The Complete Guide to Differentiation Strategy (Benefits & Tips)

Organizations utilize various tactics to distinguish and promote their offering in their market to grow profitability. One of those tactics is creating a differentiation strategy.

But what exactly is a differentiation strategy, and how is one created? How is profitability impacted with a successful differentiation strategy? To answer these strategy questions and more, our experts created this guide to enable business leaders to better differentiate their offerings.

Tip: If you have other questions on strategy planning, check out our FAQ.

We understand that there are many elements required to develop a successful differentiation strategy, so we have compiled this resource with links to more detailed articles to provide further clarity on each question.

1. What is Differentiation Strategy?
2. What Makes a Strategy Strong?
3. Why Does a Differentiation Strategy Improve Profitability?
4. How Can I Create a Product Differentiation Strategy?
5. What are the Exact Steps to Creating a Product Differentiation Strategy?
6. How Often Should I Review My Differentiation Strategy?
7. How Do I Review My Differentiation Strategy?

What is Differentiation Strategy?

A differentiation strategy is a well-defined communicable plan to optimize and maintain the value of your product or service. This strategy is tailored to your customers' needs both now and in the future.

One of the most significant challenges for an organization is setting itself apart from competitors. The key to success lies in creating a differentiation strategy that makes your offering unique and more valuable to customers. So, how can a leadership team strategically distinguish their offerings from others in the market?

The answer lies in developing a differentiation strategy. A product or service with clear differentiation is likely to be more profitable, while those that blend in with the competition will struggle.

To create a differentiation strategy, it's important to research your market and competitors thoroughly. This thorough analysis of the market and competition determines how an organization's offering can stand out. There are two primary approaches to differentiation: broad and niche.

Understanding Focused Differentiation Strategy

A focused differentiation strategy, or niche differentiation strategy, is required when an organization aims to concentrate on a specific customer segment. This approach zeroes in on a subset of a broader audience, catering to their particular needs.

The target market should be niche yet contain unmet customer needs; no customer wants to invest time and money into services that don't solve their needs or solve needs that they already have sufficient solutions for.

Exploring Broad Differentiation Strategy

The other approach to developing a differentiation strategy is a broad strategy.

A broad differentiation strategy involves identifying competitive advantages across the entire industry that set an offering apart from competitors. This approach requires a large, unsaturated customer market with numerous unresolved pain points. There is also often a "greater than the sum of its parts" factor, where being a one-stop shop for multiple pain points can create customer benefit greater than several different companies that individually solve each pain.

Real-World Example of Focused Differentiation Strategy

HubSpot provides an outstanding example of a focused differentiation strategy. When HubSpot entered the market in 2006, its primary competitors were Salesforce, SAP, and Oracle. These industry giants catered to the higher end of the market, making their platforms largely inaccessible to small and medium-sized businesses.

HubSpot’s focused differentiation strategy started by targeting small businesses and startups with its accessible product offerings. Today, HubSpot continues to offer a freemium model that’s designed to capture startups and growing small businesses.

Which Should You Follow, Focused or Broad Differentiation Strategy?

Successful organizations have well-defined differentiation strategies. Depending on an organization’s customer pains and the market landscape, it may be more advantageous to pursue either a broad or focused differentiation strategy.

High sophistication of customer needs, low experiential overlap, and low capability sharing across different potential services may suggest a focused (niche) differentiation strategy might work better. On the other hand, a customer "good enough" customer requirements, highly interrelated user experiences, and high capability similarity in creating those experiences might all indicate that a broad differentiation strategy might be the right one.

The Essence of a Strong Strategy: Key Components and Insights

While executives often agree that strategy is critical, assessing its effectiveness can be challenging, often only becoming apparent years down the line. This is also true for a differentiation strategy, particularly when an organization's offering initially appears indistinguishable in the market.

