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Competitive Differentiation: The Battle for Customer Perception, Part I
December 31, 1969 |Estimated reading time: 5 minutes
By Ted Turner, CoGen Marketing
Competitive differentiation is the life blood of every company. You certainly cannot attract venture capital without convincing investors that your company is uniquely positioned to do whatever it is that you do. During company formation, and in new product development, investment typically is made in competitive differentiation with a lot of attention to detail. All too often, competitive differentiation slides into complacency as the company and its products mature, leaving the company vulnerable to competitive attack.
If you have products or services that are not dominating market position, then your potential customers must not perceive your products or services to be uniquely superior to your competitors. These perceptions are shaped by many things: your messaging, your competitors' messaging, customer experiences with your products and services, conversations between different customers. The keyword here is perception. If you're favorably perceived, it is relatively easy to sustain and even improve the positive perception. It generally requires some amount of evidence to change the perception to negative. If you're perceived negatively, a lot of concrete evidence is required to improve perception; and it takes precious little to further damage your standing. With concrete evidence gained from competitive differentiation exercises, you can control the messaging your customers receive about your business and about your competitors'.
Every company is under pressure to reduce costs, and often vendors are pressured for price reductions. Differentiation is the fulcrum in every price negotiation. If your solution is differentiated from your competitors' solutions clearly, you can command a premium price. If your solution is not differentiated, the fulcrum is pushed all the way to your end creating the short-end with no power to negotiate. Left unchecked, lack of differentiation ultimately erodes customer loyalty. If your customer can switch to a different vendor with no changeover costs and receive an equal solution for a lower price, why wouldn't they make the switch?
Customer loyalty is a complex relationship. One true test of loyalty is when a customer knowingly buys an inferior product from a long-time supplier. This generally is not a test that anyone wants to run. While loyal customers will buy equivalent products from incumbent vendors knowingly, even this position must be defended with differentiation in other areas. Are you giving your customers a reason to be loyal? Are you using the carrot or the stick? The stick approach manifests itself in negative terms: "the switching costs are too high to drop you as a vendor at this time." While high switching cost is a great defensive position, and should be built into every product possible, solely relying on it builds bad will and only delays the inevitable. The carrot approach is described in positive terms: "our products save you money and make you more competitive." Don't confuse saving your customer money with low prices. I'll discuss this more in Part II.
To focus your differentiation efforts, begin with customer segmentation. The main purpose of customer segmentation is to provide your organization with a crisp message that resonates with a significant number of customers. There are many ways to segment your market. You may segment by industry the telecom industry speaks a different language and has different needs from the airline industry. Segmentation by revenue also is common large companies have similar purchasing processes to each other that are usually quite different from the purchasing processes of small- and medium-size companies. For competitive differentiation purposes, segmentation by purchase criteria will help crystallize your unique features and highlight important gaps, focusing your marketing and R&D resources directly where customers are making purchasing decisions.
Creating a crisp list of purchase criteria across your existing customer base and your target customers creates the data for differentiable market segmentation. Can you describe your customers' daily activities and the problems they face? Using a test vendor as an example, examine your customers' throughput and yield. What throughput improvement is required before your customers will spend money to make that happen? Is your customer limiting test coverage because of slow throughput? What is preventing your customer from achieving 100% yield? What does it cost to achieve their current yield and what is their cost of scrap? What are they doing to improve yield today? Are changes in technology creating new test challenges? For example, as technology shifts from thru-hole and gull-wing connectors to BGA and LGA connectors how will this impact your customers' test strategies? If your customers manufacture a low mix of products, they are likely testing for process yields. If they manufacture a high mix of products, they probable test to ensure correct devices are properly mounted to the board and are functioning at a requisite level. In this example, knowing your customers' fault spectrum leads directly into their purchase criteria. Every company spends money only to solve specific problems. Specific problems are never unique to any single company.
Continuing with the test vendor example, look at product lifecycle. Prototypes in R&D have different test purchase criteria from volume manufacturing. Warranty returns might be tested and repaired by third parties. How are failure and repair data shared across all of these entities to drive process control and improvement? Today's supply chains are complicated and add complexity. Characterizing and quantifying this complexity, with a bias towards your company's contributions, creates actionable market segmentation that can lead to more sales.
As you scan your market for similarities in purchase criteria, keep your product features in mind. The more clarity you have on similarities in purchase criteria, the more likely you are to identify unique qualities to your offerings and express these in differentiated benefits upon which your customers will purchase. Using this approach, you also will find gaps in your capabilities that can be crisply described to product generation in quantified terms.
Part II, appearing in the October 8, 2008 SMT WEEK e-newsletter and smtonline.com examines how to inventory your product or service features and compare them to your competitors'. I also will provide a template to put all of this knowledge into action to generate more sales.
Ted Turner is principal at CoGen Marketing, which provides business development marketing services with over 25 years experience. Contact him at www.cogenmarketing.com.