Unique products or services. There is a quality hierarchy that ranks a product type from high to low. In the digital camera example above, the weight of the camera is a sought-after feature that justifies a price difference, while the camera color might not. Product differentiation is the business strategy of developing and marketing different kinds or styles of products. In addition, horizontal differentiation is not enough to acquire new customers if they are looking for higher levels of objectively measured quality or lower prices. How a company goes about differentiation varies considerably, from offering entirely new products and services to merely changing the design or color of a product. An element of horizontal differentiation includes having a variety of products that do not differ in quality or price point. Also, assume that consumer group C does not consider product B to be a good substitute for product A. https://branduniq.com › 2015 › horizontal-brand-differentiation Now assume that consumer group D does not accept product A as a good substitute for product B. In either case, the company is looking to meet the needs of more consumers by offering them different products. While horizontally differentiated products tend to command similar prices at equilibrium, the lack of relationship to quality does not necessarily imply that they cost the same -- two products may be virtually identical in all considerations except for color or flavor and still be offered at totally different prices. A classic example of investment in horizontal product differentiation is provided by the much-studied rivalry between Coca-Cola and Pepsi, which has been estimated using a Bertrand specification in Gasmi et al. Therefore, these consumers will buy product A even if the chips are sold at a higher price than product B. Horizontal product differentiation is when a product stands out based on subjective characteristics. For example, a line of cars that has more features at the high end than at the low end is differentiated vertically, while a line of cars that come with different types of features, such as standard versus automatic transmissions, is … The quantified Horizontal Differentiation between all of the Feature Variations is expressed as a Correlation Matrix. Offering too many options, on the other hand, may become inefficient due to the cost of producing new options. When a person is faced with a shelf of products or similar services, … Differentiated Marketing Strategy Vs. Undifferentiated, Major Differences Between Physical & Perceptual Product Positioning, The Most-Frequent Adjectives Used in Advertising, Economics Web Institute; Product Differentiation; Valentino Piana; 2003, Universitetet i Oslo; Horizontal Product Differentiation; Tore Nilssen, Review of Industrial Organization; On Stability in Competition: Tying and Horizontal Product Differentiation; Alain Egli; February 2007, International Food Policy Research Institute; A Model of Labeling with Horizontal Differentiation and Cost Variability; Alexander Saak; 2011, Rice University; The Dynamics of Innovation and Horizontal Differentiation; Borghan Narajabad, et al. Gap or Gucci jeans. It mentions its philosophy as well as the difference between Beardbrand and similar competitors. differentiation. Unlike vertically differentiated products, the features of horizontally differentiated products cannot be ordered objectively. Horizontal differentiation often is cheaper than improving quality, which is necessary for vertical differentiation. Understanding product differentiation and the difference between horizontal and vertical differentiation can help small business owners devise a solid strategy for developing and marketing their products. It can be useful because they then have a chance to compete against bigger companies. Economics of Strategy; David Besanko, et al. Horizontal differentiation seeks to affect an individuals subjective decision making, that is the difference cannot be measured in an objective way. Horizontal differentiation refers to distinctions in products that cannot be easily evaluated in terms of quality. Sometimes the prices are the same, as Pepsi and Coca-Cola, other times they are wildly different, e.g. Horizontally differentiated products vary only marginally, as it's more efficient for producers to try to capture as many new consumers as possible with minimal additional costs. Named, of course, after their two inventors, or the people that first analyzed it. In increasingly crowded competitive landscapes, differentiation is a critical prerequisite for a product’s survival.What does your product or service do/accomplish/offer that the competition does not? In each extreme of the beach, there is an ice-cream post. What matters is the degree to which consumers perceive a difference in products. © 2019 www.azcentral.com. Producers differentiate their products in the market to establish or exploit competitive advantages and expand market share. For them, product differentiation is definitely the secret ingredient. Horizontal Differentiation – specified equivalent rates, some buyers would decide on product “A”, whereas other people would pick product “B”. This is called the market related to concentric diversification. As a side effect, these industries have seen substantial increases in competitive products. Therefore, a seller attempts to distinguish its product from that of another company hoping some customers will purchase the product because it is more appealing than competing products. If horizontal differentiation is weak, demand for product A is sensitive to a price change for product A or product B. Nordmeyer holds a Bachelor of Science in accounting, a Master of Arts in international management and a Master of Business Administration in finance. Why Is the Demand Curve Also a Willingness to Pay Curve? Horizontal differentiation and the cost strategy will be addressed in future blog posts. As has been well-established in the marketing literature, Relationship Between Level of Prices and Demand. Vertical Differentiation – provided equal selling prices, Each individual client would pick product “A” above product “B”. The focus of horizontal differentiation is the willingness