If your product exists in a competitive ecosystem with multiple companies offering the same service, then you need to find a way to gain a competitive advantage. This is where a product differentiation strategy comes in.
Product differentiation is the process of making one feature, functionality or area of the product, stand out from the many other competitors offering the same service. But it shouldn’t just be unique and original—it should bring real, tangible benefits to the target users you’re building the product for. This is where you come in as a product leader to figure out what that differentiator should be, based on user research.
There are different areas of the product to focus on when it’s time to develop a product differentiation strategy. Where you want to focus your differentiation efforts depends on a lot of factors unique to your product (industry, type of service, etc), but these are some examples and common ways products approach a differentiation strategy:
Your product should have a straightforward user experience and look good. But so do your competitors’ products. The question then becomes, how are you using design to make the lives of your target users easier while also standing out from your competitors? What are your unique design value props? Can you trace a line from your design choices to the specific problems your users are trying to solve?
Benefits and features
Instead of building every possible feature that your customers might use, you can differentiate your product by focusing on a specific problem (or set of problems) instead. Ask yourself: does this feature solve a high-priority problem for the target user? Is it unique in how it stands out from the competition? Focusing on a feature differentiation strategy doesn’t mean doing the most to be hyper-unique in every way. It has to address real, specific problems faced by your users—problems that your competitors aren’t solving.
The way the company approaches customer support can add or take away from the value of the product as perceived by your potential users. Fast response time, personalized onboarding experiences, helpful communities that address common questions about the product—whatever you choose as your support differentiator, it should be clearly different from the competition.
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What’s the difference between the product differentiation strategy and the unique selling proposition (USP)?
Usually, a USP is defined before the product is born and sold to users. But when it’s time to come up with more areas to differentiate your product from the competition, more than one USP can be formulated. You’d first run your product or product line through a model or strategy canvas and analyze the areas defined above (Design, Pricing, etc) for potential differentiation opportunities. For the aspect of your product that you decide to differentiate—say, the pricing model—you’d come up with a future USP.
Think of it this way: the product differentiation strategy is both
- how you’ll find that area of your product to optimize and set apart from the competition.
- the plan for how you’ll go about differentiating that aspect of the product
The USP is the what. It’s the aspect of your design, pricing, features or customer support that you’ll sell as the differentiator. So, let’s say you analyze your product from end-to-end. You and the product team realize that you have the resources to come up with a differentiation strategy and a USP for pricing. An example of a USP here would be: “Let’s plan to stand out from the competition by offering a longer free trial than everyone else” or “Let’s offer a significant discount code for people who refer others to our company.”
Why do you need a product differentiation strategy?
There’s no point in creating a differentiation strategy if it’s done for the sake of looking different on the surface, rather than for the sake of offering tangible, specific benefits to a defined or underserved target audience. At its very core, a product differentiation strategy—whether it’s pricing, design or customer service—should be about creating new unique benefits, or revamping existing aspects of the product so they become intrinsically linked to a benefit that addresses a real user problem.
Does your product have a unique benefit that encourages your customers to buy from you instead of the competition? If you don’t have a clear answer to this question, it’s time to assess the product to see what (current or future) aspects, features or functionalities need to be optimized and turned into tangible benefits.
Other benefits of having a product differentiation strategy:
- It creates loyal users who feel like the product speaks to their specific needs over other similar products in the market
- If a low-cost pricing model isn’t possible, a product differentiation strategy in other areas creates a competitive edge outside of cost
- It creates value by perfecting one area of the product in a way that directly correlates to proven user needs
How can you find your product differentiation strategy?
You defined your product’s value proposition at the start of the product development process. Now, you’re at a stage in the product lifecycle where you want to find new and better ways to differentiate it from the competition. Or, alternatively, you’re working on a new product line in a saturated market, but you have qualitative and quantitative data that tells you there’s an opportunity to differentiate from the competitors.
If you’re an established organization looking to either work on an existing aspect of the product or generate a new line of products, start by stepping back. Analyze/audit your current product strategy, and the many moving parts that make up your product (internally at the product development level, and externally at the stakeholder, competitor and customer level).
The goal at this stage is to take stock of everything before choosing one area or aspect of the product (design, pricing, customer service) to differentiate.
If you want to do an external analysis of the landscape and ecosystem your product exists in before getting into the internal parts, start with a product feature competitive analysis (which we covered in our Product Planning guide). Next, focus on finding out the motivations, problems and needs of your users by using one of these product value proposition models. These models center around uncovering the relationship between what your product offers and how to best tailor those offerings to your specific user (and business) needs.
