What is a Differentiation Strategy?

Differentiation is a strategy for showcasing unique attributes of a product or service to differentiate it from the other existing competing products or services in the market. It intends to convince the customer that a particular product is unique in its quality and features and is superior to other similar products. 

Product differentiation is done using various methods. That is, the perception of value can be created by various methods.  The change is often subjective, influencing the individual customer's perception about the product.

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Example of Differentiation

Say for example, company X and Company Y manufacture similar hand-soaps. Then X introduces a special ingredient in their hand-soap to make it different from the Y s. This ingredient can be anything that enhances the value of the product. They can use a specific fragrance or a bit more moisturizer. Alternatively, X can differentiate their same hand-soap even without introducing the new ingredient. They can simply change the packaging to improve the aesthetics. They can also use promotional campaigns to differentiate their products without altering anything in it.

Academic Research on Differentiation

• Estimating discrete-choice models of product differentiation, Berry, S. T. (1994). The RAND Journal of Economics, 242-262. This article looks at the effectiveness of supply and demand analysis on markets with multiple producers providing different products. The authors suggest that there are unobserved factors that determine price, and that traditional models may not be entirely effective. New methods for estimating utility levels are suggested and tested.
• Higher-order sliding modes, differentiation and output-feedback control, Levant, A. (2003). International journal of Control, 76(9-10), 924-941. This research helps to explain methods of achieving greater accuracy in higher-order sliding modes. Common pitfalls are examined and suggestions for overcoming them are offered. Computer simulations help to confirm the authors theoretical results.
• Product differentiation advantages of pioneering brands, Schmalensee, R. (1982). The American Economic Review, 72(3), 349-365. This paper shows that pioneering brands can experience a competitive advantage when they offer imperfect information about their product to a group of rational customers. The true effectiveness of advertising is explored, as is the importance of being the first participant in a particular market.
• International trade in the presence of product differentiation, economies of scale and monopolistic competition: a Chamberlin-Heckscher-Ohlin approach, Helpman, E. (1981). Journal of international economics, 11(3), 305-340. This research examines how countries export what they most efficiently and plentifully produce in sectors experiencing monopolositic competition. Trade within and without certain industries is examined, especially in and between areas with different per-capita incomes and population sizes.
• Equilibrium with product differentiation, Perloff, J. M., & Salop, S. C. (1985). The Review of Economic Studies, 52(1), 107-120. This research examines the equilibrium levels of markets that provide competitive products. The relationship between local competition, entry cost, and product differentiation are taken into account when determining consumer demand levels.
• Persuasive advertising in Hotelling's model of product differentiation, Bloch, F., & Manceau, D. (1999). International Journal of Industrial Organization, 17(4), 557-574. Advertising clearly affects the demand for products, and this research analyzes the effectiveness of advertising in a variety of situations. Using a multi-product market, customer preferences and demand-driven price levels are analyzed in situations involving one or more producers.
• Information goods and vertical differentiation, Bhargava, H. K., & Choudhary, V. (2001). Journal of Management Information Systems, 18(2), 89-106. This research examines the effectiveness of selling products that have objectively different levels of quality. By modeling the perceived value of consumers, the authors show the most effective situations in which vertical differentiation can be used to market physical goods by a monopolist.
• Cooperative R&D and vertical product differentiation, Motta, M. (1992). International Journal of Industrial Organization, 10(4), 643-661. This research examines the ways in which research and development will affect competition and quality of a product. By using a market in which multiple products are offered at various levels of subjective quality, the author illustrates the situations in which co-operative research and development can benefit the producers and the market as a whole.
• The value of" value pricing" of roads: Second-best pricing and product differentiation, Small, K. A., & Yan, J. (2001). This research examines the effectiveness of value-pricing by studying consumer behavior when it comes to the roads upon which they choose to drive. This study challenges the pricing structures and traditional beliefs about tollways in particular and pricing models in general. This study employs modeling with two user groups.
• Product differentiation in a market with endogenous sequential entry, Lane, W. J. (1980). The Bell Journal of Economics, 237-260. This article shows that there is a unique equilibrium for differing products and their prices when they are offered to consumers. The research also shows that when these products are first offered to the public, the order in which the products are offered can be controlled to maximize profits for the producer.
• Product differentiation and mergers in the carbonated soft drink industry, Dub, J. P. (2005). Journal of Economics & Management Strategy, 14(4), 879-904. This research uses actual data from household purches to drive simulation models showing the outcome of soft-drink manufacturing mergers from the 1980s. This study demonstrates that the demand for soft-drinks is a complicated of different products and various product sizes. The results of the research show that the merging of the largest manufacturers would lead to higher prices and lower consumer welfare.