This is part of a series of reflections inspired by my courses at HBX, an online business school cohort powered by Harvard Business School. With Business Analytics, Economics for Managers, and Financial Accounting, I'm learning the fundamentals of business. Find the whole series here.
We're constantly blasted by marketing and sales messages every day, whether they're pinging us in our inboxes, blaring over radio speakers, or popping up in our Facebook feeds.
And it works.
The interesting thing about consumers is that the majority of them want to be like everyone else. They follow trends, look for "what's in," and buy what they're told by glossy magazines.
Companies can't follow the herd if they want to turn a profit. It may work for a time, but eventually, little by little, profits will disappear. Even more disastrous? When businesses think they're following trends but they've completely missed the boat.
Differentiation prevents a perfectly competitive outcome in the market: when prices go so low that the consumer captures all the surplus and every firm is only just meeting their costs.
There's different ways to do this. One is differentiating "vertically," or participating in a hierarchy of quality when each firm has attributes that customers value the same. That's when one company produces a "better" (often signaled by "more expensive") product--when it's really very similar. It's the equivalent of wanting a black Bentley over a black BMW even though all the actual parts of the car inside are the same. (We'll get to brands themselves in a minute.)
“Horizontal” differentiation, on the other hand, relies more on innovation. It's when companies differ in attributes that customers value differently. It's what makes companies stand out: location, culture, or even color palette. This means customers create preferences for products. This is also where brand loyalty plays a much stronger part.
Differentiating well means that companies:
- Choose factors that matter. What matters most to their target consumer, their audience? How can they create the most amount of value for their set of customers so that those customers create an identity and relationship with their brand, and not their competitors?
- Differentiating horizontally, so that each product has something unique about it, rather than creating a copy of a competitor's but at a lower price.
- Taking a stand niche enough that it can stand a competitor reaction, like another company initiating a price war. Do your customers love your product and company enough that they're willing to pay more for it?
What differentiation really does is protect companies from price competition. Rather than copying "what's working," "what's hot," or "what's now," companies that are differentiated can approach pricing based on what's important: how their brand performs as a community and identity, and not just something the consumer settles for because it's cheap or easy.
You have to make the customer want to buy your product because it's the best, not just because it's the cheapest.