Join Kut Akdogan, Managing Partner at Gaussian, as he shares valuable insights into the core elements of a "good strategy" derived from various industries. He delves into several components that contribute to a successful strategy, irrespective of an organization's size, industry, or stage of development. This short, informative video serves as a checklist for leadership teams aiming to validate a new differentiation strategy or fine-tune an existing one, providing a deeper understanding of the critical success criteria.

The video focuses on three main pillars of a strong and successful strategy: 

1. Focusing on outcomes
2. Making strategy holistic
3. Driving buy-in across stakeholders

Why Does a Differentiation Strategy Improve Profitability?

There are three key ways that a well-differentiated offering improves profitability:

1. Easier to acquire net-new customers
2. Able to command a high price in the market
3. Higher customer loyalty & retention

1. Easier to acquire net-new customers

When an organization's offering delivers a superior or innovative solution to a significant customer pain point, it paves the way for attracting a larger customer base. Moreover, a differentiated offering facilitates entry into untapped markets that may otherwise be inaccessible. In both scenarios, customer acquisition costs are reduced, and marketing efficiency is increased, ultimately leading to higher per-customer profitability.

A broad differentiation strategy enhances company profitability whenever customers are satisfied. Content customers often share their positive experiences with others, becoming advocates for the brand. This word-of-mouth endorsement, or social proof, acts as a catalyst for customer growth.

A great case study illustrating the power of social proof is Slack's rapid customer base expansion. Slack focused on customer-centric differentiation before launch, ensuring they delivered the benefits their customers truly required, creating customers who were willing to spread word-of-mouth referrals (aka social proof). 

2. Able to command a high price in the market

Successful organizations employ a differentiation strategy to deliver high-quality products and exceptional customer service, enabling them to command premium pricing. For instance, Apple sets itself apart by focusing on providing premium products. Consequently, Apple has managed to charge premium prices for its offerings. Without meaningful feature differentiation, there is no driver for a higher price.

Studies have found that a differentiation strategy yields more enduring profitability than exclusively focusing on a cost-leadership strategy. Differentiation improves profitability both in the short-term and the long-term. It’s a win-win.

3. Higher customer loyalty & retention

A successful differentiation strategy allows a firm to secure customer loyalty as consumers become attached to the distinct features offered that they can’t find anywhere else.

By solving for customer needs in a unique manner, an offering gains greater value in the eyes of customers, reducing likelihood of customer churn and boosting loyalty. Loyal customers are highly valuable as it is often far cheaper to sustain business than to acquire new business to make up for lost customers.

Learn everything you need to know about strategy planning with our free eBook, “Strategy Playbook for Leaders”.

Real-world Example of a Successful Differentiation Strategy

To bring context to how important customer needs are for your offering’s profitability, look at 3M. 3M originated as a modest mining company that gradually diversified and currently offers over 60,000 products.

The organization’s growth is largely attributable to their unwavering dedication to differentiation through product leadership. By identifying customer needs in the market and pioneering innovative solutions, 3M has succeeded in delivering unique products that cater to these needs.

How Can I Create a Product Differentiation Strategy?

In the highly-competitive, rapidly-changing landscape of modern markets, differentiating your product is crucial for attracting and retaining customers. Surprisingly few organizations possess a consistent, traceable, data-driven, and efficient process for product differentiation strategy that revolves around their customers' needs. 

Understanding Product Differentiation Strategy

A product differentiation strategy is a clear, communicable plan designed to optimize and reinforce the customer value of your product. Like most cornerstones of a business, this type of growth strategy is rooted in understanding and serving customers' needs.

Customer needs are distilled from customer pain points and workflows (which themselves may be derived from jobs-to-be-done). 

These two factors impact the product's value to customers across various functions, such as marketing messaging and operational approaches that ensure an exceptional customer experience.

What Makes a Product Differentiation Strategy Successful?

A winning product differentiation strategy must:

1. Be rooted in customer insights
2. Solve customer needs as efficiently as possible
3. Be planned and built with an iterative mindset

1. Customer Knowledge Fuels Product Differentiation

Your product's primary objective is to serve your customers, and while customer data is abundant, obtaining valuable customer insights can be challenging and time-consuming. 

