How to Create a Product Differentiation Strategy (Part 1)
November 11, 2021

How to Create a Product Differentiation Strategy (Part 1)

Gaussian Team

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

Finding the time to research what makes a cohesive product differentiation strategy can be a challenge for busy leaders. Below, we outline what a product differentiation strategy is, who uses it, and what constitutes a successful strategy.

Let’s start with definitions.

What is a Product Differentiation Strategy?

A product differentiation strategy, like most cornerstones of a business, is grounded in customers' needs. Let's first concretely define a customer:

A customer is an individual, organization or internal stakeholder who has unmet needs and is willing to allocate resources to solve them.

A customer’s needs are a function of their pain points and the context surrounding them, such as existing behaviors, business workflows, and jobs. With that definition in mind, let's define a product:

A product is a good or service that can address a subset of a customer’s needs to a greater degree than the total cost to the customer (where total cost includes price, headache, internal resources, learning, etc).

Clearly, the extent to which a product is valuable is the impact on the customer needs, minus the total cost to the customer. Some call this value by another name: utility. In the free world, customers always have a choice in what new products they use—including the choice to not use one at all and maintain status quo.

Therefore, products seek to compete against each other (and against the status quo) to provide the most utility. The ways in which products demonstrate and provide differing value (including features, marketing, design, support, and so on) from each other and the status quo is called product differentiation. Differentiation may be measurable ("vertical product differentiation," eg how well a software improves a customer's employee retention) or objective and unmeasurable ("horizontal product differentiation," eg the colors of a smartphone).

Layering in the definition of "strategy," we end up with:

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

Does this just sound like "product strategy"? It is indeed—in markets where customers have choice (i.e. not in totalitarian states), product differentiation strategy and product strategy are the same thing.

Who Touches the Product Differentiation Strategy?

Overall, your product differentiation strategy provides critical input to various departments—and therefore, should symbiotically incorporate input from them:

  • Product: Adds value where the customer needs it
  • Marketing: Attracts the customers by their needs
  • Sales: Transacts with the customer for something needed
  • Operations & CX: Delivers and satisfies the customer's needs
Customer needs are distilled from customer pain points and workflows (which themselves may be derived from jobs-to-be-done). These two main 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, and so forth.

What Makes a Successful Product Differentiation Strategy?

There are three key elements to a valuable product differentiation strategy:

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

Let’s break down each of these areas further.

1. Knowledge of the Customer Drives Product Differentiation

The goal of your product is to serve your customers, though many businesses lose sight of this reality. In order to serve the customer, you must know the customer. To this end, a product differentiation strategy itself must be based upon a foundation of customer insights. Today, the most successful businesses know their customers inside and out, and orient the entire business toward an exceptional service of what customers those need.

Customer data is plentiful. Customer insights, on the other hand, are rarer and harder to assemble. One tactical step that many of our clients have found: start a monthly cross-functional "Customer Insights" meeting, in which each department must share just 1-2 themes about customers that they've been seeing, without necessarily creating any new work or initiatives. For instance:

  • The Sales Director may note that sales leads seem to lose interest every time a particular feature is mentioned
  • The Customer Support VP may say that most of the support issues over the past quarter seem to be around size
  • The Digital Marketing Head may state that all campaign experiments failed besides the one targeting the 25-34 age demographic

Furthermore, customer knowledge should compound over time — don’t throw it out. After all, customers will be changing far more slowly than the rate of your organization learning about them. The most effective innovation teams strive to constantly advance their understanding of customers, and ensure that these themes are shared cross-functionally. It’s crucial that there is a close connection between customer-facing team members (eg CX, sales, marketing) and more internally-focused team members (eg operations, engineering).

For optimal communication (especially cross-functional), project plans and organizational decisions must be traceable back to the original customer needs and the insights you’ve gathered. This provides ample transparency with your team and improves buy-in.

Helpful hint for unlaunched products: If you don’t have any customers yet, use this article to help you collect customer feedback.

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

Customers have a choice. That's why they'll always choose products that offer the highest impact on their needs while minimizing the total cost. It's an ROI decision—customers need high bang for their buck. The implication? Companies should aim to solve the biggest customer pains (and biggest customer needs) that it is reasonably cheap to do so. Does a product address zero customer needs? This product has zero value. Some examples of customer needs:

  • Must reduce maintenance expense of heavy equipment
  • Must identify equipment failures in real-time
  • Must quickly demonstrate project ROIs to departmental VPs/SVPs

Some customer needs aren't identified as problems—we call these realities or workflows. Products should accommodate and integrate with customers' existing workflows, processes, and technologies. Changing too many aspects of a workflow? This is simply adding more and more to the total cost that the customer has to bear, lowering their return-on-investment, and making you less competitive against the status quo, and it's another barrier to purchase. Identifying workflows is a critical part of customer knowledge.

A helpful heuristic (as taboo as it may sound in the innovation world) is to target profitability as a team. Are you solving customer needs immediately, to the point where you are generating revenue (and thus return) on your development investment? It's a simple financial reframing that can help your team, department, or organization focus on creating high-value products.

See Part 2 of this blog series to find a real-world product differentiation example for an example of how to arrive at customer needs.

3. Differentiation Strategies Must Be Iterative and Continuous

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, corporate events. How do we tackle uncertainty? A simple answer has emerged in the past few decades: be iterative.

As you create your product differentiation strategy, your team may feel uncertain. This is honest, and this is good. A successful strategy will be rooted in your customer knowledge at the time it is written, but it will also be a living, breathing plan. As your customer knowledge evolves (see #1 above), so will your strategy.

To accomplish this, it’s crucial that you separate ideation from prioritization. Ideation is fast and nimble, while prioritization must be global and context driven. It’s imperative that your product strategy avoids the "chicken-and-egg" paradox. This is done through short and simple product iterations. 

Steps to Create a Product Differentiation Strategy

Now that we have explained the foundation behind an effective product differentiation strategy, it’s time to review the concrete steps to create your own. In Part 2 of this blog series, we’ll do exactly that—along with offering a real-world example to provide context for how a differentiation strategy works.

Read Part 2 to discover the steps to creating a product differentiation strategy!

Need help better understanding your customers as part of your product strategy, or creating a plan that identifies and doubles down on product differentiators? Learn how our team at Gaussian can help.

Strategy Playbook download

Photo by Jeremy Bezanger.

Everything you ever wanted to know about Strategy Planning.


Subscribe for innovation and strategy insights.

Join our mailing list to get occasional, insightful articles from Gaussian on profitable innovation and successes in the market.

Continue reading

Work with Gaussian Consulting

Related consulting services

Many companies work with us to achieve the best practices and outcomes mentioned in this article. Our services focus on clients' most pressing opportunities and challenges, no matter the industry.