The 5 Step Differentiation Process (Small Businesses Guide to Differentiation).

In our last blog, we wrote about the fact that many small business owners feel that ‘business strategy’ is only for the big boys and that it was not really relevant for them. Hopefully, we fully debunked this myth. The other issue we covered was the selection of competitive strategy, whether business owners should choose a competitive strategy of differentiation or cost focus.

The problem we see consistently is that business owners never really define their competitive strategy and when pushed have no real notion of which to pursue.

The choice of a cost focus strategy would seem ideal for many small businesses, after all, their cost base is generally a lot smaller than their larger rivals. However, they do struggle to compete on cost because of lack of size, they don’t have the buying power of their larger competitors or the benefits that economies of scale bring. This leads to problems when trying to compete on ‘price’ against larger competitors (not that I would ever recommend competing on ‘price’).

So if you don’t want to or can’t use a cost focus strategy then the logical choice is to differentiate your product, service, or business to an extent, that you’re the logical choice in your marketplace. This is where the problems begin, understanding how to truly differentiate is not a well-trodden path for most business owners.

In this blog, we’re going to share with you a 5 step differentiation process for any business or product.

Step #1… determine your strategic position in the market.

What specific niche market or segment of the marketplace should your business focus on? There’s a saying which goes “you can’t be all things to all people” you’ve got to be something for someone. The problem that lots of small businesses have is that they try to be all things to everyone. It’s not a successful strategy. Your marketing message gets diluted to such an extent that it resonates with no one.

The benefit of a niche strategy is that it allows businesses to differentiate themselves, appear as a unique authority, and resonate more deeply with a distinct set of customers. Rather than blend in with the many other businesses that offer the same type of product or service. A business can use niche marketing to stand out, appear more valuable, reach its growth potential, and build a stronger, longer-lasting connection with its ideal audience.

The market for clothing and accessories is vast yet within this vast market there are many opportunities to find a niche, this could be a niche based on specific demographics such as age, sex, location, etc or a niche based on psychographics, i.e. likes or even dislikes. So you may be a small clothing business with a niche-focused on vegan’s who are located in the north of England. This would mean that you’d have sourced animal-free clothing and build an audience with vegans in the north of England. All of which is easier than just trying to be all things to everyone.

To determine your niche is a detailed process that does take some work but the end results are worth it. You can find out exactly how to do this with our Step by Step Strategy No.12. You can read this here.

Also to help you with identifying your niche we’ve another Step by Step Strategy (No.13) which helps you identify your ideal client. You can read this here.

Step #2… determine your primary market-dominating position.

There are three routes that you can use to separate your business from the competition, these are:-

The level of service you provide.
Selection.
Pricing.

In the next section, we’ll go through each of these and provide examples for you.

1: The level of service you provide.
There are a total of 6 different areas where you can add value when it comes to service. Be sure you consider these six areas when it comes to service as a way to add massive value and create a market-dominating position for your business, you an use all of them, or a combination of any of them:-

Convenience
Speed
Education and training
Eliminate risk
Quality
Security and safety

A. Convenience.
Today, what most people value more than money is more time. The more convenient you are the more business you’ll get. Convenience stores typically charge 40% or more for the “convenience” of shopping there. I’m not saying that you’d do your weekly grocery shopping at a convenience store but popping out for that item that you need to finish dinner is very common. And we’re very unlikely to price check as it would probably be inconvenient to go anywhere else.

So the first element of convenience is location. It’s no coincidence that all the major grocery stores have also opened smaller local stores, tapping into the convenience of shopping locally.
The second element of convenience to consider is availability. Customers like to do business on their schedule, not yours. This is why supermarkets, gyms, gas stations, etc have extended their opening hours and sometimes even offer opening hours of 24/7 365.

The third element of convenience is the ordering process. If ordering is typically a headache for your customers then solving this problem can help you to establish a powerful market-dominating position. The business that makes ordering convenient by providing easy access to menus with a live operator option, or the ability to conveniently order online… becomes the logical choice for most customers. Think about ‘Just Eat’ or any of the other food delivery services. They took away the headache of calling the takeaway, having to go and collect, and paying with cash all in one go.

