A 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 questions and more, our experts created this guide to enable business leaders to better differentiate their offerings.

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 communicable plan to maximize and sustain the utility of your offering, centered around your customer needs, now and into the future.

For an organization, one of the hardest challenges is standing out from your competitors. But how does a leadership team strategically ensure that their offering is unique from competitors?

The key is to create a differentiation strategy. A well-differentiated product or service will be more profitable — while an offering that blends in with the rest of the market will struggle.

A differentiation strategy works best when an organization takes the time to research their market and competitors to see how they can set their offering apart. What does it actually look like to differentiate in a strategic way? There are two main approaches: broad and niche.

What is focused differentiation strategy?

A focused differentiation strategy is developed when an organization wants to focus on one specific customer market. This focused strategy takes a segment of a broad strategy audience and narrows the focus down to those with specific needs.

The market should be niche, but there must still be customer needs to address — because without customer needs, a new offering is unnecessary.

What is broad differentiation strategy?

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

A broad differentiation strategy involves identifying industry-wide competitive advantages that set an offering apart from competitors. This type of strategy needs the customer market to be vast, unsaturated, and have many unresolved pain points. 

Real-World Example of Niche Differentiation Strategy

HubSpot offers an excellent example of a focused differentiation strategy. HubSpot entered the market in 2006, at a time when the direct competition was Salesforce, SAP, and Oracle. These market leaders focused on the higher end of the market, leaving their platforms largely unattainable for small to medium sized businesses.

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

Organizations with market success tend to have clearly defined differentiation strategies. Depending on an organization’s offering and the market, it may make sense to pursue either a broad differentiation strategy or a focused differentiation strategy.

What Makes a Strategy Strong?

While executives often agree that strategy is critical, it's hard to know how effective one is until years later. This is also true for a differentiation strategy, especially if the organization’s offering starts out as indistinguishable in the market.

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Watch Kut Akdogan, our Managing Partner at Gaussian, give an overview of the key elements of "good strategy" from across industries. He looks at several elements of good strategy that are relevant no matter the size, industry, or age of an organization. This video can help a leadership team start building a successful differentiation strategy or refine an existing one.

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

1. Being outcome-oriented
2. Being holistic
3. Being buy-in driven

Why Does a Differentiation Strategy Improve Profitability?

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

1. Easier to acquire new customers
2. Able to command a premium price in the market
3. Higher customer loyalty and retention

1. Easier to acquire new customers

When an organization’s offering provides a better or new solution to a major pain point, it enables you to attract more customers. And, a differentiated offering allows you to tap into new markets that may not be readily available without that differentiation. In both cases, the cost of acquiring a customer is lower and marketing efficiency is higher, driving higher per-customer profitability.

A broad differentiation strategy enhances company profitability whenever customers are satisfied. When an offering meets their needs, those satisfied customers will often advocate to others. This social proof from customer referrals enables customer growth.

A great case study is how Slack used social proof to rapidly expand their customer base. Slack focused on customer-centric differentiation before the product was even launched, which delivered innovation that their customers needed, rather than selling a product. 

2. Able to command a premium price in the market

Successful organizations use a differentiation strategy to offer quality products and customer service, which allows them to demand a higher price. For example, Apple differentiated itself by focusing on being a premium product. In turn, Apple has been able to charge premium prices for its products.

Studies have found that a differentiation strategy leads to more sustainable profitability than if an organization focuses solely on implementing a cost-leadership strategy. Differentiation improves profitability both in the short-term and the long-term.

3. Higher customer loyalty and retention

A pitfall to avoid in pursuing a differentiation strategy is to not aim to solve customer needs. A successful differentiation strategy allows a firm to earn customer loyalty because consumers become attached to their differentiated features.

By solving for customer needs in a unique manner, an offering becomes more valuable to customers. This reduces the risk of customer churn and increases their loyalty.

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 had humble beginnings as a mining company that slowly expanded, and today offers more than 60,000 products.

The organization’s growth can be attributed to their heavy focus on differentiation through product leadership. They drive innovation by identifying customer needs in the market and taking the lead in delivering unique products to solve them.

How Can I Create a Product Differentiation Strategy?

In a fast-paced environment with evolving competitors and markets, differentiating your product is crucial for converting and retaining customers. Not many organizations have a consistent, traceable, data-driven, and efficient product differentiation strategy that revolves around the customer’s needs. 

What is a Product Differentiation Strategy?

