Product strategies are high-level plans that businesses develop and execute. In essence, these strategies describe what businesses want to accomplish with their products, along with the ways that the businesses will employ to get to their respective goals. A successful product strategy provides answers to all of the following questions:
- Who are the people/personas that the products will serve?
- How will the products be of benefit to those people?
- What are the business’ product-specific goals throughout the life cycle of the products?
Developing product strategies is considered vital in today’s times, as they provide clarity to businesses and allow them to prioritize product roadmaps. Product strategies are also quite effective at improving the tactical decisions taken by businesses.
While there are different types of product strategies that businesses can choose, two of the most commonly-chosen strategies include product differentiation and cost leadership. In this post, we’ll pit these two strategies against one another and take an in-depth look at their pros and cons. So, if you’re into creating effective product strategies, read on.
What is product differentiation?
When a business wants to establish its product as something different and/or unique, it typically chooses product differentiation as its preferred product strategy. If a business is to develop and execute this product development strategy successfully, it has to do two things well simultaneously. On one hand, it has to identify and communicate its product’s unique qualities to its target audience. On the other, it has to highlight the differences that its product has compared to competitors’ products, i.e., the differences that make its product unique.
A business may choose this product strategy implementation based on a number of factors such as:
- Durability and performance: If a business’ product provides better performance and is more durable than a competitor’s product, the business should differentiate its product based on the factors of durability and performance. For instance, numerous battery manufacturers use this product differentiation strategy to appeal to their target audiences by marketing their products as ones that are longer-lasting than their competitors.
- Price: Businesses can use price to differentiate their products in two ways. A business can differentiate its product by charging a price higher than any of its competitors are charging. This is typically done to imply the quality of a product. However, businesses can also charge a price that’s lower than competitors’ prices. This type of differentiation will attract cost-conscious consumers.
- Service and location: Businesses that operate on a local/community level can differentiate their products based on how they serve the needs of a community and also support the local economy. Local restaurants typically use this type of product differentiation strategy.
While product differentiation can be highly effective as a product strategy, it also has some inherent limitations like:
- The perceived value of the differentiated product may decline over time.
- An increase in revenue isn’t a guarantee.
- Product differentiation can be a huge burden on a business’s resources.
So, now that you understand what product differentiation is all about, let’s turn our attention towards cost leadership strategy.
What is cost leadership?
Cost leadership is yet another product strategy, but instead of placing emphasis on the product like product differentiation, it mainly focuses on reducing production costs and increasing efficiencies. Typically, businesses that adopt this strategy aim to lower production costs well below the averages across their respective industries. Some businesses also take their closest competitors into account when adopting this strategy.
There are various benefits of cost leadership as a production strategy, such as:
- Ability to offer high-quality products at competitive prices: Typically, the product development process of high-quality products is expensive. However, when a business adopts a cost leadership strategy, it finds a way to produce quality products at a lower cost than its competitors. This allows it to provide high-quality products to customers at competitive prices, which increases its chances of success in the long run.
- Increased profit potential: Businesses that cement themselves based on low production costs and high-quality products typically have high-profit margins. If the low production costs can be sustained, then businesses operating with this product strategy can create a unique brand identity for themselves, even in the most fiercely competitive markets.
- Eliminates competition in the long run: When cost leadership is implemented correctly and executed well over a long time, it can put the competition out of business. Typically, competitors may try to mimic a successful business that’s adopted a cost leadership strategy. However, most businesses can’t afford to sustain low production costs for a long time, as it either affects profitability or product quality.
However, cost leadership strategies come with their share of cons as well, which include the following:
- Keeping production costs low can be challenging: During periods of inflation, businesses may have to cut corners to keep their production costs low. As a result, other areas of the businesses may suffer. For example, a business may have to slash its budget for customer support services. In such a scenario, even if the product is good, a customer that prioritizes customer support will look for an alternative.
- Limited innovation: The perceived value of a product is susceptible to change, which is why products in today’s times need to be dynamic. That’s where innovation comes into the picture. However, innovation is only possible in a business that invests heavily in research and development. Typically, a business that prioritizes low production costs invests very little in the R&D department, which negatively impacts innovation.
So, now that you know the differences between the product strategies of product differentiation and cost leadership, we hope you make the right choice based on where your business is today and where it hopes to be in the future. Ideally, you should reach out to professional product strategists for the most sound advice.