The fourth element of convenience is delivery. When a more convenient location isn’t an option, then bringing your product or service to the customer can be a massive advantage. The obvious example of this is the businesses that specialise in delivering local takeaway items directly to your home or office e.g. Just Eat as mentioned above. However, think about mobile services such as mobile oil changes, tire changes, or even mobile hairdressers.

The fifth element of convenience is ‘payment’ terms. If your competition doesn’t offer any type of financing options, you can differentiate your business by offering payment terms over 30, 60, or even 90 days. You may want to consider offering multiple payment options such as a
“3 easy payment plan” or consider accepting credit cards if you don’t currently accept them. Making it easy to pay and get paid can be a real differentiating factor.

The sixth and final element of convenience is all about what additional services do your potential customers consider important? For example, If your business attracts parents with small kids, consider offering child care services while the parents shop or take care of business, or If your business requires parents to evaluate their purchase decision… then having a child’s play area can be a huge area of differentiation.

B. Speed.
Speed and convenience are major players in our customer’s buying decisions. Finding opportunities here that you can exploit will allow you to quickly dominate your market. Today’s consumer is a very impatient beast, they will happily pay more for faster service, faster delivery, or pretty much anything that is faster.

For example, you may be able to provide express checkout counters for your most regular customers or provide express delivery (at a premium) for those customers who are in a rush. Either way, if you can do it quicker than your competitors it will be a definite advantage.

C. Education and Training
This is especially true if you’re selling a commodity-type product or service where application knowledge is required. Software applications are typically sold with added Education and Training. Their customers want to take advantage of all the benefits that the product or service can offer them and education and training can help them accomplish that goal.

Accountants sometimes offer a level of education and training for their small business clients. After all, having more informed clients reduces the level of support the accountants have to provide and it’s seen as a massive end benefit for the customer.

D. Eliminating risk
In any transaction, there is an element of risk for the purchaser. The product may not work as described or meet their expectations. The service may be inconsistent or poor. The purchaser will not know in advance what type of experience they will have. We’ve all been somewhere once and had a great experience, yet going the second or third time just wasn’t the same.

The ability to eliminate the risk in advance and guarantee the result your customer is looking for can be a massive differentiating factor for a small business.

100% money-back guarantees and generous return policies are quickly becoming the norm in most industries, Nordstrom department stores in the USA were famous for their generous returns policy. They’ve even been known to refund customers for items that weren’t bought at Nordstrom. This has changed a little over the years, but they are still known for their generous returns policy.

So if your competitors don’t offer a 100% money-back guarantee then you have the opportunity to make your business the only logical choice by doing so, and more importantly, mentioning this during the sales process. So often companies have great guarantees but never tell their customers about them until there’s a problem. You can find out exactly how to produce a great guarantee with our Step by Step Strategy No.7. You can read this here.

E. Quality
Generally, higher quality is defined in terms of – superior materials or ingredients, superior craftsmanship, proprietary manufacturing methods, one of a kind bespoke production, etc. Quality is difficult to use as a differentiator because it is an ephemeral trait. One person’s quality is another person’s unnecessary expense.

The way to think of quality is, as a benefit as perceived by the customer. It’s typical to pursue quality by tracking benchmarks or quality indicators. But the ultimate goal for any quality programme is customer satisfaction. Quality measured by the customer is the only measurement that serves to differentiate your business from the next. Therefore, in order for your quality to set you apart from the competition, you have to make sure quality throughout the product or service delivery is focused on the customer.

F. Security and safety
We appear to live in a less secure and safe environment, although if you carefully examine the relevant statistics this is not the case. However, because of intense media coverage of security and safety issues, security and safety have now entered into the decision making process for most prospects.

The fear of crime for example often weighs heavily in the decision-making process. Therefore it provides an opportunity for small businesses to differentiate themselves from others.

If for example, you can state that all your employees have been vetted by the relevant authorities, even when it’s not mandatory this raises the question in your prospects mind as to whether the other companies have done the same, if they haven’t then this provides a clear competitive advantage.

If you operate a food venue, health and food safety are a key component of your competitive environment. The vast majority of eating establishments demonstrate their compliance with the standards by displaying health certificates from the local authority. However, if you could demonstrate that you not only meet the highest standards set by the local authority but go above and beyond them, then you have a clear differentiator.

