May 29, 2013
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Differentiation is a characteristic of online products that is far too under appreciated. Last week I wrote about how differentiation has a major effect on competitive advantage. By focusing on creating a differentiated product, you can target a specific niche audience who are willing to pay a premium price for the characteristics that you are focussing on.
However, creating a unique product is not a surefire way to creating a differentiated product that is successful. In fact, there are many pitfalls around trying to create a unique product.
In this week’s post, I want to look at how to create a unique product, what characteristics of this strategy you should focus on and what you need to do to make it successful.
As a practical example, I’m going to be thinking about uniqueness from the point of view of a new Project Management Software as a Service application. There are more Project Management SaaS apps than you can shake a stick at these days, so I think it will make for a good case study on how to create a unique product in a densely packed marketplace.
The differentiation strategy is where a company creates a product that is unique from others in the market. There are basically two types of competitive advantage, cost leadership or differentiation. Cost leadership is where you provide the lowest cost product on the market, differentiation is where you create a unique product and can therefore charge higher prices.
The differentiation strategy works when you create something unique that the market values highly and the cost of providing that uniqueness is sustainable. In other words, creating a unique product that is not wanted by the market is different, not differentiated, and if the price that you can charge does not exceed the cost of being differentiated, you are in trouble.
For a much more in-depth look at the differentiation strategy, read last week’s post Differentiation and it’s role in Competitive Advantage.
The first big thing to say about creating a unique product is, there is so much more to uniqueness than the actual product. I think a lot of people get caught up on how their product is unique, when in reality, there are hundreds of things that effect uniqueness without concerning the product at all!
For example, how you sell your product, how you deal with customers, marketing, customer service, interoperability, future updates or continued maintenance are all sources of uniqueness that don’t actually have anything to do with the product at all. You could offer the exact same product as your competitor, but offer a unique and differentiated form of customer service and still charge a premium price.
I think internet based companies are often particularly guilty of falling in to this trap. The massive debates on what technology you should use, what programming language, what database or HTML5 verses native are all valid ways of creating a “unique” product. But in the grand scheme of things, how much of this does it really matter?
For example, the Project Management SaaS app could differentiate itself by using some fancy pants new technology, or it could use the same boring old technology, but make customer service amazing.
When thinking about how to create a unique product, don’t get caught up on what you can do to your actual product to make it different. Often the best sources of uniqueness actually have nothing to do with the product at all.
There are basically two ways to create a unique product.
Firstly, you can be unique by focusing on making certain existing characteristics more differentiated. Again, this does not necessarily have to be physical qualities of your product.
For example, you could make your Project Management SaaS app unique by offering a differentiated form of customer service by really investing in extra support staff, training videos, tutorials and documentation.
The important point here is deriving uniqueness from your existing activities.
Secondly, you can reconfigure your value activities to enhance uniqueness.
So for example, if one of your customer acquisition techniques for your Project Management SaaS application is content marketing, you could reconfigure your customer support content so that your customer acquisition segues into customer loyalty through unique video tutorials, productivity guides and a variety of other content focused tutorials, guides and videos.
The following are four ways for satisfying the two strategies for creating unique products and the methods to achieve them.
By enhancing the existing characteristics of the product or by reenforcing your investment on certain aspects of the service that your company provides, you can create a differentiated and unique product.
As I mentioned in last week’s post, in order to really be differentiated, it is important to combine multiple value activities together. When you have a single point of differentiation, it makes it much easier to be imitated.
In order to really create a unique product, you should combine multiple things together to satisfy your goal.
For example, say you wanted your Project Management application to be differentiated through usability. In order to really become unique, you would need to align your customer acquisition, and your customer support as well as actually creating the most usable product on the market. For customer acquisition you could create content on a wide variety of Project Management topics, technology, usability and case studies. For your customer support you could write in-depth tutorials, video guides and offer video conferencing seminars.
Everything you do as a company and every product decision you make should be framed by the question, how does this effect our uniqueness?
One of the problems with building products for other people is, some people will end up using it the wrong way! There are many causes for this problem, too much to get into in this blog post, but it’s safe to say at least some part of every product user base will probably be using the product not in the way it was intended.
This is a problem for differentiation because if you are trying to be unique for a certain characteristic, but your users aren’t using the product correctly to gain the advantages of that unique characteristic, your differentiation will be nullified.
For example, say your Project Management application beautifully integrates with a User’s inbox. If using this feature is too complicated or not fully explained, the User won’t use this feature correctly and your opportunity to be unique will be lost.
There are obviously many ways to make how to use a product clear. Walkthroughs, guides or video tutorials are all perfect ways to accomplish this. The most important thing is to just be aware that this is a problem and can likely have a detrimental effect on your goal to be differentiated.
