The purpose of any business is to provide goods or services that offer benefits which fulfill the needs of customers. The value offering of a company is the package of benefits that it provides to its customers, which includes all of the benefits resulting from the goods and services provided. Customers pay for the benefits provided in a supplier’s value offering. If a company’s value offering is very similar to that of other competitors, then the suppliers can be forced into a price war to gain business.
Research shows that the most successful and profitable businesses are those that are able to differentiate themselves from their competitors. Differentiation can be defined as distinguishing one company’s value offering from those of competitors by providing unique or more benefits. Differentiation is sometimes referred to as product differentiation but we must not be too restrictive. Customer needs can encompass a broad range of benefits including those directly related to the product as well as many dimensions of support. In our days of lean organizations, customers might rely on suppliers for engineering or R&D, so a supplier could differentiate based on their technical expertise while producing a product that is similar to competitors’. One of our clients produces what is clearly a commodity product but is very successful because their customer service is head and shoulders above all of their competitors.
Differentiation can be based on a broad range of benefits but it is always based on the customer’s needs and their perception of the benefit. It can be based on the benefits received from a product (or in the case of a service company, the service) including such things as functional performance, quality or durability, fit and finish, etc. It can be based on the services that surround the product such as delivery, accuracy, return policies, accessibility, or many other things. It can be based on brand perception or personal relationships. In any case, it is always in the eyes of the customer who makes the judgement of the true value of a supplier’s value offering.
Since differentiation is based on the customer’s needs and perception of value, the value will be different for different customers. In the case of our client with commodity products and superior service, the customers that most highly valued the service levels were industrial distributors. Other customers would not have assigned the same value to the level of service provided. A supplier seeking to differentiate must find the group of customers that are willing to pay for the differentiation. And when thinking about needs, it is not looking for a customer that needs a widget. Rather it is in the details of the needs – a widget with these certain characteristics or a supplier of widgets who will also provide these services.
A good differentiation strategy makes a supplier stand out from the competition when customers assign value to the benefits in the value offering. For suppliers that have a substantial benefit, either based on an economic advantage in providing it or even based on being the only supplier to recognize and fulfill a particular need, a price premium can be obtained, resulting in superior levels of profitability. A good differentiation strategy can also lead to gain in market share and high levels of customer retention.
To pursue a differentiation strategy, first identify a core group of customers that have a specific benefit in their list of needs. Then identify and build the capability to meet that need in either a unique way or a more economical fashion than competitors. And, of course, be sure to tell prospective customers about this differentiating benefit.
See this article by Chris Zook and James Allen in HBR for more detailed thoughts on differentiation.
Is your company satisfied with a “me too” strategy? What can you do to stand out from the crowd and increase the value delivered to your core customers?