Differentiation Flashcards
(39 cards)
What are substitutes?
Products that are functionally equivalent but outside the the industry being analysed. Extent wo which substitutes exit and pose a threat depend upon the extent to which consumers perceive the industry/firm products to be unique - achieved by product differentiation (heavily influences markets)
What is product differentiation?
Involves a firm aiming to make consumers perceive its products as being different from close substitutes in the market, by offering unique features that can be through intangible or tangible differences e.g. not homogenous type of car or tv channel.
Products are differentiated when consumers think the are different from other products in the market
How can products be differentiated?
- can be psychologically (perceive a difference, branding is important as it leads consumers to believe there is a difference in the product)and or physically different e.g. picking one computer over another due to different features
- often associated with the idea of versioning not all customers will want to exact same product so the firm can offer several versions with different price, quality combinations so consumers can select the product they desire e.g. different types of cereal e.g. frosted, plain, honey, shreddies
How does product differentiation link to the 5 forces?
If there is a stronger product differentiation than customers are less likely to perceive substitutes as viable options e.g. Apple’s ecosystem of devices and software make it harder for users to switch to alternatives. If products are less differentiated, then substitutes pose a greater risk because customers can easily switch based on price.
What are the 5 reasons firms engage in PD?
- Market segmentation
- Increasing customer loyalty
- Barriers to entry
- Gain competitive advantage
- Reduced price sensitivity
What does market segmentation (1) involve?
differentiating products allows firms to cater to specific segments of the market, thereby increasing their customer base and matching what customers want e.g. luxury goods, eco-friendly products, or tech innovation may appeal to particular target groups.
What does increasing customer loyalty (2) involve?
reduces PED, gives firms a degree of monopoly power, firms can still charge a higher price and still make more profits as consumers feel that a product is unique and meets their specific needs
What do barriers to entry (3) involve?
Versioning leaves less space in the market for rivals to enter (shelf-filling). Especially true if the firm has created strong brand recognition or unique features that are difficult to replicate
What does gain competitive advantage involve (4)?
creates a USP, sets their product apart, from the competition. Helps attract customers who are willing to pay more for distinctive features or perceived value
What does reduced price sensitivity (5) involve?
when a product is differentiated, customers may be less likely to compare it directly with other products based on price. This enables firms to potentially charge a premium and increase profitability as customers may view the differentiated product as offering superior value.
What is the effect of product differentiation?
Possible effects of a successful PD campaign (e.g. via advertising). Example
On D2 the firm can sell more (0-Q4) at P1 then on D1 (0-Q2)
On D2 the firm can raise price to increase revenue to P2 and loses less sales (Q4-Q3) than on D1 (Q2-Q1)
In this example, the PED is more inelastic due to an increase in price from P1 to P2, which led to only a small change in sales from Q4 to Q3 - so at a higher price quantity sold is still high.
What is natural PD?
Products become differentiated through a natural process not developed by the producers. Features that cannot be easily replicated or artificially created.
Often driven by nature of the product itself or by fundamental difference in resources or capabilities.
e.g. organic food differentiates itself naturally form regular food because it is grown without synthetic pesticides or fertilisers.
What is so different about natural PD?
the difference is inherent and cannot be easily mimicked by companies that don’t have the same access to same production practices.
Consumers perceive natural differentiation as a ‘true’ difference in quality or benefit. It might be perceived as more authentic or genuine and harder to imitate
What is strategic PD?
directly controlled by producers through their strategies such as making product different using technological features.
Involving influencing consumer perceptions and create a unique image even if the product intrinsic features may not be drastically different
What is an example of strategic PD?
Rolex uses strategic differentiation through its branding, prestige and pricing strategies. While actual functionality of a Rolex may not be vastly different from other watches its branding, marketing and status differentiate it.
Consumers perceive products as different not necessarily because of inherent qualities but because of the branding messaging and positing that the company has created.
How else is product differentiation achieved?
through expenditure upon R&D advertising but its highly reliant on how the products are communicated to consumers.
Other causes included - factor variations, additional services (car warranties), rate of change of product differentiation, national differences (point of origin), geographical variations (e.g. location of shops)
Do patent/copyright laws and trademarks support PD?
Generally yes
What is horizontal differentiation?
Products differ but their physical attributes are of similar quality, difference can be between competing firms products e.g. soft drinks, Coke v Pepsi or between firms owns products e.g. Coke v Diet Coke v Coke Zero.
Difference may not be about quality, but rather style, design or taste, where one product is not inherently better than the other, but simply different.
Customers choose based on personal preferences, like flavour, design or colour
What is vertical differentiation?
Real physical differences in quality between products in terms of quality, performance and functionality, differences can be between competing firms.
e.g. a high end model iPhone like iPhone Pro is vertically differentiated from a mid range model like a iPhone SE.
The difference in features makes the higher end model superior in performance and quality.
How do consumers view differentiation?
They may choose by comparing respective features or buy one which offers a combination of features that mostly match their idea bundles for a product.
e.g. if a consumer wants to buy a high end digital camera, consumer compares features such a megapixel count, video capabilities, dynamic range etc, they will then choose the one that matches their idea bundle for a camera of this type
What is Lancaster’s (1968) view on the market using differentiation?
Suggested that goods and services should be viewed as consisting of a bundle of characteristics where:
- consumers have clear preference over these characteristics
- they therefore buy the goods/services which most closely ideal set of characteristics
- he argued that firms need to identify key characteristics, demanded by consumers and then develop their products accordingly - rationale for PD.
How can we use indifference curves to understand what each consumers would prefer?
higher indifference curve means higher levels of total utility
anywhere on same IC gives rise to same level of utility
What is a market?
a market is made up of a collection of individuals so whilst a firm is looking for is a group of consumers with similar preferences - a market segments - which is not directly adequately serviced by existing brands and products.
Therefore, firm would then have an opportunity by serving that groups and this presents an opportunity for profit making by meeting consumer preferences and needs.
What are the requirements for segmentation?
Firms require segments to be composed of sufficiently large number of consumers so that revenue earned from introducing new products cover these costs.
If consumers are too homogeneous or too diverse in their tastes, then there are no viable market niches that may exist
