Many people in business, especially marketing, talk about the importance of differentiation—setting yourself apart from the competition and showcasing your unique value. This is where the concept of a unique selling proposition, or USP, came from.

However, there is often confusion, in practice, about what it means to differentiate oneself, and how that creates value for your business.

We at GBB Media have found, for example, no shortage of business owners who possess one (or several) of the following unfortunate beliefs:

• My differentiator is my price; since I’m cheaper than my competitors, people will buy from me.
• I don’t want to be different from my competitors; they’re already seen as the industry standard, so if I deviate from them, people won’t buy from me.
• Differentiation is just a marketing gimmick; it doesn’t actually lead to anything.
• There’s nothing that makes me (my business) unique; I guess I just don’t have a USP, and since I’m still in business, I think that’s fine.

If you resonate with any of the above, or entertain any related beliefs, then perhaps you might find value in this article. To give some broader context to the practice of differentiation, materialize its value, and offer you some ideas on how you can implement it, we’ll take a brief journey through some important microeconomics concepts and see where differentiation fits in. Ready? 

Perfect vs. Imperfect Competition: The Importance of Differentiation

In microeconomics, there are four basic types of competition (between businesses and firms): perfect competition, imperfect competition, oligopolistic competition, and monopolistic competition.

Without diving into any unnecessary details, I’ll simply touch on the fact that these types of competition correspond to the four types of market structures that can arise in an industry or sector, and that consequently they determine and limit the behavior of firms in that industry or sector.

We won’t concern ourselves here with oligopolistic and monopolistic competition; if you would like to learn more about those, send in your request here, and I can cover them in a future article. For now, let’s move on to our main focus: perfect vs. imperfect competition.

Perfect Competition

A perfectly competitive market contains many small firms that are completely homogeneous—i.e., they sell exactly the same thing. While perfectly competitive markets are rare to find outside of economic theory, close examples do exist, particularly in farming, which we will soon see.

A key trait about a perfectly competitive market is that the firms within it are price takers. That means that, as a perfectly competitive firm, you don’t set your own prices—you simply accept the price that the industry has determined (based on overall supply and demand), and supply everything that you have at that price.

Let’s look at the example of a strawberry farmer to see how this works—and, more importantly, why this works.

Suppose you’re a strawberry farmer at a farmer’s market selling your produce, that there are other strawberry sellers at the market, and that the standard price for strawberries at that market is $2 per box. Then, if you’re in a perfectly competitive market, the following facts are true for you:

• Your product is the same as everyone else’s. Generally speaking, it’s hard to tell the difference between one supplier’s strawberries and another’s, especially if you’re all good farmers. So, going with your strawberries or the next farmer’s does not make any difference for the consumer.
• You can’t sell your boxes of strawberries for anything more than $2—not even for $2.01. Why? Because everyone else is selling strawberry boxes for $2 a box, and your consumer, knowing this, will simply move on to the next farmer.
• You can’t sell your boxes of strawberries for anything less than $2—not even for $1.99. Why? Because, consumers will buy everything you’re willing to sell for $2 a box. In the grand scheme of things (for example, in an entire market), your supply of strawberries is only a small percentage of the entire supply, so you won’t have a shortage of consumers. Why are you losing money, then, by undercutting your price?

And so, you sell your boxes at $2 a box, unable to sell them higher, unwilling to sell them lower, and, once you sell out, pack up and leave for the day.

That’s perfect competition.

Your product is undifferentiated.

You take the price set by the market.

If this sounds somewhat unrealistic to you, good. Now you will understand the power of imperfectly competitive markets.

Imperfect Competition

The vast majority of markets operate with an imperfectly competitive structure. In such a market, there are many small firms selling heterogeneous products (i.e., products that have some difference, no matter how small, between them). Because of this product differentiation, firms are not price takers and have the power, however limited, to set their own price. Furthermore, their ability to set their own price is dictated by their ability to increase their product differentiation (even if it’s only perceived). This is where non-price competition becomes important.

Non-price competition refers to how firms compete with each other in every way except pricing. The biggest non-price competition that firms engage in is marketing (advertising), and this can directly impact a firm’s product differentiation and, consequently, its ability to set its own prices.

Let’s see how this works through another example.