One tactical step that many of our clients have found helpful for unearthing these insights: hold a monthly cross-functional "Customer Insights" meeting. In this meeting, each department must share recent themes about customers that they've noticed, and evidence to back up those themes.

Building customer knowledge is an ongoing process. Even if you don't have any customers yet, don't let that stop you collecting customer feedback.

2. Well-Differentiated Products Address Customer Needs Quickly

Customers will almost always always choose a product that has the most significant impact on their needs rather than one that minimizes the overall costs.

If your organization's product doesn't address any customer needs, it holds no value.

Furthermore, products should seamlessly integrate with customers' existing workflows, processes, and technologies. This ensures that the transition to your product will help, not hinder, their day to day workflows.

3. Differentiation Strategies Require Iteration

One constant in today's markets is the presence of uncertainty. Predicting competitors, market shifts, and corporate events can be challenging. How do we tackle uncertainty By being iterative.

As you create your product differentiation strategy, you and your team may feel uncertain. This is natural since a successful strategy is based on the customer knowledge available at the time of creation, but it will continually evolve.

You must separate the ideation process from prioritization. Ideation should be fast and agile ("right brain"), while prioritization must be comprehensive, global, and driven by context ("left brain").

What are the Exact Steps to Creating a Product Differentiation Strategy?

While understanding the components of a successful differentiation strategy might seem straightforward, creating and measuring one can be more challenging. In this section, we'll walk through how to create such a strategy efficiently and systematically. Then we'll discuss a real-world product differentiation strategy example.

In total, there are six steps to crafting an effective product differentiation strategy:

1. Choose customer segments and the "problem area"
2. Identify customer workflows, behaviors, and pains
3. Translate major pains into customer needs
4. Prioritize customer needs
5. Match potential features/services to top customer needs
6. Identify new differentiators for product, messaging, and customer experience

Let’s dig into each of these points further.

1. Choose customer segments and the "problem area"

Defining the target customer groups is necessary to focus on when building products.

What is a customer segment? A customer segment refers to a (subjective) classification of potential customers based on a measurable identifier. 

Within a group of potential customers there are infinite different types of products that could exist, based on the infinite problems that people have. It is crucial to pinpoint a specific problem area in the beginning, as this distinction sets apart one company building helicopters from another distributing bananas.

2. Identify customer workflows, behaviors, and pains

Customers are most willing to pay to solve their most pressing needs: their "hair on fire" issues. This means that for your in-target customers, you must identify the top pain points for your target customers within the scope of the problems your product can realistically solve.

At first, this process might seem challenging. Here are a few suggestions to help you get started:

• Analyze customer workflows, and for each, create a simple block diagram illustrating the steps involved
• List all of their "jobs to be done"
• Document their behaviors (incl concerns/fears)

We can't emphasize enough that all of these customer insights (pains, workflows, jobs-to-be-done, behaviors) must come from the customer. This data can be gathered through:

1. Customer interviews
2. Sales conversations
3. Customer surveys
4. Focus groups
5. Market research
6. In-app feedback

3. Translate major pains into customer needs

Every pain can be stated as a customer's need. For example, 

"It takes me too long to file my tax forms" therefore "Customers need to reduce the time spent filing tax forms"

Converting the most significant pain points into customer needs results in a concise list of customer needs. Enrich this list with insights around workflows, behaviors, and jobs-to-be-done.

4. Prioritize customer needs

A crucial step in efficient product differentiation is prioritizing customer needs. Start by assigning scores to each need. For example:

• Magnitude (1-5): Relatively, how much would a customer be willing to pay or sacrifice to have this need addressed?
• Competitive level (0-2): On a relative scale, how many other companies are already tackling this customer need?
• Priority: Magnitude minus Competitive level

After completing this exercise, rank customer needs based on their Priority scores. 

