Differentiation That CustomersValue
Key Topics Covered inThis Chapter
• How commodity products and services aredifferentiated
• Variousapproaches todifferentiation
• Differentiating throughbranding
features:a liter of aviation fuel; a quart of milk; six cubic meters of cement mix; the sale of two thousand shares of IBM on the New York Stock Exchange. Once people view a product or service as a commodity, the most important thing to them is the price, and that can put sellers in a race to the bottom. To get orders, producers must meet expected standards of quality andhave the lowest price.
Not every commodity product or service started out with that label. A flight from Boston to Washington, D.C., was once a memorable voyage. Every airline that flew that route boasted of some unique amenity. For many passengers, air travel was new and excit- ing. Today, that same flight is a commodity—a bus with wings—no matter which airline logo is on the rudder.
Even the personal computer, a unique and highly differentiated item when it went mainstream in the 1980s, is now approaching commodity status. More than 90 percent of current machines use the same operating systems and compatible microprocessors. For most users, any Windows machine made in the past few years is in- terchangeable with any other. The PC is fast on its way to joining the toaster, the refrigerator, and the television set as a commodity product. IBM’s sales of its PC operation to China’s Lenovo Group is
only one indication of the personal computer’s gradual descent from new-exciting-cool to commodity status.
Consider some of the terms we routinely use to distinguish be- tween commodity and noncommodity goods and services.
Widely available Exclusive Cheap and getting cheaper Expensive Standard Unique Low status High status
Sellerswant to avoid a commodity image, because doing so usu- ally allows them to command a higher price. Ideally, they’d like to acquire a strong brandstatus, which sets their offering apart and sur- rounds it with a positive aura. This chapter addresses the issues of differentiation and branding and presents ideas for using them to make your product or service stand out from the crowd.
Products and Services
Companies can still make handsome fortunes with commodity and commodity-like offerings if they can differentiate their offerings on some basis. Southwest Airlines’ low-fare, no-frills service has been highly profitable every year over the past three decades, even during years when its competitors were losing their shirts—and that seems to be most years. Southwest’s success is based on its operating effi- ciency, the high utilization of its aircraft, and the productivity of its people. Together, these have made Southwest the most powerful brand in the U.S. air travel industry.
Similarly,Nucor has been highly profitable in a highly compet- itive, commodity industry: selling bar and rolled steel. Much of its success can be attributed to the low-cost thin-slab continuous cast- ing process it pioneered and, like Southwest, to its innovative man- agement of people.
4 Marketer’s Toolkit
Despite these exceptions, the road to profitability and growth for most enterprises is through differentiation, which seeks to set a company’s offers apart from those of competitors in meaningful ways other than price. As you’ll see later, effective differentiation is associ- ated with the concept of branding.
A commodity producer can always differentiate on the basis of service. Although price and product features may be identical, it is still possible to differentiate on this basis. The cement business pro- vides an example. Cement is cement, right? That’s a fact that Mexico- based Cemex, the world’s third-largest provider of cement, is faced with. Nevertheless, Cemex has developed a capacity for fast and re- liable delivery that qualitatively differentiates its product from those of its many rivals.
As describedby David Bovet and Joseph Martha in their book on supply-chain excellence, Cemex has become a major industry power in many markets because it adopted a production and high-tech logistics strategy that achieves on-time delivery 98 percent of the time, versus the 34 percent record of most competitors. For construction companies operating on tight schedules, that reliability is highly valued, especially when a late delivery means that dozens of highly paid crew members will be standing around doing nothing. “This super reliability,” write Bovet and Martha, “allows [Cemex] to charge a premium in most markets, contributing to profit levels 50 percent higher than those of its key competitors.”1 In this case, super reliability has effectively differentiated a commodity product. You can achieve something similar by offering superior customer support.