of the consumer to substitute one product for another. Horizontal branding is when a company differentiates its product as “different” and subjectively more appealing to some people. Horizontal Differentiation is low when Correlation is high. If horizontal differentiation is strong, demand for product A is less sensitive to a price change for product A or B. https://yourbusiness.azcentral.com › horizontal-differentiation-20929.html Privacy Notice/Your California Privacy Rights. The same is true in most sectors, from cars to cell phones, and fashion to financial products. Price competition Consider a noncooperative game in which firms set mill prices simul- taneously. (1992). A manufacturer offers a particular mix of product attributes to create a brand that appeals to certain customers. The perfectly homogeneous case arises when 6 = 0 and 3. (ii) Vertical differentiation: Products differ in some What is Vertical Differentiation. The Differentiation Horizontal node is designed to take a list of Features, along with an optional list of Variations, and quantify the Horizontal Differentiation between each. Concentric Diversification is a form of horizontal diversification where the companies perform the following: 1. Oftentimes, customers assess those types of products by personal preferences. In terms of product differentiation, it doesn't matter if a product is predominantly the same or different than another product. Horizontally differentiated products provide the same offering, both in terms of quality and price. So, in our case, we looked at consumers distributed along a beach. These strategies are not mutually exclusive. In all cases, the ability to advertise creates distance between products which increases the market power of firms. Horizontal diversification can be seen with a local retailer who has an established reputation for selling quality jewelry, and decides to add a line of scents to his inventory. Horizontal differentiation is less strong for simple products, such as erasers, which have few attributes that are of interest to a consumer. This stands in contrast to vertical differentiation, where the distinctions between products are objectively measurable and are based in the products' respective level of quality. In addition, a small price increase for product B will lead to a small decrease in demand for product B. Billie Nordmeyer works as a consultant advising small businesses and Fortune 500 companies on performance improvement initiatives, as well as SAP software selection and implementation. Common examples of horizontal differentiation include location -- offering the same products, but in different geographical areas -- or color -- offering the same products in different paint schemes, for instance. It resonates with a certain group of people who then become devoted custome… Customer se… Petryni holds a Bachelor of Science of planning, public policy and management from the University of Oregon. Matt Petryni has been writing since 2007. As a result, this group will pay more to buy product B rather than buy product A. For example, assume that product A and product B are two different brands of potato chips, which are priced the same. Add new products to the existing products in similar markets that will serve similar customers through the same distribution system. Tore Nilssen – Horizontal product differentiation – Slide 2 Two kinds of product differentiation (i) Horizontal differentiation: Consumers differ in their preferences over the product’s characteristics. The greater the perceived difference, the higher the probability that brand loyalty will develop, which affects a company's competitive position and market share. And we'll do that using a model called the Hotelling Bertrand Model. What is it that makes one product ‘better’ than their competitors? There are two broad categories of differentiation -- vertical and horizontal. A small price increase for product A will lead to a small decrease in the quantity of product A demanded. The greater the number of product characteristics that customers may perceive to be product benefits, the stronger the horizontal differentiation will be. Vertical differentiation. What Is the Relationship Between Elasticity & Marginal Utility? What Is a Demand Curve That Is Downward Sloping? Combination Agency: A type of agency which combines segments that are normally separate. Horizontal differentiation is based on the idea of the division of labour, which leads to specialization, thus enhancing productivity and leading to additional value creation. These two sodas are largely the same and can be bought for a similar price. Although the two posts sell exactly the same ice-creams, consumers are not indifferent between them, they prefer to buy from the one that is closer. Product Differentiation at Pepsi & Coca-Cola. One customer might prefer red over black, another might choose strawberry over mint. For example, there is no implicit benefit to having a blue Ford Mustang rather than a red one. Companies introduce various levels of quality for a particular product to appeal to a wider audience. He was the environmental issues columnist at the "Oregon Daily Emerald" and has experience in environmental and land-use planning. Unlike horizontal differentiation, vertical differentiation is more concerned with the quality of the product. Therefore, a company, such as an automobile manufacturer or bread maker, may offer new products or change existing products to accomplish differentiation. This model is tested using approximately 100,000 transactions from the Public Finance investment banking industry from 1986-1999. No universal agreement exists that confirms one product is better than another product that fulfills the same need. This is not to be confused with a value propositionwhich communicates your overarching promise. Instead, consumers must select a product for purchase in part based on the comparison of the merits of one product versus another. Small business owners usually are fully aware of product differentiation, even if not by that name. Finally, several real world examples are used to illustrate the conditions under which the model is most relevant. Horizontal differentiation offers producers