Product differentiation is one of Michael Porter's three generic strategies for competitive advantage. A company can gain a competitive advantage by creating and marketing unique products - products that are different from what other competitors offer as well as products that are different from the company's own product offerings. Edward Chamberlin proposed the concept of product differentiation in his 1933 book "Theory of Monopolistic Competition."
Differentiation is not actually designing a product to be different. Differentiation comes from marketing your product as satisfying different needs than competitors. This is done to show the unique aspects of the product and create product value. Differentiation is created when buyers perceive a difference. The main sources of product differentiation are as follows: differences in quality (accompanied by difference in price), differences in functional features, ignorance of buyers regarding characteristics and qualities, sales promotion and activities, and differences in availability.²
There are three types of product differentiation: simple, horizontal, and vertical. Simple differentiation is variance based on a variety of characteristics.¹ Horizontal variation is based upon a single characteristic but consumers are not clear or aware on the quality.¹ Lastly, vertical differentiation is based upon a single characteristic and consumers are clear on quality.¹ Brand differences in product differentiation are usually minor: they can be anything as small as a difference in packaging to a difference in advertising.
1. Pepall, L., Richards, D. J., & Norman, G. (2005). Industrial organization, contemporary theory and practice. Natorp Boulevard, Mason, Ohio: Thomson South-Western. p. 133.
2. Butler, J. E. & Jones, G. R. (1998). Costs, revenue, and business-level strategy. Academy of Management Review, 13 (2), 202-213.