Vertical Differentiation or Horizontal Differentiation?

by Paul Simister on March 8, 2011

I was reading my good friend,¬† Ian Brodie’s excellent blog and he introduced me to the term “vertical differentiation” in this article,

Ian helps consultants, coaches and other professionals to get more clients and he was saying how difficult it is for these people to be unique.

Often these businesses provide similar services to their competitors and have little opportunity to do something new and different – what Ian calls horizontal differentiation.

Vertical Differentiation – Being Better Than Your Competitors

He selects several well known names and argues that what makes them different and successful is not that they do things different but they do things better.

This is vertical differentiation.

The firms occupy the same horizontal places in the market but clients generally rank them as above competitors.

Vertical Differentiation And The Strategy Canvas

Just to be clear, if you use a visual technique like the strategy canvas (from the Blue Ocean Strategy book) or what I call a customer value attribute map, vertical differentiation is a higher rating on the attributes considered most important to the customer)

Vertical differentiation an interesting idea but I think relying on a strategy of being seen as better is dangerous.

Claiming To Be Better Is Dangerous

First, better is such an nebulous concept and especially for services where so much of what is provided is intangible.

How can a potential client assess whether one lawyer is better than another?

Second, even if they can make an assessment, better like beauty is in the eye of the beholder. It’s difficult to influence since it comes down to personal tastes unless you introduce factors of genuine difference.

Third, if all the professional firms look the same, then different becomes better. Standing out suddenly makes the business look more attractive.

Imagine ten identical beautiful blonde girls in a room – you’d expect each to get an equal amount of attention. Now imagine one went out of the room and came back with her hair dyed brunette.

She stands out and becomes more magnetic. She’s no more beautiful than she was before but she is different from the others and more memorable because of it.

That little difference can help focus attention and instead of being dazzled by sameness, genuine quality differences might be perceived.

The final big concern about basing a strategy around vertical differentiation and being better is that it increases competitive rivalry. Competition is focused on a small number of specific attributes. As one rival improves in one dimension of customer value, another is encouraged to take actions to match or improve on that same dimension.

This is likely to create a cycle that increases costs of services but, although the customer value delivered increases, the competitors are unable to capture that value because of competitive pressure on price. Businesses are trying to move away from the customer value line to create advantage rather than along the customer value line to create a different value proposition.

Better Is Worthy But It Can Be A False Perception Of Reality

I believe being better is very worthy (we should all aim to be the best we can be) but it can lead you into a false reality.

We all tend to believe that we are better than we are.

I remember reading some research on professionals who were asked to rank their skills and knowledge compared to their peers. Something like 90% rated their skills as better than average!

How does that work?

It obviously can’t. Average means that 50% are above and 50% are below (strictly speaking that would be the median).

It does point to the problem that people generally think they are better than they are. In marketing this means relying on false hope which isn’t a strategy for success.

Even Clients Will Give You A Biased Answer

I bet you think that you can ask your clients to get an unbiased opinion but the question is rigged.

“Do you think your professional firm is better or worse than average?”

It sounds like a fair question but what’s it really asking?

“Did you make a wise, intelligent decision and use a professional firm that is better than average¬† or are you an idiot and have you continued to use a professional firm that is below average?”

Yes, you can expect to hear that clients made a wise decision even if they’d never think of making a referral.

If you think you’re better because you’re biased and your clients think you’re better because they are biased too, then vertical differentiation can lead to complacency and you finish up with the stalemate that you see in many professional services.

Differentiating by trying to be better sounds like a cop-out to me unless customers are rigid about their buying criteria and what they expect to experience.

Advantage – ABCDEF

I commented on Ian’s blog with a little acronym I’ve used for years.

ABCD – your Advantage can be Better, Cheaper or Different.

After I’d written it, I thought some more and wish I’d extended it to ABCDEF – your Advantage can be Better, Cheaper, Different, Easier or Faster.

The easier and faster helps to give a couple more dimensions to think about how your business impacts on the customer’s experience. Depending on your definitions, easier and faster could have come out of either the better or different categories.

I’d like to know what you think.

Is there merit in following a vertical differentiation strategy and being better than competitors rather than having horizontal differentiation?

And if it is, how can you communicate that you are better?

Paul Simister is a differentiation expert who helps small business owners to profit from differentiating their businesses, being distinctive in the eyes of their customers and standing out in a crowded marketplace.

You too can move past your profit tipping point by answering the seven big questions of business success.

