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Have you been competing for work that you are more than qualified to perform, only to be underbid by your competition? Or maybe you have been the one underbidding, which leaves you no room for growth or prosperity.
If you want to stop competing on price alone, it may be time to develop a stronger differentiation strategy.
Differentiation Strategy Defined
Your differentiation strategy is the way in which you make your firm stand out from otherwise similar competitors in the marketplace. Usually, it involves highlighting a meaningful difference between you and your competitors. And that difference must be valued by your potential clients. A strong differentiator will provide a competitive advantage for your firm.
Michael Porter, the famous strategist, maintains that there are only two ways to gain a sustainable advantage over your competition. One way is to compete on price, highlighting the similarities you share with your chief competition:
“We’re just as good as our competition, but we cost less.”
Unfortunately, unless you have a sustainable cost advantage, you can’t keep up this strategy for long. All it takes is someone willing to undercut your lowest price. The lowest-cost strategy also exposes you to commoditization and a much wider range of competitors, including do-it-yourself options, off-shoring and automation.
Porter’s other way — and a better way — is to stand apart. Be different. Separate yourself from competitors in a way that is both important and relevant to potential clients.
According to our definition above, this is a differentiation strategy.
Now, a point of differentiation may be broad-based and set you apart from the rest of the industry or more narrow, appealing to a niche market. This latter approach is often referred to as a focused or concentrated strategy.
Differentiation Strategy Examples
Here’s an example of a broad differentiator: adopt a very different business model. Let’s say that hourly billing is widespread in your industry. Offering a pay-for-results billing model, instead, would separate you from competitors.
Of course, developing a broad-based differentiation strategy, in which your firm is substantially different from your industry as a whole, is hard to achieve. And even if you were able to pull it off, what’s to keep a competitor from emulating your approach?
This is why many firms choose to compete with a focused strategy. In a focused strategy you narrow your appeal to a niche audience.
For example, an accounting firm that works exclusively with chain restaurants has a very compelling differentiator to that niche market segment. However, a different audience segment, such as automobile dealers, would find no value in working with the restaurant specialists.
Advantages of Differentiation
There are some big advantages to using a differentiation strategy. Here are some of the benefits.
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YOU DO NOT HAVE TO COMPETE ON PRICE ALONE.
Since you have distinguished yourself from your competitors the prospective client cannot reduce their choice to the dimension of cost alone.
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YOU HAVE GREATER APPEAL TO YOUR TARGET AUDIENCE.
Since you are different, and presumably better, you make a more appealing choice. This makes it easier to generate interest and close sales.
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THERE IS NO DIRECT SUBSTITUTE.
This is a related point to the appeal of your difference. Lack of direct comparability forces the prospect to focus on the incremental value of your difference. This adds value that other options do not have.
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YOU INCREASE LOYALTY.
Greater value and a lack of comparable substitutes result in greater loyalty to your firm. There is no good reason to switch (if you are delivering on your promise) and no comparable alternative to switch to.
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YOU CAN COMMAND GREATER FEES.
Assuming that your differentiation is one that adds value and is not available elsewhere you are in a position to command higher fees. This is especially true if your differentiator is around specialized expertise.
Whether your strategy is broad or very focused it must always start by identifying your firm’s differentiators.
Differentiator Defined
A differentator is something that makes your business meaningfully different from your competitors and more valuable in the eyes of your target audience. Differentiators are the building blocks of a differentiation strategy.
But simply calling something a differentiator doesn’t make it so.
First it must pass three tests.
Three Tests for a Successful Differentiator
How do you know you have a good differentiator? We recommend you put each one to the test. If it can pass these three critical checks, it is worth developing into a broader differentiation strategy:
1) IS IT TRUE?
Differentiators can’t be fabricated. Apart from the moral hazard of making stuff up, it is simply too easy for people to see through exaggerated claims. Whatever you put forth s a differentiator, your firm has to live it each day. And remember, you’ll need to deliver on your promises.
For example, many firms say they have superior client service, but they do nothing special to make it a reality. No special policies. No special training. Nothing to ensure it actually happens. The bottom line is they are no different than a slew of competitors that make the same claims.
2) IS IT RELEVANT?
If your point of distinction doesn’t matter to your prospects, it won’t bring you more business. In the end, what is most important is what plays into your target prospects’ selection criteria and decision-making process. Any irrelevant differentiators are wasted effort.
We once had a lobbying client that believed their strongest differentiator was their firm’s lack of conflicts of interest. Their competitors certainly could not make the same claim. But, when we dug a bit deeper, we discovered that their clients and prospects didn’t value impartiality much at all. So much for a strong brand differentiator.
In our research of professional services firms, we found another reason to reject client service as a differentiator — buyers don’t even consider it as a selection criterion. A lack of customer service may be a reason why you lose a client, but it rarely plays into the initial selection process. It’s just not relevant yet.
3) IS IT PROVABLE?
This is the often the hardest test of a differentiator. You may have identified a true and relevant point of distinction, but it is useless without proof. Even if a differentiating statement is true, if you can’t substantiate it with evidence it buyers won’t believe it. They have become inured to — and learned to ignore — empty claims.
Here’s a popular differentiator candidate that many of our clients are fond of: “We have great people.” It is a trap! Why? Well, have you ever heard a firm claim they have average people?
Didn’t think so.
But there are exceptions. One of our clients provides specialized software development services — and they hire only PhD-level programmers. They actually can support a “great people” differentiator with evidence.