Differentiation vs. Low Cost Provider

The first type of strategy we will discuss is the differentiation strategy. Differentiation strategy can be defined as a business strategy in which a company tries to gain a competitive advantage by providing a unique product or service, or providing a unique brand of customer service. This strategy is usually associated with charging a premium for the product often to reflect the higher production costs and extra value added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over the other, less differentiated products. For the company to be able to outperform its competitors and earn above average returns, the price charged for the differentiated product must exceed the cost of differentiation. Companies that swear by a differentiation strategy focus on product innovation and developing features customers’ value rather than maintaining the lowest competitive price. The following are different ways firms can differentiate their products to stand apart from standardized products: superior quality, unusual or unique features, more responsive customer service, rapid product innovation, advanced technological features, additional features, engineering design, & an image of prestige or status. An example of a notable company that swears by the differentiation strategy is Coca Cola. They spend a large sum of money in advertising to differentiate and create a unique image for their product. Like most business strategies the differentiation strategy carries some risks. The first being that customers may one day decide that it isn’t worth paying a premium for uniqueness. Another risk is that customers may learn that the extra price paid for a differentiated product no longer has the value that it once did. The last risk is other companies imitating your product. Imitation will vary based on the actual products success