Producers can also dress up their commodity products in ways that make them stand out. For example, dairy farmers in Vermont, like dairy farmers elsewhere, were faced with woefully low prices for their milk. It was a buyer’s market. And milk is milk, right? Peter and Bunny Flint of Tunbridge, Vermont, changed that. In 1989 they switched to organic production, and the next year they founded Or- ganic Cow of Vermont. Today, seventy-five certified organic dairy farmers in and around the northeastern United States supply milk to Organic Cow, which commands a price premium over regular milk in grocery stores and supermarkets.
Approaches to Differentiation
Approachesto differentiation are limited only by the human imagi- nation, but they generally take one of these forms:
• Appealing design—for example, Braun kitchen products
• Superior performance—for example, the Apple PowerBook, Porsche and Lexus automobiles
• Technical innovation—for example, hybrid-powered vehicles introduced by Toyota and Honda
• Reliability and durability—for example, Maytag appliances
• Convenience and ease of ordering—for example, Amazon.com
• Owner safety—for example, Volvo and Saab automobiles
A vendor can also differentiate itself through what many refer to as atmospherics:the physical or psychological environment in which business is conducted. This can be a powerful differentiator. Many people look for a satisfying environment in which to make their pur- chases, and they are willing to pay for it. Examples include Star- bucks, whose Wi-Fi and café ambiance many find agreeable, and Borders bookstores, where customers can sit on a comfortable sofa and sip cappuccino as they preview their purchases.
Jordan’sFurniture, a family-owned furniture retailer with five stores in the Boston area, provides customers with what can only be described as over-the-top atmospherics. Brothers Barry and Eliot Jordan and their associates don’t simply provide the standard, demure room displays; they’ve added something unexpected. Two of their stores have IMAX theaters and restaurant facilities. One features a thrill ride, and the other has a trapeze facility in which kids, and their elders, can test their nerves and mettle above a safety net.
These stores have become more than retail outlets; they have be- come destinations, drawing crowds of four thousand or more shop- pers on weekends. While the kids are aboard M.O.M—the Motion Odyssey Movie thrill ride that takes them on a high-speed police
6 Marketer’s Toolkit
chase through a mine shaft and into the alligator-infested Ever- glades—their parents are buying furniture. Jordan’s sells roughly
$950 in merchandise per square foot, versus the U.S. industry aver- age of $150. Furthermore, its inventory turns over an eye-popping thirteen times per year, versus one or two times for the industry. (Virtual tours of the company’s stores can be accessed through its Web site, www.jordans.com.)
Brandingis another approach to differentiation. One could make a case that branding is the culmination of efforts to differentiate prod- uct or service. By building a positive and familiar image for your of- fering, you have a better than even chance of becoming the buyer’s first choice among many competitors. Consider this hypothetical but familiar example:
The Schmidt family was driving west on U.S. Interstate I-80 on the first day of their vacation.The children were sleepy. It was time to find lodg- ing.As they approached the next town, they began to see roadside adver- tisements for hotels and motels: Jim and Julia’s Motel,The Iowa Lodge, Holiday Inn, and several others.The Schmidts exited the highway and drove directly to the Holiday Inn, where they checked in for the night.
Why did this family almost reflexively select the Holiday Inn? Most likely, they chose Holiday Inn because it was a recognizable brand whose features and perceived benefits they valued.
A strong brand either will become the default choice when the customer goes to make a purchase, or—the next best outcome—it will get the product or service onto the short list of possible choices. In our example, the Holiday Inn brand was the default choice of the Schmidt family, given the range of options, all of which were un- knowns. The Schmidt family knew in advance what to expect in terms of price and quality from Holiday Inn, but knew nothing about the others. They knew that they would experience no un- happy surprises by choosing the name brand, and this made their choice easy.
But what would have happened if the Schmidts’ list of options had included one other strong brand, such as Econo Lodge or Mar- riott? The Schmidts’ automatic decision in favor of Holiday Inn might not have happened. They would most likely have pondered their choices.
