In marketing, product differentiation is the modification of a product to make it more attractive to the target market. This involves differentiating it from competitors' products as well as one's own product offerings. In economics, successful product differentiation leads to monopolistic competition and is inconsistent with the conditions for perfect competition, which include the requirement that the products of competing firms should be perfect substitutes.

The changes are usually minor; they can be merely a change in packaging or also include a change in advertising theme. The physical product need not change, but it could. The major sources of product differentiation are follows.

• Differences in quality or design among output (product)
• Ignorance of buyers regarding the essential characteristics and qualities of goods they are purchasing
• Pervasive sales promotion activities of sellers and, in particular, advertising
• Possibility of developing significant product differentiation through advertising is greatly enhanced for so called “gift goods” or “prestige goods”
• Differentiation in the locations of sellers of the same good where the product fills no technical function but rather can satisfy many different sort of personal needs or uses (psychological or physical).

The objective of this strategy is to develop a position that potential customers will see as unique. If your target market sees your product as different from the competitors', you will have more flexibility in developing your marketing mix. A successful product differentiation strategy will move your product from competing based primarily on price to competing on non-price factors (such as product characteristics, distribution strategy, or promotional variables).

Differentiation has been shown to impact firm performance positively both theoretically and empirically. Differentiation primarily impacts performance through two mechanisms:

• Reduced price sensitivity: Consumers may become willing to pay a premium price for the differentiating factor/s.
• Reducing directness of competition: As the product becomes more different, categorization becomes more difficult and hence draws fewer comparisons with its competition.

Most people would say that the implication of differentiation is the possibility of charging a price premium; however, this is a gross simplification. If customers value the firm's offer, they will be less sensitive to aspects of competing offers; price may not be one of these aspects. Differentiation makes customers in a given segment have a lower sensitivity to other features (non-price) of the product.

The disadvantage of this repositioning is that it usually requires large advertising and production expenditures.

See also

• non-price competition
• marketing
• market segment
• product management
• brand
• country of origin
• marketing plan
• mass customization
• positioning''

External links

• Spring 1997 - Jonathan B. Baker Director, Bureau of Economics Federal Trade Commission on Product Differentiation

• http://www.economicswebinstitute.org/glossary/product.htm Further explanations and a free software

Marketing | Product management | Management | Imperfect competition

Diferenciación de producto | productdifferentiatie | Diferenciação do produto