Product Differentiation

Distinguishing products to make them more attractive to a particular target market and, hopefully, more profitable. This can involve differentiating from competitors' products or a firm's own products.

Differences between products are not product differentiation. Differentiation is only achieved when the differences are perceived by the customer and valued accordingly. Differentiation occurs because buyers perceive a difference between products, not because of the differences themselves.

Products are often differentiated by drawing attention to differences in quality, features, and design. The base model of a particular automobile typically features cloth seats and relatively few features. Each step up introduces higher quality (leather seats, metallic paint, nicer wheels) and more features (GPS, satellite radio, heated seats, etc.).

Availability, specifically timing and location, can also be used to differentiate. People will generally pay more to have something right away, and less if they have to wait.

Differentiation is essential in the popular freemium model that offers both free and paid premium versions. Such a model can only work if the two offerings are sufficiently differentiated that the paid version is attractive to a meaningful percentage of buyers.