Product differentiation occurs on two clear levels: vertical and horizontal. Vertical differentiation refers to products that fall on a scale from best to worst, highest to lowest, impacting the overall functionality of the item. Horizontal differentiation has similar products that vary in ways that are often superficial and do not impact price or quality. There are advantages and disadvantages to differentiating your products, no matter which type of differentiation best suits your company.
Part of vertical differentiation is the range of quality of the products produced. When vertically differentiating your products, you can have some products of high quality, some of mid-level quality and others of low quality. While an advantage of this is that it allows you to capitalize on a wide range of consumer quality preferences, it also can be a disadvantage. Having low-quality products in your catalog can earn your brand a reputation of poorly made products.
When you differentiate the quality of your products, you are able to differentiate the cost as well, another aspect of vertical differentiation. An advantage of this is that it enables you to capitalize on the price points of all consumers shopping for your product. Not only does this broaden your consumer base but, as a result, your revenue as well. With multiple price points in products, you can have shoppers of all budgets covered, pulling revenue from competitors.
An element of horizontal differentiation includes having a variety of products that do not differ in quality or price point. For example, your product line could have various flavors, colors and styles. One customer might prefer red over black, another might choose strawberry over mint. An advantage of this is that it allows you to cover the preferences and tastes of a wide variety of consumers. A disadvantage is that you will have higher production costs but not necessarily an increase in revenue from product to product, since they are likely priced the same. For example, a red coffee maker is not typically more expensive than a black one.
Broad vs. Specialized
Overall, there are pros and cons to differentiating your products. A company that produces only chocolate ice cream but is well known for having the highest-quality, and best-tasting chocolate ice cream has its own realm of appeal. In contrast, a company with more than 100 flavors of ice cream can be known for having a flavor for everyone. Ultimately, you nee to take into account your goals for company profits and branding to decide if product differentiation is a beneficial strategy.