of the food cooked in the pan. This type of differentiation commands a premium price from consumers, and in some cases, will also attract B2B customers for its quality enhancing properties.
Cost improvement value
The fourth group can also be an advantage in almost any market, because the value is generally associated with cost improvements. Any product or service which lowers the operational costs of your customers will attract some buyers in both consumer and B2B markets. Unfortunately, this value attracts both specialty and commodity buyers, so you should expect downward price pressure as the differential gap closes over time.
Risk reduction value
The final group has a less tangible value, but may be attractive to a specific type of customer. This differentiation doesn’t change costs or value directly, but addresses risk (either real or perceived). Insurance, as a type of product, is almost completely oriented around this value, but so are provisions of alternative production or trouble-shooting in manufacturing environments. This type of differentiation is often difficult to put a value on (unless you have encountered the risk before), and so, may command substantial premiums from risk-averse customers. Naturally, the challenge in selling such differentiation lies in convincing such customers that you can reliably counter the risk.
If you have a specialty-driven strategy, have you examined each of these types of differentiation value for your markets? For those of you with commodity-driven strategies, would any of these approaches to value improve either pricing or volume for your products or services?
Have you discussed differentiation value in your Strategic Planning process? Attend the Simplified Strategic Planning Seminar for more in-depth instruction on this subject as well as all other aspects of Simplified Strategic Planning.
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