{ 2 comments }

Ian Brodie August 14, 2011 at 2:16 pm

Dangerous ideas? Me? Surely not?

The fact that better is such a nebulous concept and it’s difficult for clients to tell is a huge reason to focus on it, not run away from it.

Frankly, differentiation is easy. A lwayer in a clown suit would be very different. And memorable. Would you hire him? Probably not.

Let’s look at a couple of examples.

Let’s say a C list celebrity gets caught speeding and they’re going to lose their licence. They need to get off, their livelihood depends on it.

Who do they call? Somone who fights speeding cases “differently” somehow? Or the guy who they think does it the best.

They call Mr Loophole, of course.

Is he really better at getting people off driving offences? I don’t know – but he’s created that impression with his marketing. He’s the guy on the TV and radio all the time commenting on big cases. In terms of a market position, he’s vertically differentiated above all the other traffic lawyers.

Or a case a little closer to home. About 5 years ago I was headhunted to help set up a US consulting firm’s UK office. I had a bunch of restrictive coventants in my existing contract that seemed unfair to me, but I wasn’t sure.

I did what most people would do. I googled around. I found a bunch of reference material and news reports. But I also found some really helpful and relevant articles written in language I could understand on the website of one law firm.

3 months later, they were the firm I hired. Through their website materials they’d positioned themselves in my mind as the experts in their field (again, whether they were the absolute best or not I don’t know – but perception-wise for me they were at the top).

How about your line up of ten girls. Sure, I might remember the one brunette a bit more. But ask me who I’d like a date with and I’d pick any.

Conversely, line up 9 average looking girls with one “stunner” and my choice is simple.

Ian

Paul Simister August 14, 2011 at 5:54 pm

This is fighting talk Ian.

Your lawyer in a clown suit isn’t an example of being effectively horizontally differentiated. The clown suit adds no value to his ability to be a lawyer for any particular client or legal problem. It’s a meaningless way to be different. (Note to self,Ii must blog about this.)

A lawyer who specialises in getting clients off speeding offences is differentiated from the many other lawyers out there who could represent the banned driver but “specialise” in general practice or even motoring law.. Yes I accept that he may be very similar to other specialist lawyers but there are often other reasons that make the choice easier by being different e.g. by conveniently having an office in Manchester rather than London.

I’m not against better at all and the idea of vertical differentiation. As I say, I believe you should constantly strive to be the best you can.

Better does exist.

But if you’re going to rely on vertical integration, you need to work hard to prove it.

Otherwise you just get yourself into a silly situation where competitor A says “we provide the best solutions” and then competitor B comes along and says “No we provide the best solutions.”

And the customer doesn’t know who to believe.

If you want to go the “better” route of vertical differentiation, then you need to be quantifying your competitive advantage in terms of benefits to the customer.

Staying with the lawyer example, if lawyer A says “I have got 86.7% of driving bans reversed over 250 cases” then you think that’s sounds great until lawyer B comes along and says “I have got 92.3% of driving bans reversed over 400 cases.”

Now lawyer B does sound better and worthy of your customer preference. But you might find when you make contact, that lawyer B has very careful client acceptance rules and, because he doesn’t think he can win your case, he won’t take you on as a client.” Lawyer A however is happy to take the risk to his record and will represent you. As you walk away from the meeting, you start thinking about the two sets of statistics and what they mean. While lawyer A appeared better, it seems he’s playing a game rigged in his favour and may not be as good as lawyer B after all. Losing more than 7% of “red hot certs” may indicate a weakness in technique.

You can see a similar statistical aberration with surgeons. The best surgeons may be prepared to try the most difficult of operations and may refer the easy cases elsewhere. This reduces their overall success rate.

Despite these concerns, quantification is a good way to prove claims of being better and much preferable to leaving superficial claims in the air “We are the best…”

Another way is to use third party endorsements. I was watching TV a couple of nights ago and saw a Colgate (I think) toothpaste advertisement. It included the strap-line “Colgate, the number 1 toothpaste choice by dentists.”

To make the claim, they’ve got to have the statistics to back it up, but that expert opinion did impress me.

Better (vertical differentiation) works best in repeat purchase situations where the customer is able to make a reliable judgement of respective qualities. I can believe that one restaurant is better than another because I’ve eaten in both several times, and each time the meal, the atmosphere, the service has been better. I wrote about differentiating hotels and how favourable TripAdvisor reviews influence my choice. I don’t have to stay at the number 1 rated place but I do read through the reviews of the top 10% or so with vacancies to find one that sounds like our sort of place.

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