With more than five million new businesses started in 2022, according to the US Census Bureau, it’s crucial companies create a strong, recognizable brand so they stand out from the pack. Consider companies such as Patagonia, Fenty Beauty, Google, or Spanx. These successful, mainstream brands may at first seem risky, unconventional ventures due to their unique qualities and innovative business plans. 

How did these companies evolve and grow into names that resonate with customers? Each took a great idea and used a differentiation strategy to stand out from the competition. 

What is a differentiation strategy?  

A differentiation strategy is when a business or brand makes the decision to compete by offering a different product, feature, or service to its target audience to gain a market advantage. The approach highlights a business’s unique features, or unique value proposition, which could include a company’s product offerings, exceptional leadership, or distinct customer service experience. Even emphasizing a business’s marketing tone—sassy, humorous, or earnest—or striking visuals of beautiful product packaging or website design can make a business distinct. 

Some entrepreneurs have differentiation baked into their new business or brand. Consider Swedish furniture company Ikea, known for its affordable, modern designs, do-it-yourself product assembly, and experiential stores—all of which set it apart from other furniture stores when it came to the market. 

However, if you are still assessing what makes your business different, review the two main types of differentiation strategies.

1. Broad differentiation strategy

A broad differentiation strategy is when businesses set itself apart from competitors by focusing on one type of product or service. For example, an online platform that sells all types of bicycles—electric, mountain bikes, old-fashioned three-speeds, and folding bicycles—might decide to focus only on folding models. Specializing might be a calculated risk: You could lose potential and existing customers looking to buy only mountain and electric bikes; or become the No. 1 folding bike ecommerce platform.

2. Focused differentiation strategy 

A focused differentiation strategy zeroes in even more on a specific target market. For example, a folding bike retailer might only sell one brand—such as an import from Japan—and offer Zoom customer support with a technician for help with at-home assembly. A focused differentiation strategy can be risky due to its limited customer segment, but financially rewarding when implemented successfully.

3 benefits of a successful differentiation strategy

The three benefits businesses gain from implementing a solid differentiation strategy include:

1. Strong appeal to target customer

Creating a niche product or service typically resonates with a business’s target customers. A whale enthusiast, for example, might buy products from a shop that only sells items emblazoned with whales—socks, earrings, t-shirts, bed sheets, tablecloths—especially if a portion of each sale is donated to a whale conservation charity. Regardless of the market, offering a product with distinct features, capabilities, or other unique traits can add cachet and make it more appealing to your audience.

2. Increased brand loyalty

Uniqueness can also attract loyalty. Customers who discover companies whose values, products, or services are unlike other market players, yet are similar to their own, often feel a connection to a company over its competitors. This can positively impact customer satisfaction rates, which often translate into customer loyalty. 

The hot sauce market, for example, is highly saturated, yet customers often find their favorite brand. In this scenario, factors that increase brand loyalty include taste, packaging, price point, where it’s sold (such as farmers market, supermarket, boutique grocery store, or ecommerce platform), quality and origin of ingredients, treatment of farmers, copywriting and marketing tone, name recognition, even celebrity partnerships. 

3. Higher prices, increased profits

Specialized businesses can often charge higher prices because customers are willing to pay more for what is, or what they perceive to be, high quality products. In turn, this can give a company a wider profit margin. Many consumers think if a brand is niche, there are no substitutes, so a higher price point is acceptable.

4 types of differentiation strategies

Product differentiation
Service differentiation
Reputation differentiation
Pricing differentiation

There are subcategories of differentiation strategies that help businesses stand out from their competitors. The four key types can be broad or focused in characterization. 

1. Product differentiation

When you are trying to persuade consumers to buy your product over a competitor’s because it is unique or already has a strong, established brand name in the market, that is product differentiation. Such products typically appeal to a small yet loyal target customer. While it doesn’t guarantee market share, this strategy can center your brand and gain attention in an otherwise crowded marketplace. Examples of product differentiation may include ethically sourced, single-origin spices or shampoo made with hand-gathered seaweed from the Greek Islands. 

If you choose to sell your differentiated product at a premium price, you can attract potential customers who value real (or perceived) quality products, and are willing to pay high prices. This strategy may be broad or focused.

2. Service differentiation

Service differentiation is selling a service to your target audience that differs from the competition based on factors such as quality, customer service, price, delivery, and environment. This approach is often taken by businesses that embrace a business-to-consumer (B2C) model, and is not exclusive to certain market segments. You may benefit from conducting competitive intelligence to assess and analyze information about your competitor products and marketplace before deciding how to set your products apart.

3. Reputation differentiation

Reputation differentiation focuses on a brand’s image and identity, which includes everything from its logo and visuals (and the perceptions they evoke) to the uniqueness of its persona and how it is viewed by its customers. If you have visually striking packaging, strong values, or an especially engaging website that performs flawlessly, these help customers have a positive association with your business. Every detail that contributes to a memorable experience when purchasing a company’s products can influence your reputation and set you apart. 

4. Pricing differentiation 

Pricing differentiation is a combination of adjusting your pricing based on your customer’s traits and characteristics, and competitor pricing. Depending on your marketing strategy, you may take into consideration customer willingness to pay based on geographic location or market demand, for example, when assessing how the competition prices its products or services. You may lower your price point to compete with a more expensive brand. But this strategy can be risky, as competitors may modify their market action to help level the playing field.

