Editing Product differentiation (section)

==Rationale==
[[File:Fredmeyer edit 1.jpg|thumb|Aisles in a supermarket. While each item has the same intended purpose, [[Competition (economics)|competition]] has driven each brand to differentiate its own product from the others to encourage consumer [[Preference (economics)|preference]].]]
Firms have different [[Capital asset|resource endowment]]s that enable them to construct specific [[Competitive advantage|competitive advantages]] over competitors.<ref>{{cite journal|last=Barney|first=J|title=Firm resources and sustained competitive advantage|journal=Journal of Management|date=March 1991|volume=17|issue=1|pages=99–120|doi=10.1177/014920639101700108|s2cid=220588334}}</ref>  Resource endowments allow firms to be different, which reduces competition and makes it possible to reach new [[Market segmentation|segment]]s of the market. Thus, differentiation is the process of distinguishing the differences of a product or offering from others, to make it more attractive to a particular [[target market]].<ref name="kotler">{{cite book|last=Kotler, Keller|first=Philip |author-link=Philip Kotler |title=Marketing Management |year=2006| isbn=9780130156846 |publisher=Prentice Hall New Jersey}}</ref>

Although research in a [[niche market]] may result in changing a product in order to improve differentiation, the changes themselves are not differentiation. Marketing or product differentiation is the process of describing the differences between products or services, or the resulting list of differences.  This is done in order to demonstrate the unique aspects of a firm's product and create a sense of [[Value (marketing)|value]].  Marketing textbooks are firm on the point that any differentiation must be valued by buyers<ref name="kotler"/> (a differentiation attempt that is not perceived does not count).  The term [[unique selling proposition]] refers to [[advertising]] to communicate a product's differentiation.<ref>[[Rosser Reeves|Reeves, Rosser]] (1961) The Reality of Advertising. {{ISBN|978-0982694145}}</ref>

In [[economics]], successful product differentiation leads to [[competitive advantage]] and is inconsistent with the conditions for [[perfect competition]], which include the requirement that the products of competing firms should be [[Substitute good|perfect substitutes]]. There are three types of product differentiation:

# Horizontal differentiation: Based on a single product characteristic that is subjectively evaluated by consumers
# Vertical differentiation: Based on a single product characteristic that can be objectively evaluated by consumers
# Mixed differentiation: A combination of horizontal and vertical differentiation factors

The brand differences are mostly minor; they can be merely a difference in [[packaging]] or an advertising theme.  The physical product need not change, but it may.  Differentiation is due to buyers perceiving a difference; hence, causes of differentiation may be functional aspects of the product or service, how it is [[distribution (business)|distributed]] and marketed, or who buys it.  The major sources of product differentiation are as follows.
*Differences in [[Quality (business)|quality]] which are usually accompanied by differences in price
*Differences in functional features or design
*[[Ignorance]] of buyers regarding the essential characteristics and qualities of goods they are purchasing
*Sales [[Promotion (marketing)|promotion]] activities of sellers and, in particular, advertising
*Differences in [[Supply (economics)|availability]] (e.g. timing and location).

The [[Goal|objective]] of differentiation is to develop a [[positioning (marketing)|position]] that potential customers see as unique. The term is used frequently when dealing with [[freemium]] business models, in which businesses market a free and paid version of a given product. Given they target the [[Price discrimination|same group of customers]], it is imperative that free and paid versions be effectively differentiated.

Differentiation primarily affects performance through reducing directness of competition: as the product becomes more different, categorization becomes more difficult and hence draws fewer comparisons with its competition.  A successful product differentiation strategy will move a product from competing based primarily on [[price]] to competing on non-price factors (such as product characteristics, distribution strategy, or promotional variables).

Most people would say that the implication of differentiation is the possibility of charging a [[price premium]]; however, this is an over-simplification.  If customers value the firm's offer, they will be less sensitive to aspects of competing offers; price may not be one of these aspects.  Differentiation makes customers in a given segment have a lower sensitivity to other features (non-price) of the product.<ref>{{cite journal | last1 = Sharp | first1 = Byron | last2 = Dawes | first2 = John | year = 2001 | title = What is Differentiation and How Does it Work? | journal = [[Journal of Marketing Management]] | volume = 17 | issue = 7–8| pages = 739–59 | doi = 10.1362/026725701323366809 | s2cid = 167346565 }}</ref>