As I covered last week, a critical component of differentiation is signalling. Signalling is how you show that you are differentiated. A superior product will often lose to an inferior product due to bad signalling. Signalling is most important when the customer does not understand what constitutes as valuable and what makes competing products different or superior.
I think content marketing is a perfect source of signalling online. In order to signal that you value usability, you have in-depth knowledge of the subject and how highly you value that quality, there is pretty much no better way to do this than through content marketing.
The cost of differentiation plays a huge role in the outcome. If you can’t differentiate cost effectively then it is simply not sustainable.
Differentiation is pointless if you can’t make it cost effective. You should strive to find cheap ways to differentiate or enhance your uniqueness.
The problem with this is, differentiation by it’s very nature is often costly. The customer is paying you a premium to provide your unique product because they value the emphasis you have placed on that characteristic.
However, there are many ways that can you differentiate on the cheap. A good way to reduce costs as you differentiate is by linking two activities together. For example, the content that you produce for your customer acquisition can also be used for customer support.
You should always be aware of how much it is costing you to differentiate. The balance between investing too much or too little is very precarious and you need to always understand how your costs, sale price and margins are all interrelated.
In order to keep this balance, you should aim to minimise the costs of differentiation in any way possible.
For example, in our Project Management application, reducing the number of superfluous features down to the very minimum will not only make your product more useful, but it will also significantly reduce the cost to maintain and support it.
If you have any cost competitive advantage over your competitors when it comes to differentiation, you must exploit it. Anything that is difficult to replicate or imitate makes for a good base for differentiation.
37 Signals’ Basecamp is a good example of this. Founder David Heinemeier Hansson is also the creator of the extremely popular web framework Ruby on Rails. This enables 37 Signals to have a huge advantage in marketing to the web developer niche. I think it is safe to say that many Web Design Agencies around the world use Basecamp because of David’s influence in that community.
If you can’t win the game by playing by the rules, change the rules. The rules of an industry were created and maintained by the industry leaders. In order to beat them at their game, you can’t play by their rules because it obviously favour the incumbents.
As I covered last week, the decision maker has a big impact on on the success of differentiation. If you are putting emphasis on a characteristic that is not valued by the person who makes the purchasing decision, you will never be successful. Instead, you need to change the rules of the game.
For example, say your Project Management application is perfect for teams of developers. You value power user shortcuts and integration with services like GitHub and AWS. However, the person in the purchasing department couldn’t care less about those qualities and is only interested in price.
In this situation, you need to change who the decision maker is. A good way of doing that in this situation is to encourage your product to creep into an organisation uninvited. For example, if you had a freemium plan, you could encourage developers to start using it without permission or without the need to actually buy the product. This would allow your product to creep into the organisation until it reached the point that it has become critical to the company’s workflow and they need to upgrade to the premium plan.
If you can find new ways of using a product, or uncharted methods to market or reach your intended audience, you can find an impactful way to differentiate.
For example, your new Project Management application will never supplant Basecamp in many of the ways that it is differentiated. But you can change the rules and go after opportunities that they have not explored. Basecamp is the clear leader in Project Management applications for Web Agencies, but what other niche market segments can you attack? Basecamp is likely going to be prevalent in many different industries, but you can supplant them by focusing on reaching that audience in unique ways.
Everything in life changes from time to time and so the shift in an industry’s tectonic plates is the perfect opportunity to preempt those changes. When you see how changes to an industry will effect the future, you can put yourself in a position to reap those rewards.
For example, as the new wave of collaborative consumption companies rises, is there an opportunity to build a Project Management application that is better at managing those flexible and open tasks rather than the more rigid tasks of a traditional company?
And finally, probably one of the best ways of achieving differentiation is to completely turn the industry on it’s head. Every single industry has fallen into a set pattern of how things are done. But this is often not the best way of doing things. Look for opportunities where you can completely change how the industry works, what it values and how it is delivered.
For example, your Project Management application could be completely open sourced and distributed freely to anyone who wants it. This would mean any company that wanted to host their Project Management software on their own servers could do so. You could then charge customers who wanted you to host their installation to save them the headache, as well as providing more advanced tools, services and integration.
By making your application open source you would achieve significant exposure and you would turn the industry on it’s head.
As with differentiation, creating unique products is not as simple as it sounds. It’s easy to create a product that is different, but its quite another thing to make it differentiated.
There are many opportunities to create a unique product, many of which have nothing to do with the product at all. In order to achieve traction and gain marketshare, you need to be pursue uniqueness.
However, being unique is not always a good thing. By understanding differentiation and how to analyse an industry, a product and an opportunity, you can create unique products that have significant competitive advantage over the market.