5. Match potential features/services to top customer needs

The next step is to map your features and services (both existing and planned) against the top customer needs, as such:

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6. Identify new differentiators for product, messaging, and customer experience

With a prioritized list of customer needs mapped against features, you can draw several conclusions:

• Existing features addressing high-priority needs with low competition: These are your active differentiators.
• Planned/hypothesized features that solve high priority needs: These should be the next features to develop.
• Features that solve high priority needs where the competitive level is high: These are the baseline expectations, and neglecting them may result in underdelivering.

Customer feedback at the feature-level can also be very useful to help refine your understanding of which areas of the existing product offering are most valued by customers.

Real-World Differentiation Example: An Industrial Technology SMB

To make the above steps and concepts concrete, here's a real-world product differentiation case study. It’s based on an innovative industrial tech venture focusing on technological solutions to industrial fixed equipment maintenance. 

The screenshots below are from Sapium Strategy, a tool from Gaussian Holdings that helps collect insights and turn them into actionable strategies.

1. Choose customer segments and the "problem area"

The company mapped out two segments: 

1. "SMB Manufacturers (Non-Food)"
2. "Large Manufacturers (Non-Food)"

These were separated from other segments that ultimately were not considered attractive enough due to their limited market size: "Food Processing Facilities" and "Raw Materials Processors."

2. Identify customer workflows, behaviors, and pains

The company listed the pain points for each company, drawing on our customer knowledge acquired from selling in these industries. We also identified what did not constitute pain points for each segment.

Simple workflow diagrams were also assembled based on past customer conversations.

3. Translate major pains into customer needs

Each of the pains identified was converted into a customer need. 1-2 more customer needs were later added based on unchangeable workflow requirements of customers.

4. Prioritize customer needs

The company assigned scores for each customer need, for (1) Magnitude, i.e. how much a customer would be willing to pay for this need to be substantially met, and (2) Competition, i.e. how active are competitors in trying to solve this need.

5. Match potential features/services to top customer needs

Finally, each customer need was mapped to (1) Features we have today, and (2) Feature ideas for the future.

6. Identify new differentiators for product, messaging, and customer experience

The exercise yielded the following outputs:

• The current differentiator is the speed of delivering maintenance savings, given the low level of competition and significant progress already made.
• Most urgent features are the OTS sensor suite and the network health dashboard, as these align to the highest priority customer needs.
• New marketing messaging must communicate (a) the ability to reduce maintenance spend, and (b) the speed with which we can do this.

The resulting communicable strategic statement is thus:

“We will focus product development on features that directly minimize customers' maintenance costs with little to no integration burden, while realigning product messaging around our differentiator of fast impact.”

Upon completing this process, your team will have a set of differentiators and baseline table stake expectations, as well as the strategic actions needed to capitalize on them.

But remember: your work isn’t done. This is an ongoing, iterative, incremental process. Your customer knowledge will grow and change over time. As it does, refine the differentiation strategy routinely.

Learn how an organization can defensibly refine its strategy through workshops in this article: How to Run a Strategy Workshop in 5 Steps.

How Often Should I Review My Differentiation Strategy?

Your differentiation approach never happens in isolation ⁠— the market, your competitors, and even your own product are constantly evolving. To remain competitive and informed on your customers’ needs, effective leadership teams strive to reassess their differentiation strategy frequently.

There is a reason why this strategy is not reviewed annually. A common pitfall of a differentiation strategy is that many organizations conduct annual strategy planning, only to promptly and subsequently archive them. This can lead to executives believing that strategic planning is too time-consuming, or is rendered obsolete within months.

Instead of dedicating a large chunk of time each year to overhaul critical decisions, enterprise companies continuously evaluate their plans and adapt accordingly. Organizations that prioritize this ongoing planning, “...make more than twice as many important strategic decisions each year as companies that follow the traditional planning model.”

There are four primary drivers that indicate for why differentiation strategy must be reevaluated regularly:

1. You learn more about the customer and the market

Leaders are constantly learning about their customers, even though they may not realize it. The more customer interactions and the more products or services added into the market, the more an organization will learn.