2: Selection.
The second path you can take to really differentiate your small business is through selection. In the early 1980’s the video rental market was dominated by small mom and pop shops where they would have 1 or maybe 2 copies of the latest blockbuster which was always out with somebody else, and maybe a few hundred other films for you to consider (if you were lucky).

Along came Blockbusters who always had a copy of the latest blockbuster for you to rent. They would also have a massive selection of other films for you to rent, and you could even buy popcorn to snack on. Soon all the mom and pop shops were no more. Blockbuster dominated the video market by stocking more hit movies than its smaller competitors. They created a true point of differentiation where they guaranteed that new releases would be available whenever their customers wanted to rent them.

Then along came Netflix, they duplicated the Blockbuster model for selection and then added the convenience of never having to leave your home to rent a movie, simply go online, select your film and post it back when you’re finished with it. Blockbuster went from $6 billion in total revenue in 2004 to bankruptcy in 2010 while Netflix went from $500 million to $2.2 billion in revenue in that same time frame.

In Netflix’s case, they matched their competition in the area of selection and innovated in the area of convenience.

Selection can include different models, shapes, sizes, styles, colours, and so on, so If you’re a retailer, offering greater selection may be as simple as combining different products or services to create a bundled offer. Think about what combination of products and services will appeal to your various customer groups? What don’t your competitors offer that your customers would appreciate?

Another example would be an Accountancy firm offering other business services that their clients are purchasing anyway, such as Human Resource Services, IT Services, or access to legal support. This is relevantly easy for them to do through smart partnering and would enable them to differentiate themselves from other Accounting firms in the area. Particularly, if all the services come on one bill.

3: Price
The final direction you can take where you can differentiate your small business is price. However, it does come with a warning. If low prices represent your point of differentiation, you’re settling for low-profit margins at best. There’s always somebody willing to do, whatever you do for less. Competing on price is nothing more than a race to the bottom.

The thing is, If you fail to convince a prospect of your value proposition, you can cut your price in half and you still won’t get the sale. This is because despite what salespeople will tell you, only 14% of prospects buy strictly on price.

So how can you use Price as a differentiator? If you combine price with other market-dominating advantages, then price can be a compelling tool. Here we have 3 ways you can use price as a point of differentiation.

Single or fixed pricing.
Businesses that can differentiate themselves by offering a set price are those that charge by the hour, the unit, the number of services they provide, the amount of food eaten, or the number of products used.

Fixed pricing can be used for most businesses to establish a point of difference. You can also use fixed pricing on a per visit or per season basis. For example ‘All you can eat’ buffets are very common and work on a single fixed price. Fixed price legal services for house purchases are also quite common. Of course, for these types of fixed-price offerings, the business has to be very certain of its costs for it to be profitable, any slip up in understanding the costs can lead to trouble very quickly.

Changes in pricing.
Increasing or decreasing the price you charge. Businesses can actually raise their pricing and instantly reposition their product or service to give it the perception of being the superior choice without changing anything else. Prospects often judge quality by the price you charge, ‘It’s very expensive therefore it’s high quality’. A price that they perceive to be extremely low instantly sets off warning bells in their decision-making process.

It is important to understand that the calculation of your price and how your prospects may respond to that price is just an estimate and that it might change over time. Markets change – customers become more or less sensitive to price changes. The tastes and preferences of consumers change; new methods of distribution are developed; consumers become more aware of pricing information. All of these (and other factors) affect the price you can charge.

Value-added services
The third way you can use price to differentiate is to offer small value-added services. There are always customers that will gladly pay you a little extra to receive a higher level of service.

As a good rule of thumb offering an additional 10% of whatever you do costs considerably less than a 10% discount. A 10% discount comes directly from the gross margin for that product or service, whereas an additional 10% will only cost you a fraction of the cost of the product or service. Put simply, offering someone 10% more will make you more money than offering a 10% discount. You can read my step by step guide to ending the discount madness (Step by Step strategy No.11 here).

A great example of offering value-added services would be an accountant offering a free subscription to online accountancy software such as Quickbooks or Xero, or any of the other cloud services available. This is seen as a benefit to the accountants’ clients as it helps them keep track of their expenditures and revenues and for the accountant, it makes compiling the end of year accounts easier. This helps the accountant differentiate their practice from others at the same price point, who don’t offer the same free software subscription.