Another price differentiator might be if your brand is synonymous with an affordable, mid-range, or luxury price point; think Kia versus Jaguar; H&M versus Gucci. In such circumstances, you would likely have different target audiences.

5 tips for developing a differentiation strategy

Know your differentiation factors
Research your target audience and market
Develop your differentiators
Tell your story
Create brand messaging

If you have a generic strategy for your company that’s not working or are unsure of your business’s unique offerings, here are five differentiation strategy examples to help your business distinguish itself:

1. Know your differentiation factors 

The first step in developing a differentiation strategy is assessing what makes your business unique. Capitalize on that knowledge to help your business stand out, especially in saturated markets such as natural skin care, hospitality, or candle making. Start by completing a checklist of all your products and services, pricing, and anything else your customers would want to know about how your business differs:

Is your pricing exceptional? Maybe you feature low prices or frequent special discounts. 
Are your ingredients sourced in a specific way? Maybe your vegetables are grown at a regenerative farm. 
Is your manufacturing special? If you are a small-batch beauty brand that infuses crushed pearls in its organic face serum, emphasize that to your customers. 
Are the materials and packaging you use noteworthy? Maybe they are made from recycled magazine pages.
Do you have a unique family or personal history that’s part of your business story? Maybe your business was inspired by a trip taken as a child, or by an uncle who immigrated from abroad and taught you how to create a particular item you sell.

If it’s hard to identify differentiators, consider journaling to organize your ideas or brainstorming with a trusted colleague or mentor. Some themes to examine include: price competition, visuals, brand identity, and target consumer. This process may help you pin down your differentiators. 

2. Research your target audience and market

Conduct research to see how your products or services compare to other brands in the same industry. You can do this through customer surveys and interviews, conducting a competitive analysis, or convening focus groups. Hone in on your target audience and market by answering these questions:

Is the marketplace saturated or emerging? 
Is there a range of price points? 
How do existing companies in the same niche market themselves or advertise? 
What percentage of market share do you want your business to capture? 
What is the demographic of your target consumer and what is their lifestyle? 
What are their economic, political, and emotional concerns? 
Why would they be willing to spend money on your product or service over a competitor’s offerings, especially if they are the same quality? 
What is the lowest price you could charge? 

3. Develop your differentiators 

Develop your differentiators as part of your business’s mission statement, keeping in mind the wants and needs of your target customer. Understand what makes your brand appealing and communicate those unique qualities to your audience. A few questions to ask yourself in this phase include: 

Are your products ethically sourced? If so, how are they different from other brands that are ethically sourced? Why would they appeal to your target consumer? 
Is your product or service considered luxurious and affordable to a small demographic? Or, is it aimed at a mass market?
Is there a sustainability element to your business? Is it in the packaging or sourcing? Does your target consumer want sustainability values folded into the business? 

4. Tell your story

Your compelling origin story can make your brand more appealing than that of your competitors. Many business owners feel their brand story isn’t particularly interesting, but mining your business’s journey can help you discover interesting nuggets that engage customers and media alike. Ask yourself:

What series of events propelled you to launch a business?
What is your family heritage, where were you born, and did that impact why you opened your business? 
What sets you apart from competitors now? 
What makes you excited to get up and go to work everyday? 

Share your fresh or unusual stories through your company’s website, newsletter, or social media. You are more likely to attract media attention by delving into your story that weaves together the professional and personal.

5. Create brand messaging

Create a consistent brand image and brand identity across all platforms that reflects your differentiators. 

Let’s say you own an online shoe store specializing in high-end, Italian-made shoes. Start your brand messaging by creating a virtual space to attract your target customer. The design of your website should reflect the quality and price point of the shoes. Would elegant fonts and muted tones be appropriate? Maybe create a digital lookbook in your signature style on your website to show your brand’s visual style. 

If customers are attracted to your business because of your differentiation strategy, they may become repeat buyers. 

Differentiation strategy FAQ

What are some challenges of a differentiation strategy?

Some challenges of a differentiation strategy include being unable to articulate and nail down authentic differentiators in your business, perhaps because there are none. Another challenge includes making superficial splashy changes not relevant to the business and mistaking them as differentiators.

What’s a real-world example of differentiation strategy?

Ecommerce shoe retailer Zappos is an example of a brand that has embraced a service differentiation strategy. The brand is known for its outstanding customer service and branded “WOW” experience that includes a 365-day return policy, sustainability like the LEED-Gold certification of its Las Vegas headquarters, and affordable prices.

What’s vertical product differentiation?

Vertical product differentiation is when products or services are sold at different price points and levels of quality. If a customer decides to buy an item, service, or experience based on quality or price point, it is considered a vertical differentiation.

What’s horizontal product differentiation?

Horizontal product differentiation is when the customers choose to buy a particular item over another, despite the same products selling for the same price and level of quality. Therefore, horizontal differentiation is based on a customer’s personal taste and preferences, rather than cost.

How is the effectiveness of a differentiation strategy measured?

A company can measure the effectiveness of its differentiation strategy through customer surveys and tracking key indicators such as profit margins and unit sales, both before and after implementing a strategy to differentiate.