Suppose you’re a strawberry farmer again. This time, however, you don’t go to the farmer’s market to sell strawberries; you go to sell strawberry jam. Further suppose that there are other people selling strawberry jam at the market, and that the average industry price is $2.50 a jar.

You prepare your strawberry jam according to a secret recipe left to you by your great-grandmother. No one else but you produces jam according to this recipe. Since many people who have tried the jam report that they favor it over other jams, you feel that it deserves at least $3.50 a jar.

Now, the industry standard price is $2.50 a jar, but you’ve raised your price to $3.50 a jar—a full $1.00 above the industry standard. Other competitors in the farmer’s market stay around $2.55 or $2.60 a jar. Do you think you’re losing business?

The answer is, it depends.

It depends on how strongly you’ve differentiated your product from your competitors’. If you clearly market to consumers that your method of jam preparation is unique, you’ve established strong differentiation, which might be enough to allow you to set your price this high.

In general, the stronger your differentiation, the greater your price-setting ability.

The Key Difference

Why do firms in a perfectly competitive market have no price-setting power, while firms in an imperfectly competitive market have at least some?

The answer lies in one thing: product differentiation.

The fact that the products are not homogeneous across firms means that you can’t only compare them on price. And the stronger you establish your product differentiation through non-price competition (namely marketing), the greater your price-setting abilities.

Let’s explore this point a little bit more.

Non-Price Competition: Creating Value Through Marketing

We’ve seen in a previous example that non-price competition can lead to greater price-setting ability. The situation is, however, slightly more nuanced than it might seem at first glance, so let’s explore some of the nuances now.

I’ve mentioned that you have price-setting power in an imperfectly competitive market; but how much power do you really have?

If the industry standard price is $2.50 for a jar of strawberry jam, it seems reasonable that you can still sell at $3.50 a jar. But what if your price was $350 a jar? Do you have that much price-setting ability?

For a jar of jam? No. Unless, you create it.

Let’s come out of economics for a moment and remember the principles of business.

All business is based on creating value for your client. You create value for your client, and your client rewards you with money. This is the essence of any business transaction.

So, if you decide to charge $350 a jar, and the industry price is $2.50, then you must necessarily be creating $347.50 of additional value above the industry price. Meaning, there is something you must add above the jar of jam that is worth the additional $347.50 to the consumer.

This does not mean adding special exotic pearls to the jam or doing any other sort of manipulation on the product. In fact, value is often perceived, and this is why it is possible to create (perceived) value through marketing.

In other words, I claim that if you can create the $347.50 of value through your marketing, then you can charge $350 and people will still buy it even though most other jams cost $2.50 a jar. This is because the more value you create through non-price competition (namely, marketing), the greater your product differentiation, and the more consumers will not compare your product to others’ based on price.

In marketing, this is known as creating a “category of one:” Your product is not only differentiated from others’, but it is entirely in a league of its own, so you become the only solution consumers can turn to for that category. (In essence, this idea mimics the creation of a monopoly, a market structure in which the defining characteristics are the presence of only one firm, and complete price-setting power—i.e., people buy at whatever price you choose to set because you are the only option.)

What Differentiation Means for You

Differentiation is not a marketing gimmick. It is a real distinguishing feature between your product or service, and someone else’s. It isn’t something you need to invent, because, unless you exist in a perfectly competitive industry with homogeneous products, you already do have some differentiating factor—maybe the way you assemble the product, render the service, or service the client.

However, it’s something that you can greatly augment by coupling it with powerful marketing that complements the unique features of your product or service.

If you’re in the jam business, this could involve building a story behind the recipe. If you’re in the financial advisory business, this could involve building a story behind you, the advisor. This is why personal brands are considered so powerful—they position you to act as the main element in your company’s non-price competition against competitors, and because there is only one of you, you can gain greater product differentiation.

The Key Takeaway from This Article:

Product differentiation is inherent in your product or service because your product or service is different in at least one way from your competitors’.

This differentiation gives you price-setting power, so you can set your price at least some degree above the market price. Greater product differentiation amplifies your price-setting power, and the easiest way to increase your product differentiation is through marketing.

Marketing does this by increasing the perceived value of your product to your clients. The more value you create through marketing, the greater your product differentiation, and the greater your price-setting power.

Therefore, price does not drive marketing; marketing drives price.

May this new understanding help you unlock the power of differentiation and non-price competition for your business.

– Ace V.

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