Profitable Differentiation – Beware The 5 Differentiation Traps

by Paul Simister on July 22, 2011

It’s very nice to build a business that is different and distinctive.

It gives you a feeling of superiority because you’ve created something that you can be really proud of.

But we can’t escape from the basic idea of differentiation…

Differentiation Must Be Profitable Differentiation

You differentiate your business because you believe you will make more profit than you will if you either get caught in the commodity trap or stay as a commodity and any business you win is by offering a low price.

Not all differentiation is profitable. You need to make sure you avoid the differentiation traps.

The 5 Differentiation Traps

First you can be different in ways that your customers don’t value – you don’t care whether I’m the tallest or shortest business coach in the world because my height is not one of your purchase criteria.

If you want your differentiation to be profitable, you must be different in ways that customers appreciate.

Second you can be genuinely different in ways that matter to your customers but you can hide your light under a bushel.

Differentiation will only create profit if the customers know about it and understands why your dimension(s) of difference create value for them through better results or a better experience.

A unique feature about your product or service only becomes a differentiating factor if customers understand the importance.

Third, you can fail the message to market test. You can have a great, well differentiated offer which is highly valued by one customer segment but if you send it to the wrong market, it will miss its target.

Different customers want different things.

Just think about clothes shops. What you want when buying clothes is very different from what your partner wants, what your teenage children want and what your parents want.

The choice of what you do has to be closely connected to who you do it for.

To make matters more complicated, the same customer can want different things at different times.

The choice of hotels and restaurants may be very different for a business owner or manager when they are away on business than when they are buying for their family and friends.

Fourth, a classic differentiation trap is to increase your costs by more than the customer value you generate.

You do your market research and you find out that customers would love it if your product could have a longer battery life (think of an iPod/mp3 player for example). You research the market and you find that just like your products, your competitors products also need to be recharged every ten to twelve hours.

You research the product possibilities and find that you can get a battery that will last 20 to 25 hours. It sounds like a competitive advantage which will differentiate your product so you’re excited.

You buy the batteries, which cost £10 extra. You incorporate them into the product and you do a big marketing campaign only to find that no one buys.

The extra battery life will cost the consumer an extra £35 including sales taxes and profit for you and the distribution chain but the consumers don’t value it that much. The short battery life is an inconvenience but it’s not a critical inconvenience – it’s a “nice to have” rather than a “must have” and at an extra £35 in the stores, it turns into a “can do without”.

The usual way to think about differentiation is to think about the price premium it can justify and price is certainly one way that differentiation can deliver profit.

The concept of the customer value maps makes it clear that providing extra value justifies a price increase if you stay on the fair value for money line. It can also create an irresistible offer if you move away and offer more value for money although it can trigger a price war.

The fifth way that differentiation can be a profit trap is to make promises that you can’t deliver. This is the distinction between shallow and deep differentiation.

Making big promises may convert leads into orders but failing to meet the promises won’t create a big group of customers eager to repeat the experience and buy again and again. I think the airline industry is the exception (Airlines suck).

This creates a bad experience and with social media, people love sharing their horror stories.

How To Have Profitable Differentiation

If you want profitable differentiation, you need to avoid the 5 differentiation traps

  1. Differentiating on factors the customers don’t value
    .
  2. Having a genuine difference and not telling the customers
    .
  3. Marketing a differentiated offer to the wrong customers
    .
  4. Differentiation that costs more than it earns
    .
  5. Not delivering consistently on the differentiation promise

Paul Simister is the business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of the ebook The Six Steps Profit Formula.

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