As a rule offering value-added services shouldn’t require huge investments, as it should be something you already do or have available.

A note on ‘method’
Many businesses think of their ‘method’ as their primary differentiation strategy. There is a problem with this thinking, in that the ‘method’ you use to get your customers the results they’re looking for is only relevant as a point of difference if it does any of the following:-

Gets results faster
Improves the consistency of the results.
Is more secure or safe
Is of a higher quality
Allows you to differentiate on price

So for example both Slimming World and Weight Watchers claim that their slimming programmes (methods) provide an easy pain-free method to lose weight, both claim their method is unique and works best. WW (‘weight watchers’ say “Get to know our most holistic weight loss approach—ever”) and ‘slimming world’ say (It’s our unique mix of a healthy no-hunger eating plan, gentle activity and unbeatable support that makes Slimming World so different…).

They are trying to differentiate themselves from other weight loss programmes by claiming unique methods, of course, the problem with this approach for both of them is that everyone in their industry claims their methods are the ones to use. Therefore the element of differentiation ‘method’ gets lost in the myriad of confusing messages.

Step #3… supporting business models.

Having identified both our strategic positioning (who we are for) and our primary market-dominating position (why our target market should choose us over the competition) the next question to ask is:-

“How will you specifically deliver what your strategic position and primary market-dominating position promises?”

Here’s an example of how you may want to think about this. Back in the 1960s when Pizza was relatively new, Domino’s Pizza was a very small company based in Michigan, USA. Their business idea was simple; to deliver hot, freshly made pizzas in as quick a time as safely possible, while playing an active role in the local community.

Their strategic positioning was college students on local college campuses and their primary market-dominating position was speed. They backed up their ‘speed’ promise with a specific risk mitigation strategy of “Fresh hot pizza delivered in 30 minutes or less, or it’s free”. This appealed strongly to college students.

To back up their promise of fresh hot pizza in 30 minutes or less, meaning that they had to build stores close enough to their target audience so they could get there in time. Domino’s built low cost, plain vanilla stores strategically located near college campuses and hired additional delivery staff and drivers on a stand-by basis. This was Domino’s supporting business model.

To say that this was a successful strategy is an understatement, at the current time Dominoes have over 17,200 stores across the world.

Your supporting business model is there to ensure consistency of experience. So what changes, if any, do you need to consider making to your business to ensure you deliver consistently on your position and your promise? This is where many businesses fall down, they lack the necessary operational systems to ensure consistency. Do you have the necessary operational measurement processes to identify weaknesses, so that you can rectify them?

It’s no good having a great niche and competitive advantage if you fail to deliver on your promises.

Step #4… secondary competitive advantage.

Having a primary market-dominating position / competitive advantage will put your business in the top 20% of businesses in your marketplace. The simple fact is that the vast majority do not have a competitive advantage. However, to cement this advantage the next step is to develop a secondary competitive advantage.

If we look again at Dominoes, their primary competitive advantage was ‘speed’ of delivery backed up with a strong guarantee. They could look at our list of differentiation strategies from earlier and pick one of these as a secondary competitive advantage. In their case, the logical choice would be ‘selection’. Domino’s secondary benefits might include special pricing, assorted sizes, a much broader selection of toppings, or additional menu items. All of which is focused on making Dominoes the logical choice for hungry customers.

Your secondary competitive advantage is there to support your primary market-dominating position.

Step #5… communicating your differentiation.

It’s all well and good going through steps 1-4 but if you fail to communicate your differentiation then there is little or no point in being differentiated in the first place. Far too many firms fail to communicate their “inside reality” to the outside world.

Your potential customers can only perceive your points of difference through the communications you put out. If your communications are the same as your competitors, the logical interpretation by your potential customers is that you are the same. Your points of differentiation have disappeared.

Your inside reality is all the things that make your customers value what you offer. In Domino’s case, it was the speed of delivery backed up with a strong guarantee.

Without the ability to effectively communicate what makes you different and how it makes a difference for your clients, you give them no reason to choose you over your competitor. It is your job as a business to provide your dream client or customer with all of the reasons that they should choose you over your competitors.

It’s not easy, but if you can take your primary market-dominating position, backed up with your secondary competitive advantage, and boil them down to a single statement, you can arm your business to answer the question: “What makes us different?”