For an internal analysis of the different areas of your product (design, pricing, features, customer support, etc), use one of the tactics defined below. These tools, frameworks and canvases act as diagnostic tools that help you assess the product’s internal ecosystem in a holistic way.
They also provide a framework of action—the needle of the compass that can point the product manager towards the areas of the product that have the potential for differentiation.
If you’re not sure which areas you should consider for a product differentiation strategy, run it by a SWOT Analysis. SWOT is a strategic analysis and planning tool that looks at a combination of the external and internal influences that affect product development. SWOT stands for Strengths, Weaknesses, Opportunities and Threats.
A SWOT analysis of your product requires that you look at both the internal and external factors that make up/affect your product. It’s a powerful exercise that can help product managers determine the following:
Strengths: take stock of the aspects of your product that put you ahead of the competition, satisfy your users, and directly contribute towards moving the product closer to the product vision.
- Questions to ask: What are the value props that your product offers? What problems do you solve in a way that your competitors don’t? What internal and external resources do you have that you can use to push an aspect of the product forward? What do your users think are your strengths?
Weaknesses: identify harmful weaknesses that competitors could capitalize on. These are the areas where your product could improve.
- Questions to ask: What areas of the product could use improvement? What’s your competition doing better than you? What’s the cash flow/debt situation? What are the most common complaints we hear from our users (both potential and current)?
Opportunities: these are the external factors (market, consumer trends, technology) that affect the product. What current situation can the product take advantage of? Is there any potential to leverage strengths or weaknesses so they align with these opportunities?
- Questions to ask: Could one of our weaknesses be turned into an opportunity? Can any of our competitors’ weaknesses be turned into an opportunity? What are some user needs (based on the common complaints they voice about the product) that can be turned into potential growth opportunities?
Threats: these are also external factors out of your control. These are the factors that will inevitably affect your product, so you have to plan to avoid them or minimize their impact.
- Questions to ask: How are your competitors better equipped than you (funding, company size, etc)? Is your security in tip-top shape? What are some market/industry trends that you could foresee and prepare for?
Pro tip: If you’re interested in analyzing more closely the external factors that affect your product’s potential for differentiation, you can also use these popular tools for strategic analysis:
- Pestel Analysis (Political, Economic, Social, Technological, Legal, Environmental factors)
- Porter’s Five Forces Analysis (the five competitive forces that shape a product’s strengths and weaknesses)
Balanced product scorecard
A traditional product scorecard typically only measures external KPIs (financial and user experience). These KPIs are important for measuring the performance of the product, but they don’t paint a full picture. That’s where a balanced product scorecard comes in.
Originally designed by Roman Pichler (inspired by the book The Balanced Scorecard: Translating Strategy Into Action by Robert Kaplan and David Norton), the updated version of the traditional product scorecard encourages product managers to look beyond the usual financial and user KPIs. A balanced product scorecard also takes into consideration people, processes and product KPIs. These are all areas of the product that can be explored for differentiation possibilities.
A balanced scorecard (BSC) can act as a diagnostic tool before developing a product differentiation strategy. By defining the process, people and product KPIs, measuring them over a quarter or two, then analyzing the results, product managers can see what areas of the product have room for improvement. These areas can then become the focus of a product differentiation strategy or even an innovation plan.
-Credit: Roman Pichler
The BSC defines business goals as the “benefits your product should deliver.” Or, as Kaplan and Norton put it, this section answers the question: to satisfy our shareholders and customers, what business processes must we excel at? This is an opportunity to step back and analyze what the product is doing to meet those business goals. Does it meet specific user requirements? How are we measuring that? Can we optimize our process to better measure this?
The financial section of the BSC takes into consideration every aspect that impacts financial health. At this stage, you should be asking:
- What’s the pricing strategy?
- How does the current pricing strategy affect current and potential customers?
- Is there a budget for expanding performance/technical goals?
- Are stakeholders and users meeting the goals they hoped the product would satisfy?
The rest of the BSC is straightforward: For the product and process section, generate the KPIs that tell you how the product is being used and developed. For the customer section, ask questions related to conversion rates, customer feedback and even market share. And finally, for the people section, look internally at the product team. How engaged and motivated are they? Do they feel like their efforts contribute to the vision, strategy and business goals?
Depending on the answers to all these questions, and the resulting KPIs, product leaders can then ideate potential differentiation strategies for each area of the product.
What can we do at either of these levels to push the product to new differentiated/innovated heights? By analyzing the product from end to end using a balanced product scorecard, product managers can poke holes and brainstorm potential ideas for a differentiation strategy.
Ready to start building your own product roadmap? Try our ready-to-use product roadmap template.