Vertical Differentiation

In today’s fiercely competitive and noisy environment, the need for strategic brand differentiation is acute.

At the macro level, a brand can be differentiated vertically, horizontally, or pursue the cost strategy.

This article explores the vertical differentiation strategies. Horizontal differentiation and the cost strategy will be addressed in future blog posts.

What is Vertical Differentiation

Products in most categories can be differentiated by their perceived quality level. The primary indicator, and the most visible, consumers use to evaluate quality is price.

Vertical differentiation involves finding a quality/price mix that will differentiate the brand from its competitors, that appeals to enough consumers and can be profitably implemented.

A company can also use this strategy to differentiate between products in its portfolio designed to target multiple consumer segments.

With vertical differentiation consumers agree on which product is better, and choices are made based on individual needs.

A product’s points of differentiation should be easy to explain, at least in theory. Its price should be reflective of the features it provides, vis-à-vis its competitors.

If you are in a market for a digital camera for example, there are plenty of options to choose from.

You might want to get a camera with interchangeable lens, that takes amazing pictures in low light conditions, and has a high enough resolution that allows you to create large format prints from your shots.

Or, you might just want to save money and buy a lightweight camera that takes decent enough pictures for you to publish online and share with your friends on social media.

There is no right answer as to what camera you should go for. It all depends on what’s important to you: you might want to become a professional photographer, or just capture your life’s moments with ease.

Pursuing Vertical Differentiation

Vertical differentiation requires a brand to find that quality/price value proposition that (ideally) no other competitor claims, and own it. Here are a few things to consider:

Identify the features/quality levels that justify a price difference. That is, make sure you understand what’s important for your customer when deciding on a product in your category. In the digital camera example above, the weight of the camera is a sought-after feature that justifies a price difference, while the camera color might not.

Ensure there is enough demand for your new offering. The goal with this strategy is to design a product or service for which there is enough demand to justify launching it. Surveying your consumers might not offer you a complete picture, as many will tell you they want highest quality product at the lowest price.

Ensure the quality level you choose to offer can be profitably implemented. It’s great to offer a product for which there is enough demand, but what’s driving a business forward is profits, not the number of consumers who like its products.Too many features at an attractive price is sure to create enough demand, but your profitability will most certainly suffer.

Disadvantages of Vertical Differentiation

Companies pursuing vertical differentiation face two potential risks.

Vertical differentiation is impacted by sudden or unexpected changes in the marketplace that might make this strategy obsolete.

Consider the fast-changing technology market. When a new feature-packed product comes out, its price is usually appealing only to early adopters. Once the market catches up, the “advanced” features quickly become obsolete, and the price goes down accordingly.

The second danger is imitation. Most innovative products, when proven successful, are forced to compete with virtually identical products at much lower products.

The Onda tablet, an identical copy of Apple’s Ipad,  offers users a dual operating system (Windows and Android) at a third of the Ipad’s price.

Even reputable manufacturers such as Lenovo are capable of shamelessly copying successful products. Just take a look at their latest phone, S90 “Sisley”, an otherwise decent device, but an identical copy of Apple’s Iphone.

In conclusion, claiming a spot on the “quality” ladder is a viable way to differentiate. The higher the quality (and consequently the price), the more “niche” your brand will become.

But that doesn’t mean you should always aim to launch products in the more crowded low and medium price segments. Niche brands might not enjoy mass appeal but are usually much more profitable.