Differentiation relies on the concept that customers will pay more for an item if they perceive that it is different and if the basic for the difference is valued by the customer.
Differentiation involves achieving competitive advantage through pinpointing product or service attributes that customers perceive as valuable and positioning the firm to meet those demands betters than the competition. It refers to -
"...creating something that is perceived industrywide as being unique. Approaches to differentiating can take many forms: design or brand image, technology, (...) features, customer service, dealer network, or other dimensions" (Michael E. Porter ).
Differentiation has several potential advantages:
- Differentiation provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price.
- It increases margins, which avoids the need for a low-cost position.
- It can provide entry barriers for competitors as a result of customer loyalty and the need for a competitor to overcome the product or service uniqueness.
- Differentiation yields higher margins with which to deal with supplier power.
- It can mitigate buyer power because there are no comparable alternatives.
- The firm that has differentiated itself to achieve customer loyalty should be better positioned vis-a-vis substitutes than its competitors.