When explaining a new product or service to a potential client we’ve all been asked, “Why should I buy from you; what do you do that’s different?” This simple question reinforces the message that differentiation is valuable. While this is often true, it is not always true.
For entrepreneurs going through the customer discovery phase with their business this can be a dangerous message to receive time and time again because differentiation for the sake of being different is not a sound business strategy.
What is differentiation?
Kevin Lane Keller, Brian Sternthal, and Alice Tybout wrote a great article for the Harvard Business Review called Three Questions You Need to Ask About Your Brand that asks two important questions about points of differentiation – i.e. the things that are different about your product or service.
“Are they desirable to customers, and can you deliver on them?”
The question of desirability is straightforward; are customers willing to pay for your unique product or service? The question of deliverability is slightly more complex and breaks down into components of feasibility, profitability, and defendability. Feasibility refers to whether or not you can deliver on all your points of differentiation. Profitability is your ability to deliver your unique product at a competitive price that allows for a reasonable profit. Lastly, defendability refers to how you prevent others from duplicating part or all of your uniqueness. Some common ways to defend a product are by protecting your idea through intellectual property (IP), by hiring specific people to develop your product, or by offering a feature at a price that others simply cannot.
Over-focusing on feasibility
In my experience many entrepreneurs over-focus on product design. In other words, they focus more on feasibility and less on desirability, profitability, and defendability when creating points of differentiation. The result is a beautifully designed product that is desirable at this moment, but might not be different enough to prevent copying, and therefore may not be desirable or profitable in the future.
This situation often arises because entrepreneurs don’t ask enough questions in the customer discovery phase. Many entrepreneurs hear that customers want a product that accomplishes X and then think to themselves, “We can do that! That’s feasible,” and they begin to move forward with the project.
What entrepreneurs sometime fail to do is ask additional question about existing products that can accomplish X and what is desirable/undesirable about them. Answering those questions will guide the development of a desirable and defendable new product that addresses a specific, narrow set of criteria for a niche market.
A case study
A controlled process of differentiation, starting with a product that is designed specifically for a narrow market, reduces the risk of creating a general product that is feasible to deliver but isn’t necessarily valuable or defendable. However, no market will be safe from competition forever and it is important to monitor profitability and defendability for signs that it’s time to re-differentiate.
Let’s consider an example that most of us are familiar with. Many entrepreneurs do at least some business online and have to make decisions about which web-based payment solution to use. There are two basic models. Traditional merchants who moved online after building physical world payment solutions seem to have a monthly maintenance/subscription fee and take a small percentage of each transaction. Newer web-only merchants have products without monthly maintenance/subscription fees but take a larger percentage of each transaction.
Web-only merchants are able to offer a desirable alternative model because they have a specific product for niche market businesses that have fewer transactions and are willing to pay a higher percentage of each transaction to avoid the maintenance/subscriptions fees. One risk to this model is that merchants serving this market may face challenges of profitability because they have lumpy revenues due to the infrequent transactions of their customers.
As long as there are few competitors, each merchant could control enough market share to stay in business. Now the defendability of these web only products may be changing. It is becoming easier to replicate these products and as a result we are seeing lots of vendors enter into this space with similar products to claim small market shares.
Beware the pressure to discount
So what do businesses do when they realize their product is elegantly designed and generically desirable without being profitable or easily defendable? Frequently they discount trying to attract a large number of new customers. In the process they may unintentionally compromise their profitability. You will see campaigns like, “sign up now and get 6 months free, or sign up today and enjoy this special rate!” This tends to be a short-term solution because it is easy for competitors to price match. A better tactic is to recognize that pressure to discount may be a sign that changes are needed to keep your product desirable, profitable, and defendable.
Differentiate more effectively
How can you differentiate most effectively? Focus on getting deep customer insights to really understand the desirability of a product and be brutally honest with yourself about whether the point of differentiation is defendable. Believe it or not, it is OK to pass on opportunities occasionally. Differentiation is a continuous process and your points of differentiation may not stay the same over time.
Lastly, monitor the profitability of your product and pay close attention to your competitors. That way if you are feeling pressure to discount you can make a pivot, add a feature, or improve how you market your product in order to keep it desirable, deliverable, and differentiated.
Image credit: by Jesus Solana, via flickr.com.