The Finer Points of Product Differentiation

Sunday, January 3, 2016

Everyone wants to be able to charge more than the next guy. After all, who wouldn't want to earn more money for a given investment of time, materials and effort?

There are many ways to earn more money per unit sold, but the most obvious is to differentiate your product. Most people would agree that if you want to charge more for your product, you'll need to make it better than the competition's.

Unfortunately, it's not so simple.

In the model below, I demonstrate two criteria that you must take into account before you can predict whether a given differentiator will generate additional revenue:

	Differentiation is valued by customer	Differentiation is not valued by customer
Differentiation is understood by customer	Customer will pay a premium.	Customer will pay "normal" rate. Seller's reputation may be diminished as customers think they are being upsold with useless features. More valuable differentiators may be forgotten.
Differentiation is not understood by customer	Customer will pay "normal" rate, unless the differentiation is explained or discovered. Customer has the potential to experience higher levels of satisfaction upon discovering the unexpected value.	Customer will pay "normal" rate.

As you can see, it's not enough to build a better mouse trap. Doing so will not cause the world to beat a path to your door. Two conditions must be met before your door faces even the smallest risk of usage:

The differentiator should be understood by the customer. It terrifies me that I felt the need to type this, but many companies fail miserably at this. When I was buying a car, the salesman gave me all sorts of statistics about the engine. Unfortunately for him, I know next to nothing about cars. The numbers may have been a differentiator, but I didn't understand how they were relevant. A more effective approach would have been for him to speak about how additional torque would allow me to speed up more quickly.
The differentiator must be valued by the customer. When I was shopping for a car, the salesman attempted to upsell me to a more expensive vehicle. His pitch consisted of the fact that the more expensive model had leather seats. Living in a very hot region of the country, leather seats could be very uncomfortable. They were certainly not something that I would pay a premium for, so I chose the base model.

Don't just differentiate for the sake of differentiation. Differentiate for a profit, using this model as a guide. It's not very complex, but many companies could benefit greatly from it.

Want to improve your pricing? Contact me for a consultation or take a look at my book on how to price software systems.