When you do the hard work to answer these questions (or if you are in sales and you write these answers yourself), you also teach your dream client to answer the questions that she is asking herself about you—and you are teaching her to answer the question when she is asked by people within her own company.

So how should you communicate your difference? Let’s use Dominoes as an example. Their primary market-dominating position was the speed of their delivery backed up with a strong guarantee. Therefore the initial opening statement should be:-

“Dominoes, fast hot pizza delivered within 30 minutes or it’s free…”

An expanded version of this which incorporated the secondary competitive advantage might say:-

“Domino’s provides busy college students with fresh hot pizza and other food items within 30 minutes or less or it’s free. Our vast range of pizza offerings and toppings combined with our value pricing makes Domino’s affordable to everyone”

Notice how this statement also includes who they are for as well as the primary and secondary competitive advantages.

Final word.
So there you have a five-step programme to give your business an effective competitive strategy.
There are a number of resources dotted throughout this document to allow you to create a competitive strategy whichever route you choose, they are free to use. The important point is, don’t be one of the 1000’s of small businesses that never effectively develop their competitive strategy to a point where they are the logical choice for their market.

To download a PDF of this blog hit the button below:-

PDF Version Here…

The next section has two examples of how you might put this all together.

Example 1. How to put this all together:- Accountant Practice:- ABC Accountants Ltd.

Our accountancy practice has a passion for helping small business start-ups in their area.

Step 1: Their Strategic position is:- small business start-ups within 50 miles of their practice (although of course, it could be a lot larger with remote working).

Step 2: Their Primary market-dominating position is:-

– Strategic partnerships with local funders give unique options for startup financing.
– They ensure proper corporate structure to minimise tax liability.
– Guide them in the selection of their office equipment and IT systems as well as procuring discounts with strategic partners.
– Initially set up their bookkeeping and accounting system at no charge.

Step 3: Their Supporting business model is:-

– Appoint a dedicated staff member with small business expertise
– In-depth knowledge when it comes to small business loans, funding, investors, or strategic alliances with other experts in any or all of these areas
– Staff has specialised training in all areas applicable to small business start-ups
– Able to outsource programs and services offered initially for free

Step 4: Their secondary competitive advantage is:-

-Free consultation or free classes on starting your business the right way. Discounted support from local business growth specialists.
-Access to the accountant’s proprietary software programs (e.g Quickbooks or Xero)

Step 5: Their communication statement would be:-
Here at ABC Accountants, we work with startup businesses to ensure that they get the best possible start in business. We help them get the best rates for their business startup loans and even help them with the provision of their IT equipment and services. Our Free classes on starting your business in the right way have been proved to reduce business failure rates in the first critical years.

Which means that your startup business is more profitable and sustainable in its first few vital years.

Example 2. How to put this all together:- T-Shirt Printing Business:- ABC T-Shirts Ltd.

Our T-Shirt Printer has a passion for helping local bands with their promotional T-shirts and attending music festivals.

Step 1: Their Strategic position is:- small independent rock bands in the North of England (although of course, it could be a lot larger with a good e-commerce strategy)

Step 2: Their Primary market-dominating position is:-

– Unique artwork designed using in-house designers included in the costs.
– Quality T-shirts that are guaranteed not to shrink or lose their colours in the wash.
– Unique six colour process guaranteeing vivid T-shirt printing.
– Fast turnaround within 7 days for orders of more than 100 units.

Step 3: Their Supporting business model is:-

– Appoint a dedicated staff member with design experience
– In-depth knowledge of the local music scene
– Access to a large variety of blank T-shirts at an appropriate price and quality
– Sufficient capacity to meet turnaround times and commitments

Step 4: Their secondary competitive advantage is:-

– Selection (A wide variety of styles of T-shirts and traditional shirts found nowhere else).
– Free Delivery within a 50-mile radius of the printing shop.

Step 5: Their communication statement would be:-
Here at ABC T-shirts, we work with local independent bands to ensure that they get the best possible merchandise for their gigs. Our Free in house designer makes sure that your fans will absolutely love their quality T-shirts, which will not lose their colour or shrink when washed. Check out our free delivery for local bands and rush service.

All of this means that your merchandise will fly off the shelves at gigs allowing you to charge higher prices and making you more money.