[Paper] What is Differentiation and How Does it Work ?

Title: What is Differentiation and How Does it Work?

Author(s): Byron Sharp & John Dawes

Abstract: In this article we provide a basic review of the relationship between differentiation and profitability. In particular we address the misconception that the reward of differentiation must be a price premium. We conclude with the following:
Differentiation is when a firm/brand outperforms rival brands in the provision of a feature(s) such that it faces reduced sensitivity for other features (or one feature). Through not having to provide these other features the firm has an avenue to save costs. The firm benefits from the reduced sensitivity in terms of reduced directness of competition allowing it to capture a greater proportion of the value created by exchange.
We observe that real world differentiation is a pervasive feature of modern markets, but seems to be largely due differences in distribution and awareness, and occasionally design. Brand level differentiation on functional features is less common due to competitive matching.


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