Differentiated products and services

A second generic strategy is to offer products (we’ll use the word products here to represent both products and professional services) that stand out from those offered by other companies. If these standout products are truly valued by customers, the firm won’t have to resort to low prices to sell them.

There are many examples of this across all industries. Products such as BMW automobiles, Calvin Klein jeans, and Apple products are all sold to consumers who value some intrinsic quality or perceived benefit in the product. And they are willing to pay a premium price to obtain them.

In some cases, the prices that customers will pay are almost breathtaking. Some golf clubs, for example, have an initiation fee of more than $100,000 and an annual fee of $25,000. That certainly keeps out the riff raff—creating a truly distinctive air of exclusivity.

So, what does the customer get for all this dough? Are these products really worth it?

The answer, of course, is that these products are worth it to the people (the right customers) that are delighted to pay for them. The tough part is to determine how to find and convince these particular people to pay these high fees. This is where the specific strategies, discussed below, play a role.

The key here is to find at least one way to differentiate the product in a meaningful way—a way that is valued by the customer. For example, many customers buy a BMW because they are convinced that their vehicle is the best handling car on the road; many people buy Calvin Klein jeans because of the status conferred by wearing designer clothing; and many people buy Apple products because they are stylish and technologically advanced, and when other people see your new Apple i-something, they say, “Oh, wow!”

It’s important to note that the customer’s perceptions are more important than “actual facts.” For example, we know that an inexpensive electronic watch keeps time as well or better than an ultra high-end mechanical “chronograph” watch, despite all the descriptive hype about how well the watch is constructed. That’s immaterial. People don’t buy that fancy watch just to keep time—it’s an icon of success.

The customer’s perception of the product—the “position” that the product holds in the customer’s mind—is of utmost importance in determining how well the product is distinguished. The firm simply must find a way to position its product as an outstanding one.

A firm can certainly do this with “the facts.” Indeed, BMW has pages of test data and an endless stream of advertising to convince us that their cars truly are exceptional performers. Similarly, there are products in virtually all fields that can demonstrate their superiority with data.

Even for firms with the information to demonstrate their product superiority, there is still work to do. It is simply not enough to trot out the data. Customers need to be convinced. There are many tales of superior products that did not catch on with customers as well as the facts might have led us to predict (Sony Betamax, Apple computer software). But even when we have “the facts,” we must remember that it is the customer who places a value on those facts. So, we must have specific strategies to determine how to convince the customer of our products’ value.

Honda is the world’s leading automobile engine manufacturer. They might have simply tried to convince people of this through repetitive fact-based advertising, as they sometimes do. They have also done other things, however, that are strategically designed to position the firm, in the customers’ mind, as the world’s leading engine maker. For example, they manufacture engines for a wide variety of applications (for example, automobiles, lawnmowers, motorcycles, generators), they have participated in a high-profile racing program designed to showcase their technology and success, and they continually tout the cutting-edge technologies embodied in their engines (ultra-low emission engines, hybrid engines, and so forth).

Alternatively, some firms can differentiate their products by ignoring the facts, while finding some other means of convincing us of some important benefits. These firms recognize that there are many factors that influence buyers’ decisions. In effect, the “facts” may not even be important to some customers.

Let’s look at designer jeans as an example. Is the denim really better, stronger, tougher, more supple? Is the stitching more robust, the zippers zippier? Even if that were the case, the designers don’t even discuss it in their advertising. Instead, they position their product as one that is worn by the hip, the beautiful, and the knowing. We buy this stuff because it’s cool, and we are happy to pay the price.

Similarly, objective tests run by a nationally-known consumer testing organization concluded that New York City water was of the highest quality and was preferred to “designer water” by tasters in blind tasting tests (that is, they didn’t know which water they were drinking). Nevertheless, consumers are willing to spend billions of dollars to drink bottled waters from exotic glaciers and mysterious wells, and they do this because they perceive some benefit from it (taste, status, perceived health benefits, holding a cool looking bottle).

The firms that successfully differentiate their products have some characteristics that are quite distinctive, and certainly different from those of a low-cost company. Here are a few:

- The products are constantly being improved or replaced with better ones.

- Customers anticipate and desire the new stand-out products.

- Customers are willing to pay a premium for such products.

- The company culture values creativity and tomorrow’s ideas.

- Employees enjoy the challenge of creating the next best thing.

- Management is willing to take calculated risks.

- Management is not rigid, but basic rules are followed.

- The firm can quickly change direction—it’s highly flexible.

The successful firm that differentiates itself by its products is run by managers who value new ideas and new ways to satisfy customers. The employees love to get up in the morning if it means that they can work on creative new products and be challenged to produce things that haven’t been seen before. And the firm satisfies its customers when it delivers stand-out products, even if they are high priced.

These firms create new products that out-compete their old products, and they do this before the competition does it. For many years Intel did this with its ever-improved line of computer chips, and Apple continues to wow its customers with exceptional and creative products every year.

Notice also that management in a product-differentiated company is not focused on standardizing operations as it is in a low-cost company. Innovation is the coin of the realm, and the company is very willing to spend money on tinkering and experiments. Such a company does not put cost-cutting at the focus of its day-to-day operations.