On Differentiation

it takes a surprising amount of courage to build differentiation into products

Sign hanging around the neck of a well dressed panhandler we spotted in downtown San Francisco: “Have Courage Will Differentiate for Six Figures”

As a marketer, it is extremely tempting to push your company to build me-too products. After all, differentiation takes courage. A me-too product that tanks is bad enough, but something new and different that fails is a really hard decision to defend. It takes real nerve to try something new, a quality that seems in short supply inside most executive suits.

At Firewhite, we don’t have any magic elixir that will give senior marketing people courage. This isn’t Oz, unfortunately, and we’re not the wizard who can hang a medal that says “Courage” around your neck. However, what we do have is some encouraging news. Safe and painless differentiation isn’t all that hard if you listen to what your customers are telling you, both in words and deeds.

WORDS

Every time your customer touches your company they leave behind their words. Sources of words at your company may include:

Customer phone calls
Customer mail/fax
E-mail/website contacts and/or support inquiries
Public online discussions (Internet message boards, blogs)
Comments in surveys/focus groups

Until very recently, unstructured data like this was simply viewed as jetsam and flotsam, too inchoate to bother analyzing. More recently, companies as disparate as Procter & Gamble and Mazda are finding that text mining can be used in much the same was as data mining: to uncover insights hidden in plain sight within unstructured data.

Case in Point: Mazda

A recent article in Business 2.0¹ magazine waxes poetic about how Mazda has reshaped its dealerships by installing Internet kiosks in the center of showrooms and – gasp! – encouraging customers to research pricing right then and there. Customers aged 24-35 make up the lion’s share of new car sales among the “Big 3” (Honda, Mazda, and Toyota). This target is getting harder and harder to reach through traditional media but spends a significant amount of time online. To get a better shot at this moving target, Mazda turned to text mining. It’s a surprising finding. By connecting with web-savvy bargain hunters through the medium they preferred—the Web—Mazda could engage at a deeper level with this group, and could increase revenues and margins.

DEEDS

More obviously, every time a customer interacts with your company, they leave behind a trail of behavioral data. This data can become the basis for extraordinarily effective differentiation. After all, your customers are your customers. They don’t belong to anyone else. By understanding their needs, it is possible to precisely tailor your offerings in a way that 1) separates you from the competition; and 2) makes your offerings a tighter “fit” with the needs of your particular customer.

Case in Point: Charles Schwab

Charles Schwab recently rolled out a new product offering it calls Personal Choice. By mining customer behavioral data, Schwab discovered that it served three broad groups of customers: self-directed investors, those that need help managing their portfolios and are willing to pay for it, and frequent traders. By developing different products and services for each need-based segment the company is able to create a set of highly differentiated offerings in a category that has become fixated on the $9.95 trade.² The goal here is to focus Schwab’s customers on the value of what they are getting from their broker instead of the cost of a single trade.

ALTERNATIVES

Whole categories of products are moving to commodity status at unprecedented speed. Commoditization is the black hole³ of business—once it’s in place, it’s extremely hard to escape, and it can swallow up whole markets very quickly. Think of, for instance, the neighborhood stationery store, which has now been crushed by Office Depot, OfficeMax and Staples.

Many companies don’t realize how their own behaviors contribute to commoditization. Instead of building meaningful differentiation into their products, companies get caught up in a kind of vicious cycle where they:

design a new product to match the competition feature-by-feature
pay lip service to differentiation by adding a handful of features that don’t really matter
price the resulting offering at parity with the competition

Viola! Your new product is guaranteed to find success in the marketplace. After all, it offers more features for less, something important to today’s value-oriented consumer, right? There are two problems with this model.

First, eventually it drives profits down to zero or nearly zero. Feature creep is costly, particularly in categories that don’t offer a lot of margin opportunity in the first place, e.g. computers. So we see strong brands like Gateway struggling to make a go of it against such Goliaths as HP and Dell, both of whom have overpowering economies of scale Gateway lacks.

Second, and more importantly, today there is no such thing as a market serving a single type of consumer. Increasingly there is not one market but tens of smaller markets. Winning in this type of competitive environment is a matter of figuring out what tenth of the market you will dominate and crafting a strategy that allows you to do so profitably.

The way to avoid the black hole, then, is to tailor your value proposition to the market you want to own. You must convey to your customers what you will do for them, and it must be something they care about. Since everyone doesn’t care about everything, different markets demand different value propositions. A “me-too” product’s proposition is basically identical to every other product’s. A differentiated product’s is, well, different. It reflects, and speaks to, the needs of a submarket in a way it’s bigger, dumber, “me-too” cousin can’t possibly.

Case in Point: Apple

The best example of this is Apple. Apple is up against the Four Horsemen of Commoditization: Intel, HP, Microsoft and Dell. Yet, they have survived, and even thrived, by articulating a value proposition that speaks to the mini-markets they want to, and do, own: students, creative services (design, music and so on) and very high-end (and profitable) consumers seeking an integrated solution. Their proposition is, basically:

We make computers that are powerful, beautifully designed, especially good at graphics and media, and don’t have you, like everyone else, spending money that eventually goes to Bill Gates.

Is your value proposition shipshape?

A good value proposition will compel a certain group of customers to do business with your company and not your competition. A compelling value proposition has those same customers delivering incremental revenues and profits to your company year after year.

Ultimately, commoditization means competing on price alone, which isn’t really competing at all. It’s just an endless game of “who can make and sell it cheaper.” Commodity products have little intelligence built into them, and your customers have little loyalty. If the next guy can make it more cheaply, they’re gone. And so are you. Differentiation short-circuits this by, in effect, building your customers into your product. Your product is different, it’s better, and you get customers for life. Sure beats “me, too”.

Notes

Source: Business 2.0 – June 04. The complete article is available to subscribers who login or via email by going to this page and requesting the full article by email. ↩
At $9.95 a trade, a full-service brokerage firm like Schwab can’t make money given today’s volumes, down significantly since the height of the bubble. ↩
A black hole is a region of space-time from with a gravitational pull so intense that nothing can escape. ↩

Originally published on Firewhite Consulting site, 5.04.