When defining their business strategy, a lot of companies prefer to take on a differentiation approach as opposed to cost leadership. In other words, instead of focusing on reducing costs and optimizing their internal processes, they are looking to stand out from their competitors with a unique aspect of their product or service.
A differentiation strategy is great for encouraging customers to choose one brand over another because it offers something unique, innovative, or simply superior in a crowded market of lookalikes. However, it’s not always as good as it sounds. Today, we will be looking at some differentiation strategy risks and how to avoid them when building your strategy.
So, without further ado, let’s go:
1. Losing your differentiation point
A good differentiation strategy allows you to build a competitive advantage over other businesses. One great example is Apple, a company that’s associated with higher product prices justified by the unique aesthetics of their products and the continuous use of the latest innovations and technology.
However, one of the biggest differentiation strategy risks that many companies are facing is the possibility to lose your competitive advantage if it isn’t strong enough. If you aren’t able to really differentiate yourself from competitors, you might fall right into the crowd that you were trying to escape from.
How can you reduce this risk?
One way in which you can avoid this risk, or at least mitigate it, is to choose a sustainable point of differentiation that is able to stand the test of time. Think about a restaurant whose differentiation point is the unique location of the physical place, let’s say, on the last floor of a very high building with a great view.
If at some point the restaurant has to move to a different location (maybe the rent of the place got too high), it completely loses its unique selling point. So, as a business, you should always go for a differentiation strategy that you can maintain over time – for example, the restaurant could have focused on delivering a superb food quality.
This way, even if it changes location, people would still prefer to go there because of the food.
2. Getting copied by competitors
Next on our list of differentiation strategy risks that companies are facing is getting copied by competitors. Of course, no matter how strong your differentiation point is, competitors will always try to copy you in one way or another, and you can’t always stop them. However, mitigating this risk is important.
Think about phones – just a decade ago, we had hundreds of different brands, models, and sizes. Today, most smartphones, if not all, practically look the same – flat, wide, with standard sizes and little to no buttons. Some of them differ by colors, but we almost always end up covering them for protection so you can’t even see the original color.
The point is, getting your product or service copied to the point of losing your competitive advantage can be a serious risk for your differentiation strategy.
How can you reduce this risk?
This one of our differentiation strategy risks is more complicated as it will depend on the product or service that you are offering. For example, if you are planning to sell an innovative product, it is an absolute must to patent it nationally and even on an international scale.
This way, even if companies copy you, you can at least take legal action to protect your business.
On another hand, if we are talking about a service, it can be more challenging to protect yourself from copycats as you can’t really patent a service. Of course, this also means that services are more difficult to copy because they might require unique resources or very specific internal processes.
For example, let’s say that you are a Marketing agency that provides top-notch SEO services for which people are willing to pay 3x more because they bring great results. For a competitor to provide the same service as you, they would either have to find SEO specialists that are just as good as yours, or steal yours, which might be difficult.
So, you should identify the real source for your differentiation, and make sure to protect it at all costs in order to mitigate differentiation strategy risks.
3. Disappointing your customers
Undoubtedly, one of the biggest differentiation strategy risks that businesses are facing when undertaking this approach is consumer disappointment. As opposed to cost leadership, in which businesses rely on reducing costs to gain a significant market share, a differentiation strategy is typically associated with higher prices.
Of course, this is not always the case, but it is true in most cases – companies are looking to stand out with something unique and innovative, and customers are willing to pay higher prices in order to get it.
However, what may happen is that you increase the prices for your products or services, but customers don’t perceive them as unique enough, and are not able to justify paying so much for them. Again, think about Apple and how many people just don’t see the point and value in paying for an overpriced device.
How can you reduce this risk?
Speaking about differentiation strategy risks, it can be very difficult to manage the varying expectations of your customers. If your product fails to deliver, they will end up being disappointed and frustrated with their decision to purchase it.
In other to reduce this risk as much as possible, it is very important to ensure that you are actually keeping your promises. If you don’t have the resources or technology to live up to your unique selling proposition, don’t go with it – tone it down or try to find another one.
A great example of a company that’s living up to the expectations is Siteground, at least from my own personal experience. I am paying a higher price for their hosting because their differentiation point is their super fast, always available and reliable customer service.
And it’s true, they always respond in the chat within minutes, and are always able to resolve any issue quickly and without any hassle. The reason why they are able to keep their promise if because they have invested a lot of money in technology and human resources to achieve that.
4. Displaying your value inefficiently
Next on our list of differentiation strategy risks that many companies are facing is value. Even if your product or service has the unique value that is able to differentiate it from the rest, if it hasn’t been expressed effectively, customers might not be able to perceive it in the same way that you do.
Let’s say that you have created a shampoo with unique technology that removes dandruff better than anything else on the market. However, instead of providing some solid data or statistics on the label to show how good it is, you decide to go with a fancy bottle or a label that doesn’t express much.
How can you reduce this risk?
While customers may differ, there is one thing that we know for sure – if you are not able to justify your prices in front of their eyes, they won’t buy your product or service. For this reason, it is very important give solid proof to your customers so they know why are they paying more for a product when they can pay much less.
A good example of a company that’s doing a great job demonstrating the value of their product is Function of Beauty. Yes, you pay up to $50 or more for a single bottle of shampoo when there is shampoo for $5 in the supermarket.
However, they have clearly explained across the website and their Marketing campaigns what is it makes them different – it is a fully customizable shampoo that adapts to the needs of your hair according to its type, structure, and moisture level. And people are willing to pay higher prices for it.
Note: I am not saying Function of Beauty is better than other shampoo, I have never used the brand in my life. It is just an example of how they are doing a good job with their differentiation strategy. You can see more differentiation strategy examples here.
5. Selecting a weak differentiation point
Last on our list of differentiation strategy risks are weak differentiation points. Sometimes, what we think is unique and innovative might not be well-received by our target audience, or maybe it’s a product that consumers simply do not need in their lives because it doesn’t bring any value to them.
One example of a failed differentiation strategy is LG G-flex. The company was so focused on innovating at all costs that they didn’t realize that it was not what the market needed at all.
In 2013, they launched the LG G-flex, a mobile phone with a slightly curved screen that promised a better and more immersive experience for watching movies.
However, since 99% of customers use their smartphones for general purposes and not for watching movies, the screen ended up being uncomfortable and useless most of the times. The model was later discontinued.
How can you reduce the risk?
The key to reducing this one of our differentiation strategy risks is doing a lot of research. Before you even launch your product or service, you should have a clear understanding of your audience’s needs and whether your product actually solves them.
So, before you start developing your product, try to collect as much feedback as possible – from your existing customers, potential customers, non-biased people, etc. Make sure to do a lot of market research and investigation as well. Try to answer one simple question: does this product solve an actual need, or is it just a cool innovation?
If your product doesn’t solve a need, it probably won’t be perceived well on the market.
And that was all from me for today! I hope you liked my article on differentiation strategy risks, and I hope to see you in the next one! In the meantime, if you have any comments or questions, don’t hesitate to let me know in the comments below.