To further document your learning process, consider routinely exploring these four avenues:

• Customer feedback and sales conversations
• Customer support emails
• Focus groups and surveys
• Market research

2. Your product and services change

As a company improves its product(s), it will gather more and more information about whether their differentiation strategy is successful. 

How your service's differentiation factors into your overall strategy may change over time. For example, your marketing may gradually strike a balance between unique features and "table-stakes" features that are less prominent in customers' minds. 

3. Competitors emerge and adapt

Competitors are not static; they too are learning and evolving. Your differentiation strategy must adapt to the latest market shifts. A quarterly review is more likely to achieve this compared to an annual review

Smaller businesses have an advantage over large enterprises in this approach Smaller businesses can react more nimbly than larger teams, which is all the more reason to regularly review your strategy.

4. The market, and the customers, evolve

Smaller organizations have the ability to react quickly, underscoring the need for frequent strategy reviewing.

To adapt to these four areas of pressure, your differentiation strategy must be reviewed each quarter. This way, you can proactively identify potential challenges and opportunities for your organization's future

How Do I Review My Differentiation Strategy?

Now that you understand why leaders like you need to review your differentiation strategy, it’s crucial to discuss how a leadership team starts reviewing their plan. There are three steps to effectively utilizing the strategy feedback loop and reviewing a differentiation strategy.

1. Adopt a consistent annual strategy process

The first step to making profitable strategic decisions is to plan your differentiation strategy annually. Any strategy planning process consists of the following stages:

• Define outcomes
• Research & diagnose
• Brainstorm and collate opportunity ideas
• Prioritize opportunities
• Vet & approve
• Execute

For more information about these stages, see our series of 2 minute videos on the 6 Steps to Strategy Planning.

2. Divide the annual plan into quarterly objectives and initiatives

At this point, you have a long-term strategy, but it remains theoretical. No one is executing it, no one is being held accountable to it.

The critical task here is to break the long-term objectives into near-term initiatives. What does this mean tactically? Think of the graphic above as this method below:

1. Start with the long-term opportunities you can reasonable go after
2. Quantitatively define what "meaningful success" would look like in each opportunity over the next year
3. Now repeat step #2 but for opportunities over over the next quarter

It's all about cascading, from long-term (multi-year), to medium-term (1 year), to short-term (1 quarter), seamlessly. We call this process decomposing a strategy.

3. Regularly evaluate progress against quarterly objectives and initiatives

To ensure initiatives are on track, borrow from the Agile approach and review progress every 1-2 weeks. We call this the Strategy Drumbeat. 

For each quarterly goal, assess every 1-2 weeks whether the objective is:

• Green: This objective recently made the necessary progress towards on-time completion
• Yellow: There were some small setbacks recently (but there is low risk of missing the quarter goal)
• Red: Immediate actions are needed and the objective is likely to be missed by the end of the quarter

Want to understanding how mature your organization is? Take a quick maturity assessment.

Aim for all initiatives to be Green each week; there's no benefit to self-punishment through aggressive goals that can only ever be Red. No meaningful progress on an objective? Then it's time to ask what it would take to make it Green.

 If you don't strive for incremental progress, then you're not executing.

To outpace your competitors, offer a product or service that addresses customer needs, and drive profitability, your business must regularly revisit its differentiation strategy.

In summary, a successful product differentiation strategy is closely tied to solving customer problems. Before building a plan, you need to prepare for your plan. As you prepare, ensure everyone involved in the strategy creation process is closely attuned to your customer. Strive to solve their needs as simply as possible. 

Because leaders juggle so many responsibilities in their day to day, some organizations hire differentiation strategy consultants to assist them with crafting and executing a plan. Although a product differentiation strategy demands time and effort, the rewards and revenue growth make it worthwhile.

Have more questions about profitability and growth strategies? Check out our free eBook that covers everything about strategy planning.