A product differentiation strategy is a communicable plan to maximize and support the utility of your product, centered around your customer needs.

Like most cornerstones of a business, this type of growth strategy is grounded in 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 influence the product’s value to the customer across functions: for example, the marketing messaging, the operations approach for ensuring a great customer experience, etc.

What Makes a Product Differentiation Strategy Successful?

1. It must be rooted in customer insights
2. It must solve customer needs as efficiently as possible
3. It must be planned and built with an iterative mindset

1. Knowledge of the Customer Drives Product Differentiation

The goal of your product is to serve your customers, and plus, customer data is plentiful. However, customer insights are rarer and harder to assemble. 

One tactical step that many of our clients have found helpful for unearthing these insights: start a monthly cross-functional "Customer Insights" meeting, in which each department must share just themes about customers that they've been seeing.

Customer knowledge needs to be compounded over time. Even if you don’t have any customers yet, you still need to be collecting customer feedback.

2. The Best Differentiated Product Offers the Fastest Path to Addressing Customer Needs

Customers will almost always always choose a product that offers the highest impact on their needs over one that minimizes the total cost.

Does your organization’s product address zero customer needs? Then the product has zero value.

Additionally, products should integrate with customers' existing workflows, processes, and technologies.

3. Differentiation Strategies Must Be Iterative

If there's one certainty in today's markets, it's that there is plenty of uncertainty. It's hard to predict competitors, market changes, and corporate events. How do we tackle uncertainty?

Be iterative.

As you create your product differentiation strategy, your team may feel uncertain. This is good, as a successful strategy will be rooted in your customer knowledge at the time it is written, but it will always evolve.

Make sure to separate ideation from prioritization. Ideation is fast and nimble, while prioritization must be global and context driven.

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

While it’s fairly easy to read the elements of a successful differentiation strategy, it’s harder to create one. We'll walk through how to create such a strategy efficiently and systematically, and offer a real-world product differentiation strategy example.

Overall, there are 6 steps to creating an effective strategy for product differentiation:

1. Define customer segments and "problem area"
2. Identify customer workflows, behaviors, and pains
3. Express pains and other customer insights as customer needs
4. Prioritize customer needs
5. Map features/services against top customer needs
6. Determine new differentiators for product, messaging, and CX

Let’s dig into each of these points further.

1. Define customer segments and "problem area"

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

What is a customer segment? It is a subjective grouping of potential customers based on some 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's critical to define a problem area upfront, as it’s what separates one company manufacturing shoes from another company constructing airplanes.

2. Identify customer workflows, behaviors, and pains

Customers are willing to pay to solve their "hair on fire" needs. This means that for your in-target customers, you must identify their top pain points (within the space of the problems you can realistically solve).

The first time you do this, it can be hard. Here are some things to try:

• Identify workflows that the customer follow, and for each, try to draw a simple block-diagram to show the steps in that workflow
• List all of their "jobs to be done"
• Write down their behaviors and fears

It's critical to note that all of these customer insights (pains, workflows, jobs-to-be-done, behaviors) must come from the customer. This can be gathered through:

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

3. Express pains and other customer insights as customer needs

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

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

Turning the biggest pains into customer needs like this yields a short list of customer needs. This should be enriched by the other insights around workflows, behaviors, and jobs-to-be-done.

4. Prioritize customer needs

The critical step of an efficient product differentiation is to prioritize these customer needs. This is done by first assigning scores to each one, for example:

• Magnitude (1-5): On a relative scale, how much would this customer pay or give up in order to have this need solved?
• Competitive level (0-2): On a relative scale, how many other companies are already tackling this customer need?
• Priority: Magnitude minus Competitive level

Once this exercise is complete, you can rank customer needs according to how large the Priority is. 

5. Map features/services against 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. Determine new differentiators for product, messaging, and CX

Once you have a prioritized list of customer needs that are mapped against features, you can infer a few takeaways:

• Existing features that solve high priority needs with low competitive level: These are your current differentiators.
• Planned/hypothesized features that solve high priority needs: These are the next features to build.
• Features that solve high priority needs where the competitive level is high: These are table stakes, without which you may underdeliver.

Customer feedback at the feature-level can also be very useful to help sharpen the understanding of which areas of the existing product offering are most outstanding in customers' eyes.

Real-World Product 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. Define customer segments and "problem area"

We mapped out two segments: 

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

These were separated from other segments that ultimately weren't attractive enough from a market size perspective: "Food Processing Facilities" and "Raw Materials Processors."