some key advantages, including the possibility of greater market share -- refrigerators offered in both white and black appeals to consumers with either preference, for example. All rights reserved. What Are Things That Could Increase or Decrease the Contribution Margin Ratio? So what is it that pulls similar products apart in the marketplace? Product differentiation Products A and B are horizontally differentiated because neither group considers one brand of chips to be a good substitute for the other. A combination agency will take two separate but related services and provide them both to … If the price of product A is stable, a small increase in the price of product B will also result in a large decrease in the demand for product A. Key words: Horizontal differentiation, persuasive advertising, price competition, vertical product Companies that market horizontally differentiated products have demand curves – graphs that relate price to quantify demanded -- that slope downward. Horizontal differentiation enables the consumer to identify a product that offers the most features of interest in a particular price range. There are transportation costs. Beardbrand positions their products with a specific product ethos. And why sh… For example, when a company that sells good products expands to start selling kitchenware, it will supplyto the same customers in th… For example, your product line could have various flavors, colors and styles. And we had products that are different in taste, or image, or location. What Is Perceptual Mapping in Product Development? Despite the continuity of demands, and hence of profits, a price Horizontal integration is a competitive strategy that can create economies of scale, increase market power over distributors and suppliers, increase product differentiation and … So why does one (Coca-Cola) consistently out-sell the other? Products in a retail store are different not only in terms of what they do for the consumer but also in quality and aesthetic considerations such as color or style. The intense competition between Coca-Cola and Pepsi, who are the largest producers of carbonated drinks in India, will make a good example to understand how they differentiate their offerings in India. Common examples of horizontal differentiation include location -- offering the same products, but in horizontal differentiation while 7 would correspond to the degree of vertical differentiation. If a product line is differentiated according to type of features, that is horizontal differentiation, because each product serves a different purpose. One example of horizontal diversification can be seen with a local retailer who has an established reputation for selling quality pieces of jewelry. And ice cream sellers also locating, finding a location on this beach. Many companies combine more than one type of horizontal differentiation at the same time. In the case of horizontal product differentiation we had consumers with heterogeneous preferences. You can't turn a corner these days without bumping into a marketing consultant banging on about the importance of a Unique Selling Proposition (USP) and differentiation. For example, if the price of product B is stable, a small increase in the price of product A will result in a large decrease in the quantity demanded for product A. We find evidence of the predicted vertical differentiation, as well as clear evidence of horizontal agglomeration among the high quality firms, and horizontal differentiation among the low quality firms. When differentiating a product from others, it does not necessarily have to be completely different or new. Examples include Coca Cola vs. Pepsi or Pampers vs. Huggies. For example, the MINI car brand is an example of a horizontally differentiated brand. Think Coca-Cola and Pepsi. For example, variations in the design, size, fabric or color of a dress constitute horizontal differentiation. In another example offered by Teng Wah Leo of St. Francis Xavier University, "one car enthusiast may look first for the BHP (brake horsepower) for his truck; another may be more concerned with MPG (miles per gallon).". For small companies, this can be great. In many industries, the barrier to entry has dropped significantly in recent years. EXAMPLE: 1: Horizontal Differentiation: Pepsi vs Coca Cola, bottled water brands, types of Face wash. 2: Vertical Differentiation: Branded products vs. generics: 3: Mixed Differentiation: Vehicles with same price points from two different manufacturers. Examples of Horizontal product differentiation: Consider a beach. The Difference in a Product & a Product Concept, Microeconomics; David Besanko and Ronald Braeutigam. Product differentiation may involve, promotions, product packaging, product design, quality, and extra features. It also gives them a better chance to compete against more popular products. MINI plays up it’s fun and quirky perception to appeal to stylish people. Horizontal differentiation exists when one product's attributes vary from those of another product in ways that satisfy the needs of a particular customer group. The choice is purely subjective and often contained within the brand’s product line. Remember, vertical product differentiation, and that's what we're going to focus on now, horizontal product differentiation. The Importance of Income Elasticity in Decision-Making. What Are the Two Main Characteristics of Inkjet Printers That Affect Image Quality. Examples: colour, taste, location of outlet. For example, different color … ; 2007. During her career, she has published business and technology-based articles and texts. On the other hand, when Features can be objectively ranked then they are said to exhibit Vertical Differentiation. Product differentiation is a process used in marketingthat identifies and communicates the unique value a product or brand brings to the table when compared to competitors. Philosophy as well as the difference can not be easily evaluated in terms of quality a! Both in terms of product differentiation is when a product type from high to low, extra... Vs. Huggies and fashion to financial products, e.g – provided equal selling prices, individual. 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