Situationslike this one encourage companies to work diligently and spend lavishly on branding their offerings. Companies also go to great lengths to defend their brands from illegal encroachment or anything else that might blur or tarnish their image. Some brands have become so successful that they have entered the American vo- cabulary. Thus, when President George W. Bush asked for significant reform of the Social Security system in early 2005, he said that he would not accept a Band-Aid solution. Band-Aid, an adhesive band- age, is a brand of Johnson & Johnson, one that is more than seventy- five years old. And how many times have you requested a Xerox copy of a paper document or asked, “Do you have a Kleenex?” when you were about to sneeze. For more on branding, see “Brand Vocabulary.”
Whether they deserve it or not, brand-name products have an aura of quality or utility that rival products in the same category do not possess (see “The World’s Top Brands”). That aura usually trans- lates into premium prices over nonbranded rivals. Brand power also leads to higher unit sales, because customers don’t have to agonize over whether or not to buy them. As Patrick Barwise and Seán Mee- han have written, “Familiar brands reduce risks in a reliable, afford- able, convenient way.”2A recognizable brand acts as an imprimatur of reliability, making the consumer’s choice easy. This leads to repeat sales for products like Crest toothpaste and Tide detergent, because people don’t have the time or energy to compare and consider other products when they are shopping. When people find something that works for them they tend to stay with it. So they reflexively add Crest and Tide to their shopping carts.
The power of some categories of consumer packaged-goods brands may be diminishing, however, as customers come to under- stand that the aura of superiority may be nothing more than a cur- tain of advertising, and that nonbranded products may deliver the
8 Marketer’s Toolkit
As described in Brand New: How Entrepreneurs Earned Consumers’ Trust from Wedgewood to Dell,business historian Nancy F. Koehn defines brandas “a name, logo, or symbol intended to distinguish a particular seller’s offering from those of competitors.” It also em- bodies the abundant marketing messages connected with the offer- ing and the complex set of customer expectations that arise from it.
As mentioned earlier, brandingrefers to the communication effort that aims to differentiate a product or service from its rivals and to create a positive attitude toward it. Maytag did this with a long-running ad campaign that
featured the Maytag appliance repairman—“the loneliest guy in town”—sitting in his office, waiting for the phone to ring. Of course, the phone never rang because of the implied reliability of Maytag appliances.
Brandequity,in turn, is the financial value of a brand to a firm. For example, when Procter & Gamble acquired Gillette in early
2005, it did not pay $57 billion for Gillette’s facilities, plants, and product inventory. These could have been purchased for a frac- tion of that princely sum. No, P&G paid that much because of the value of Gillette’s consumer brands, which it saw as reliable cash generators for years to come.
One can estimate the value of brand equity by comparing the net present value of future cash flows from a branded product to the net present value of cash flows over the same number of years from an equivalent, but nonbranded, product. The differ- ence between the two is brand equity. The calculation should include all the costs of building and supporting the brand through promotion.
Brand extensionis the act of attaching a successful brand name to another product or service. That product or service may be weakly or strongly related to the original. For example, not many years ago, Dove, a producer of highly regarded chocolate-covered ice cream bars, created a new line of premium chocolate bars.
These new bars were automatically invested with the positive aura of Dove’s ice cream product. Brand extensions like this one make it less risky and less expensive to introduce new products. There is a risk, however, that extending the brand name to a mediocre new product—or to too many new products—will debase the value of the original brand.
source: Nancy F. Koehn, Brand New(Boston: Harvard Business School Press, 2001), 5.
sameutility at significantly lower cost. This understanding is gaining ground as supermarkets and drugstores place their lower-cost generic products side-by-side with more expensive brands.
At CVS, a major U.S. drugstore chain, for example, the store’s generic pain killer and fever reducer sits on the shelf next to Johnson
& Johnson’s Tylenol, one of the most powerful nonprescription drug
The World’s Top Brands
What are the most recognized brands? The answer depends on where you live and varies over time. In late 2004 the online magazine Brandchannelasked ad executives, brand managers, and academics, “Which brands had the most impact on your life in
2004?” Almost two thousand people responded. Here were their picks, ranked and ordered by geographic region:
source: Adapted from data in Robin D. Rusch, “Readers Pick Apple: 2004 Readers Choice Award,”
10 Marketer’s Toolkit
brands. Both have the same active ingredient: acetaminophen. In one size and type, the CVS brand costs $8.68, whereas the Tylenol costs $15.99. The difference is enough to make a shopper think twice, and many, seeing little difference between the two, make the switch to the nonbranded house product.
