How do you create a business differentiation strategy?
A while ago, that’s the question I discussed with a customer. This person, let’s call her Gwen (not her real name) had just started her business in a really crowded niche.
Because there was so much competition in that niche, it was hard to charge a decent fee.
As Gwen explained this situation in more detail, it became clear that she shouldn’t try to compete with others on price (since prices were already so low in her niche) and instead aim to stand out in another way.
So, let’s walk through how and why Gwen should try to strategically differentiate her business from others in the same niche.
First though, let's clarify some terms.
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What is a business differentiation strategy?
The (rather self-explanatory) term describes a strategy that companies use to set themselves apart from similar businesses in the same industry in order to gain a competitive advantage.
Whereas a business differentiation strategy is about the overall business, the focus of a service or product differentiation strategy is narrower (differentiating your service/product from similar offers).
Basically, the strategy answers the question every customer has: “Why should I buy from you and not from your competition?”
Here are some examples of how businesses can differentiate themselves or their products: price, quality, values, level of support and customer service, reputation, etc.
Why can a good business differentiation strategy do for you?
I recently had an unexpected experience that taught me the value of differentiation strategies from the customer perspective.
When I logged into Netflix a while ago, I saw a new Arthurian-themed show called “Cursed.” My immediate response was to wonder if we need yet another take on the Arthurian legend.
After all, since Geoffrey of Monmouth's fanciful Historia Regum Britanniae (that got published in the 12th century and jumpstarted the whole Arthurian legend), we’ve been drowning in different retellings of it. For instance, I’ve read and watched at least a dozen versions of it, and that’s just the tip of the iceberg.
A few hours later, I was immersed in Cursed and realized that yes, I did need to see a variation of the legend that included girlpower Nimue and a Black Arthur. A few days later, excitedly I shared about the show with others and hooked a few people into it.
One could say that this is an example of a successful product differentiation strategy. If you do a great job at answering an unmet need, it can help you create an audience of true fans.
Let’s look at what I learned from this experience that’s directly applicable to Gwen’s situation.
What makes a business differentiation strategy work?
A great differentiation strategy is immediately obvious to the customer and taps into an unserved need.
Take, for instance, the email provider Protonmail. Why would anyone want to pay Protonmail for an email account when they could just get a free Gmail account instead?
The answer is immediately obvious when you go to Protonmail’s website: their basic pitch is that they’re like Gmail but without the creepy data gathering. In other words, Protonmail's competitive advantage is privacy. It's how they differentiate themselves from other companies and there’s clearly a growing need for it.
How about Cursed? The image they use is literally a woman (Katherine Langford who plays Nimue) with a sword. It’s immediately obvious that they’re offering a retelling of the Arthurian legend with a strong female lead and they emphasize that in many different ways:
who run the w̶o̶r̶l̶d̶ fey? girls. pic.twitter.com/T8sRwNQ7Jt— Cursed (@CursedNetflix) August 22, 2020
As someone who used to love the Arthurian legend as a child and felt sad that there weren’t any female characters I could identify with, I can attest that there’s a need for that in the marketplace.
As you can see these, two strategies help differentiate an offer (email provider/Arthurian stories) from similar offers.
Gwen needed something similar. Here's a process that can help her find it:
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The 4-step process for creating your business differentiation strategy:
What do or other customers not like about your competitors?
Start with customer feedback. If there’s something that you or other customers don’t like about your competitors, that’s a great place to start.
Are they too expensive? Too transactional? Too slow? Not ethical enough (ethical considerations can definitely be a factor in the marketplace and increase customer loyalty)?
For instance: “While I like the scarves my competitors produce, I don’t like their ‘fast fashion’ approach and that they manufacture their products in sweatshops."
In the case of Cursed, a potential answer to that question could be: "What I don't like about other shows and movies about the Arthurian legend is that women don't play a significant role."
Could you do this one thing better?
If you have found something that you or other customers don't like about your competitor's offer, ask yourself if you could do this one thing better than them.
At this point, you don't yet need to know every single detail about how to make it work, you just need to know if there is a realistic chance that you could figure it out with reasonable effort.
For instance: "Yes, I could create scarves in more ethical ways. Figuring out the best way to do this would require some research but I am aware of other people who are doing something similar and pay people a fair wage so it's definitely possible."
In the case of Cursed, a potential answer could have been: "Heck yes! I can create a retelling of the Arthurian legend and put a woman in the front and center of the show. And while we're at it, why not make Arthur Black?"
Do enough customers care about this one thing?
After you have identified something that your competitors don't do so well and that you could do better if you put some effort into it, it's time to do customer research to find out if this could give you a competitive advantage.
Concretely, you want to know if enough customers care enough about this one thing you could do better to make it worth your time. If you did this better than your competitors, would they buy from you instead?
This step requires quite a bit of research. In addition to other forms of research, you also should directly talk to some people in your target audience.
For instance: "Alright, so I have done research into demand for ethical fashion and talked to a number of customers what really matters to them. What I have found is that people would prefer to buy ethical scarves from me, as long as that change only increased my prices by 15 USD per scarf."
In the case of Cursed, a potential answer might have been: "As the enduring success of the book 'The Mists of Avalon' indicates, there's demand for a female-centered retelling of the Arthurian legend. After also checking the demographics and doing further [presumably very extensive] research into shows with female leads, it looks like there would be an audience for this project."
Test out your differentiation strategy, as cheaply as possible
Once you have created a potential differentiation strategy, you want to test it out. Even if people said that they would buy ethical scarves from you, you don't know if that's actually true until they have put their money where their mouth is.
So, you want to consider the cheapest way to test our your strategy in real life so that you keep the risk as low as possible.
For instance: "I could buy a few dozen ethically-sourced scarves and put them online for the price that my customers mentioned to check if they would actually buy them. If I get enough orders, I can consider wholesale ordering. If I don't get any orders, at least I won't have put that much money down the drain."
In the case of Cursed, a potential answer could have been:
"We could do a pilot/a first season with limited budget and see how the viewership reacts. If we get a positive reaction, we can then renew for more seasons."
By following the steps above, Gwen can create a viable business differentiation strategy (just like Protonmail).
While her niche has about as many competitors as there are retellings of the Arthurian legend, a great differentiation strategy can still help her stand out without needing to have the lowest prices.
The process above teaches you how to create one—like a true legend.
Two additional resources
If you need more help with monetization in your business, I recommend this very affordable masterclass:
Marketing and Monetization 101 Masterclass
If you haven't yet started your business, I also recommend this FREE mini-course:
FREE Do What You Love Mini-Course