2. Identify customer workflows, behaviors, and pains

We then listed out the pain points for each company, using our customer knowledge acquired from selling in these industries. We also identified what were not pain points for each segment.

Simple workflow diagrams were also assembled based on customer conversations.

3. Express pains and other customer insights as customer needs

Each of the pains identified was turned into a customer need. Workflow realities were layered in afterwards as additional customer needs.

4. Prioritize customer needs

Each need was then scored for Magnitude (how much a customer would be willing to pay for this need to be substantially met) and Competition (how active are competitors in trying to solve this need).

5. Map features/services against top customer needs

Lastly, each customer need was mapped to (1) Features today, and (2) Feature ideas.

6. Determine new differentiators for product, messaging, and CX

The results of this analysis were as follows:

• The current differentiator is the speed with which we deliver maintenance savings, given the low level of competition and the high level of progress we have made already.
• Most urgent features are the OTS sensor suite and the network health dashboard, as these map to the highest priority needs.
• The core of the new marketing message must be, (a) the ability to reduce maintenance spend, (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.”

If you’ve completed this process, your team now has a set of differentiators and table-stakes, as well as the strategic actions required to capitalize on them.

But remember: your work isn’t done. Your customer knowledge will grow and change over time. As it does, revisit the product differentiation strategy often and refine it.

How Often Should I Review My Differentiation Strategy?

Your differentiation approach never happens in a vacuum ⁠— the market, your competitors, and even your own product will always be evolving. To stay competitive and up to date on customers’ needs, effective leadership teams strive to review their differentiation strategy every quarter.

There is a reason why this strategy is not reviewed annually. A typical pitfall of a differentiation strategy is that many organizations do annual strategy planning, and then promptly archive them. This can lead to business executives believing that strategy planning takes too long or becomes redundant.

Instead of taking a bulk timeframe each year to overhaul critical decisions, enterprise companies continuously evaluate their plans and adapt.

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 main pressure-drivers that indicate why you need to reevaluate your differentiation strategy regularly:

1. Your customer and the market knowledge constantly improve

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.

Do you want to formalize your learning process further? Here are four avenues you can leverage:

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

2. Your product and services evolve

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 evolve. For example, your marketing may increasingly strike a balance between differentiated features and "table-stakes" features that are not as top-of-mind for your customers. 

3. Competitors emerge and adapt

Competitors are not static; they too are learning and evolving. Your strategy for differentiation must adapt to the latest market changes. A quarterly review has a higher chance of accomplishing this, rather than an annual review.

Smaller businesses are able to react more nimbly than larger teams, which is all the more reason to regularly review your strategy.

4. Your customers and markets change

Smaller organizations have the ability to react quickly, which is all the more reason to regularly review your strategy.

To adapt to these four areas of pressure, your differentiation strategy must be reviewed each quarter. This way, you can proactively identify headwinds and possibly tailwinds in 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 using the strategy feedback loop and effectively reviewing a differentiation strategy.

1. Strategize annually in a consistent manner

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

• Define outcomes
• Research & diagnose
• Ideate opportunities
• 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. Break the annual plan into quarterly objectives and initiatives

At this point, you have a long-term strategy, but it's still theoretical. No one is executing it, and no one is being held accountable.

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 in your strategy
2. Quantitatively define what "meaningful success" would look like in each opportunity over the next year
3. Quantitatively define what "meaningful success" would look like in each opportunity 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 decomposing a strategy.

3. Assess progress frequently against the quarter’s objectives and initiatives

To ensure initiatives are on track, you can take a page from the Agile playbook and review progress every 1-2 weeks. We call this the Strategy Drumbeat. 

For each quarterly goal, ask yourself every one or two weeks if the objective is:

• Green: In progress
• Yellow: Some setbacks
• Red: Immediate assistance needed

Your goal is for all initiatives to be green every week. 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, deliver a product or service that meets the needs of your customers, and drive profitability, your business must revisit its differentiation strategy often.

Overall, a successful product differentiation strategy is deeply aligned with solving problems for the customer. Before building a plan, you need to plan for your plan. Ensure you and others in the strategy creation process are closely attuned to your customer. Strive to solve their needs as simply as possible. 

Because leaders wear so many hats, some organizations hire differentiation strategy consultants to assist them with forming, implementing, and executing a plan. While a product differentiation strategy takes time and effort to be successful, the benefits and revenue growth are worth it.

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