Differentiation That Matters
Is your company following a strategy of differentiation (and who isn’t)? If it is, what sets your offerings apart from those of your rivals? Whatever the answer, remember this: differentiation matters only to the extent that customers value the difference.If the customers you’ve targeted truly value the difference that sets your product or service apart, they will either (1) select yours over others, (2) be willing to pay a premium for what you offer, or (3) act on some combination of
1 and 2. Experience and market research are the best ways to deter- mine whether your difference is valued by customers.
There is growing evidence, however, that many physical products fail to differentiate themselves in ways that customers really value. Company marketers and product developers sometimes add bells and whistles to new and enhanced product versions without giving much thought about whether customers care about or are willing to pay for them. Did car buyers really ask for a choice between ten wheel cov- ers, six types of interior upholstery, and eighteen unique steering wheels? After years of hyping these features, the Japanese carmaker that offered them figured out that few people cared.
Do consumers want the many capabilities built into their DVD players, VHS machines, digital cameras, and office software suites? Engineers love these things and dedicate enormous effort to making them part of their products. This explains why new editions of successful textbooks get longer instead of better, growing over time to the size of the New York City phone book. It explains why every new version of Microsoft Word and Excel gets bigger and more complex, even though 90 percent of users probably use only a small fraction of these capabilities.
There is an alternative to differentiation overload: being “simply better.” According to Patrick Barwise and Seán Meehan, improving on the basics—what they call “generic category benefits”—will set a product or service apart. In their view, being the best at what mat- ters to customers produces a winner, and in many cases being the best is achieved when a product or service performs as it should, is easy to buy and operate, and is backed by excellent service.
Barwiseand Meehan argue that most companies have taken dif- ferentiation so far that they have left their customers behind. In the view of these authors, the emphasis on being different is probably driven by ad people, who desperately need something different to talk about so as to cut through the smog of contemporary media. In advertising today, you must say something very different—even out- landish—to be noticed. But according to these two scholars, many customers don’t want bells and whistles and other differentiators as much as they want quality products, reliable service, on-time deliv- ery, and fair value for their money. If you can deliver on these re- quirements better than others, you may have all the differentiation you need to be successful.
• Products and services can be differentiated in many ways, including customer service, rapid delivery, appealing design, superior performance, technical innovation, convenience, safety, atmospherics, and reliability.
• A brand is distinguished not only by a name or logo but also by the marketing messages connected with the offering.
• A brand with a positive image makes the consumer’s choice easy.
• Differentiation matters only to the extent that customers value the difference.
1. David Bovet and Joseph Martha, Value Nets(New York: John
Wiley & Sons, 2000), 30.
2. Patrick Barwise and Seán Meehan, Simply Better (Boston: Harvard Business School Press, 2004), 20.
Harvard Business Essentials
The New Manager’s Guideand Mentor
The Harvard Business Essentials series is designed to provide com- prehensive advice, personal coaching, background information, and guidance on the most relevant topics in business. Drawing on rich content from Harvard Business School Publishing and other sources, these concise guides are carefully crafted to provide a highly practi- cal resource for readers with all levels of experience, and will prove especially valuable for the new manager. To assure quality and accu- racy, each volume is closely reviewed by a specialized content adviser from a world-class business school. Whether you are a new manager seeking to expand your skills or a seasoned professional looking to broaden your knowledge base, these solution-oriented books put re- liable answers at your fingertips.
Click here to download the complete solution
Our happy customers
They are fast in responding to homework questions. they have the best technical writers. Thanks for helping me with my programming doubts.
I contact to disklib for homework, they help me out, despite there was some technical issue they gone through extra mile for me and provide me good quality work in first priority. 100% recommended.
Desklib's study resources are best & unique. Their study database is easy to access and easy to use.
100 % recommended.