TLDR: To stand out and attract the right clients, professional service businesses should focus on being different in ways that clients truly value, rather than competing on price alone. Sustainable advantages come from differentiation and specialisation, not just lower costs. Effective differentiation is evident in a company's daily actions and provides demonstrable value to clients.
The opportunity in a nutshell
Differentiation in the business world simply means being different from competitors in ways that potential clients value. It gives clients a clear reason to choose your services over others. When executed well, differentiation leads to high demand and attractive profit margins.
This article provides an overview of the key concepts.
Three ways to gain a competitive edge
Although differentiation is a powerful strategy for gaining a competitive edge, it’s not the only one. Harvard’s Michael Porter, famous for his writings on business strategy, said there are three ways to create a lasting advantage over competitors:
- Cost leadership (having lower costs than competitors)
- Differentiation (being different from competitors)
- Focus (specialising in a niche market)
In professional services, where skilled people are the main cost, achieving lower costs than anyone else is very difficult. This makes differentiation and specialisation the more practical routes to a strong competitive position.
Specialisation, such as focusing on a narrowly defined type of client or providing a specialised service, is a common strategy for professional services. Regardless of whether a firm specialises or not, differentiation will strengthen its advantage over competitors, ultimately helping it attract more ideal clients.
The benefits of differentiation
Differentiation helps services stand out, even in a crowded marketplace, and enhances the perceived value to ideal clients. This boost in perceived value leads to other benefits:
- You don't have to rely solely on price to compete.
- You can justify charging higher fees.
- Clients become more loyal.
If your firm doesn't differentiate, potential clients will struggle to see a difference between you and your competitors. It's natural that price will become a significant factor in their decision. If you want to avoid being chosen based on price alone, or if you aim to charge premium rates, differentiation is essential.
Using client concerns to drive differentiation
I see many opportunities for differentiation through understanding common worries of clients and addressing them in innovative ways. For instance, clients who engage software agencies in large projects often worry about being kept updated on progress, so there is an opportunity to differentiate by solving this problem. Each time you offer a solution that rivals don't, you give clients a reason to choose you.
Why price is a poor differentiator
As advertising legend Jack Trout pointed out, "cutting prices is usually insanity if the competition can go as low as you can" [1]. There will almost always be competitors willing to offer lower prices, meaning any advantage based on price won't last. Lowering prices in the long run harms your business by reducing profit margins, leaving fewer resources to invest in growth or in hiring the best people. Also, lower prices tend to attract clients who are very price-sensitive and not loyal, making them easily swayed by even lower offers from competitors.
Differentiation goes beyond branding
Differentiation should go beyond branding, vision, or mission statements, which often describe aspirations. Differentiation needs to be visible in the everyday actions of your team—how they interact with and support clients. As James Allen stated, "Ultimately, differentiation is found in what you do for your customers each and every day. It is embodied in the routines that people throughout the company follow, especially front-line employees" [2].
Most businesses don’t differentiate effectively
Unfortunately, it is rare for businesses to be differentiated convincingly. There are various perspectives on why this might be the case.
One is that leaders genuinely believe their business is different. However, research indicates a significant gap between this perception and clients' views, with one study finding that 80% of executives thought their company was differentiated, while only 10% of their clients agreed [3].
Another viewpoint is that differentiation is rare because "managers in most industries tend to do what is safe and conventional, which is to say, what everyone else is doing" [4].
A further explanation is that some businesses simply lack the knowledge of how to differentiate effectively [1].
Regardless of the reasons behind this widespread lack of differentiation, it presents an opportunity for your firm to gain a significant advantage by becoming a leader in differentiation within your market.
Key criteria for differentiation
Here are three key criteria for effective differentiation:
- Be truly different. Simply claiming "better" quality or service is often unconvincing if it can't be demonstrated. In any case, high quality and good customer service are generally expected, not points of differentiation [1].
- Be provable. Clients have likely experienced unmet promises before. Don't expect them to simply believe your claims of superiority. Provide clear evidence or focus on differences that clients can easily assess for themselves.
- Be valuable to clients. Ensure your differences are meaningful and important to your target clients.
Visualising differentiation
To better understand and compare different differentiation strategies, the authors of the bestseller "Blue Ocean Strategy" introduced the concept of the value curve (they also called it a strategy canvas and a value map). A value curve visually compares different approaches to differentiation. It plots various customer purchasing criteria on the vertical axis and a performance rating scale on the horizontal axis.
Value curves comparing the value offered by three types of hotel: Formula 1 hotels, one-star rated hotels, and two-star rated hotels.
One of their articles provides an example of a value curve comparing the differentiation strategies of the budget hotel chain Formula 1 with those of one-star and two-star hotels [5]. The value curve compares the hotels across ten purchasing criteria. It's evident from Formula 1's value curve that they deliberately chose to differentiate on only three purchasing criteria: bed quality, hygiene, and room quietness. This strategic decision focused on exceeding industry standards on these three aspects because they were deemed most important to Formula 1's target customers. Simultaneously, Formula 1 intentionally reduced costs on other criteria.
References:
[1] Trout, J., & Rivkin, S. (2008). Differentiate or die: Survival in our era of killer competition (2nd ed.). Wiley.
[2] Allen, J. (2012, March 21). Living differentiation. Harvard Business Review. Link
[3] Zook, C., & Allen, J. (2011, November). The great repeatable business model. Harvard Business Review. Link
[4] Holt, K. (2022). Differentiation strategy: Winning customers by being different (1st ed.). Routledge.
[5] Kim, W. C., & Mauborgne, R. (2004, July 1). Value innovation: The strategic logic of high growth. Harvard Business Review. Link
