Vive la Difference: Using Hyper-Differentiation Strategies to Build Value and Boost Profits
When the upstart Victory Brewery brought its beer to a limited number of store shelves in 1996, the product came along without the usual frothy dose of marketing common to the industry. The Downingtown, Pa., brewery set about to create a microbrew with a distinctive taste, dramatically different from anything else on the market. Flying Fish Brewing in Cherry Hill, N.J., entered the industry in a similar way in 1995 - by creating a product unlike other beers. It also opted for a web presence from the start.
Because they were small operations, these companies capitalized on the uniqueness of their brands and in turn sought to cater to a specific sector of the market, notes Eric K. Clemons , professor of operations and information management at Wharton. The strategy has proved successful for both companies, which routinely receive industry accolades for their products.
As consumers find themselves besieged by advertising campaigns, says Clemons, smaller companies, in particular, can benefit from the strategy of differentiating their product from the competition. He distinguishes "push" campaigns ("buy this and be cool") from "pull" campaigns ("this is exactly what we have; do you want it?"). He also points out that the larger companies, including the top sellers in the beer industry, often opt to differentiate their advertising rather than their products. "If you're a small company, you can't afford to advertise against the Budweisers of the world. So, about four or five years ago, a counter-trend began with the extreme differentiation or 'hyper-differentiation' of products, with consumers informed by the vast amount of accurate and timely information now available on the net."
In a new research paper titled "Hyper-Differentiation Strategies: Delivering Value, Retaining Profits," Clemons and co-authors Rick Spitler, a founding partner of management consulting firm Novantas, and Bin Gu, a recent Wharton PhD graduate and now an assistant professor at the University of Texas in Austin, take a look at the way companies can use hyper-differentiation of their products to beat out their competitors. Clemons notes that the Internet provides the customer with an unprecedented amount of information and with a greater opportunity to learn about a wider variety of products from an even wider array of companies. The level of information that consumers receive via the Internet, television, radio and print can be mind-boggling. But the Internet, in particular, provides all shoppers with the ability to reach into cyberspace and gain the details they want on a new specialty coffee company or a small boutique beer business. In the world of Internet marketing, cyberspace affords the mom-and-pop operation an equal footing to that of the Fortune 1000 company.
For now, Clemons notes, the hyper-differentiation approach appears to be more popular for smaller or start-up companies, as they remain the ones that need the strategy the most. These fledgling enterprises simply cannot afford to compete against larger concerns that already occupy the middle portions of each product market. However, where competitive pressures are the most extreme, as in air travel, major firms are indeed experimenting with hyper-differentiation. Concerns like Singapore Air, which recently added luxurious cabins for business and first-class passengers, and British Airways, with new sleeper seats in business class on long-haul flights, do manage to set themselves apart from their competitors as they go about differentiating themselves in the airline industry, he says.
But whether the item may be considered a luxury or a more reasonably priced specialty product, the strategy of hyper-differentiation still relies heavily on what the authors term "delight-based strategies." The researchers note that this business strategy involves finding the product that is a perfect fit to the customer's desires or it may take the form of providing the "totally unexpected extra bit of service."
The paper cites "super-premium" niche players like soap maker Casswell & Massey and Kona coffee purveyor Country Samurai as examples of companies using this business technique, and in turn the companies reap the reward of gross margins "high enough that they are profitable even without scale in marketing or operations." The success of these relatively small businesses in a sea of larger competitors illustrates the success of "getting the word out" through product differentiation and Internet marketing.
Prior researchers in the area of online commerce assumed that the Internet would destroy profitability for all companies, Clemons says. They hypothesized that as consumers became more savvy about the product offerings available to them and the prices attached to those same items, the consumer would select the item with the lowest price. Consequently, a perpetual price war could ensue, as competing companies lowered prices to keep their market base. While the authors concede that this scenario is possible, they also take the research in a new direction by noting that the informed shopper can be convinced to pay a higher than average rate for an item that matches his or her specific tastes. If you and you alone offer what a customer craves, then "your prices will be determined by your value to your customers, and not by your costs or your competitors' costs of production," the paper states.
Thus, notes Clemons, as consumer knowledge increases, the hyper-differentiation of products will also grow. "Many companies will look for ways to counter the pressures of selling commodity products to informed consumers, choosing instead to sell items their customers really want, and also at higher prices than the competitor," he says. However, for the hyper-differentiation strategy to ultimately work, the shopper must feel the differentiated and more costly product is worth the additional charge. Companies that successfully provide a unique item also benefit by creating a "mini-monopoly," as their products "are neither comparable on any single dimension, nor even on their entire attribute set."
Unfortunately customer behavior is often highly unpredictable, and Clemons says that the possibility of failure exists whether or not a company hawks a unique product or opts to sell a more mainstream offering. Once a company chooses to tap into a niche market, says Clemons, success for the hyper-differentiated product has to come from intimately knowing that market and maintaining the quality of the brand. The paper notes that the availability of information available on shopper preferences, through the use of data-mining and other information-gathering techniques, makes it more possible than ever for companies to respond to the changes in customer demands and desires.
While some may assume that the state of the economy would greatly affect the demand for the higher cost differentiated product, Clemons says that this does not always appear to be the case. Interestingly, he believes the changes in the economy have less impact than expected on the drive for or away from hyper-differentiation of consumer items. "Hyper-differentiation is not so much driven by the economy but the need to make money in any economy," he adds. "When the market pushes your prices down, for reasons that may or may not be related to an economic downturn, that is when there is a need to differentiate your product."
While shoppers certainly look for a good value in lean times, says Clemons, they will often gravitate towards specialty items that they feel they cannot do without - even if these goods cost more than another brand. As an example, he points to the success of premium ice cream maker Ben and Jerry's Homemade. "For many consumers, inexpensive indulgences provide a real psychological lift, and they are certainly less expensive than a vacation or a new television," he adds. (The once small, privately held specialty ice cream company became big business, and was bought out by food products conglomerate Unilever in 2000, testifying to the success that hyper-differentiated brands can sometimes have in the marketplace.)
Clemons notes that since research into the hyper-differentiation of products is relatively new, there is an increasing misperception that the strategy can only apply to luxury or excessively priced items. "The same strategy can apply whether or not the item is seen as a luxury product, as long as it is sufficiently differentiated from the competition," says Clemons, and differentiated in a way that the customer values.
The authors note that the majority of businesses have yet to employ the hyper-differentiated strategy effectively, although customer demand may soon require all companies to work harder at providing more tailor-made products. The ability to absorb the customer data now available, and to come up with a unique item that truly responds to the customer's desires, will soon become key for all businesses, says Clemons. If the hyper-differentiated product finds a receptive and loyal customer base, then the payoff could be another Ben and Jerry's Homemade, or a jump in market share at Continental Airlines. Unfortunately, an uninformed move could put a company on the wrong end of the proposition, producing the next DeLorean car, which has become a textbook case for a unique product that consumers shunned.