Three Ways Your Differentiation Can Impact Your Profits
Three Ways Your Differentiation Can Impact Your Profits.
When we talk about differentiation, often people think about things like having a unique product or service, being the first to market, or having a strong brand identity. And while those things are certainly important, so many teams struggle to measure the impact their differentiation has on the bottom line.
Michael Porter, possibly one of the greatest thinkers on strategy, believes there are three ways towards differentiation and competitive advantage. By doing something different than competitors or doing the same thing but more efficiently. Focusing on either of those strategies or a combination of both, we can then unlock a narrow market segment where our expected profits might be.
A strong differentiation in the market must allow you to charge a higher price because you’re creating value, and/or finding efficiency thus increasing margins. Otherwise, we might have a marketing tagline, but not differentiators that will impact our bottom line.
During our quarterly and annual strategic workshops with clients, we discuss the following questions:
- Three years from now, what would happen to the value of our business and level of profitability if we continue doing what we’re doing?
- Based on our business strengths and competencies, which differentiation lens we could focus on?
Let’s review three ways you can validate your strategic differentiation.
1. Focusing on something different
Recently, I came across a new initiative from a free-range egg company. Honesty Eggs, an Australian company located in Victoria, is no stranger to supply issues and increased feed costs. They recently launched the first-ever fitness tracker designed for chickens, measuring their daily steps and printing them on the eggs.
Whilst the free-range eggs value is provided by different brands, Honesty Eggs are focusing on doing it differently. Not only does it validate their free-range promise, but it also builds trust with their customers, enabling them to substantiate a premium price and boosting their bottom line.
2. Focusing on efficiency
Cost leadership, on the other hand, involves achieving the lowest cost of production in the industry while maintaining an acceptable level of quality. By operating with lower costs, businesses can offer lower prices to customers, improve profitability through higher sales volumes and achieve long-term success.
For example, Walmart is a cost leader that achieves economies of scale by offering low prices to customers. And Aldi, a discount supermarket chain that achieves a cost advantage by operating with a highly efficient supply chain and by offering a limited range of products that are sold in high volumes.
Another Australian company, Jetstar Airways achieves a cost advantage by operating a no-frills model that eliminates many of the expenses associated with traditional airlines.
3. Focusing on a specific market segment
Now we can unlock a narrow market segment, create a deep understanding of the segment’s needs, and develop products or services that meet those needs better than other competitors. We’re talking about a specific segment where we can achieve our expected margins.
Lorna Jane, a women’s activewear brand, focuses on a narrow market segment of women who are passionate about fitness and health. They tailor their products and marketing to this specific market segment, and as a result, have developed a loyal customer base.
Another example is GoGet CarShare. An Australian car-sharing service that allows customers to rent cars by the hour. They provide a narrow range of services and use technology to reduce costs, offering affordable car rental options and maintaining profitability.
Most leadership teams can articulate what their business is doing today. Equally important is to articulate what and how their business will endure and keep providing value over time.
It is critical that leadership teams spend time evolving their strategic positioning and what sets them apart in the market.
Evolving your differentiators will help you close more deals, better align your Sales and Operations teams, and make better decisions throughout the business.
To learn more about how you too can create profitable differentiation to create enduring value, please contact us.