In businesses with diverse product lines, differentiation is one of the main keys to success. With differentiation, you can sell products with different purposes to customers with different needs. Products may be differentiated according to quality, functionality or design. In general, differentiation based on higher and lower quality is vertical, whereas differentiation based on different functions is horizontal.
Products of the same type can differ tremendously in terms of quality. When stores arrange their products in order from lowest to highest quality, they are practicing vertical differentiation. One example of quality-based vertical differentiation is to have a line of computers that have all the same features, but different quality parts. All of the computers in the line would come with the same basic features and design, but the higher-end computers would have more space and memory. Another example would be to set higher prices for jewelry that has a greater concentration of gold than lower products on the line.
Superficially similar products can differ tremendously in terms of functionality. Differentiation based on functionality can be vertical or horizontal, depending on the function's purpose. If a product line is differentiated by the number of features, that is vertical differentiation, as the presence of greater functionality implies that some products are superior to others. If a product line is differentiated according to type of features, that is horizontal differentiation, because each product serves a different purpose. 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 differentiated horizontally.
Differentiation by aesthetics is usually horizontal, with some exceptions. Aesthetic features are a product's visual, tactile or aural qualities, the aspects we take in with our senses. When the same product is offered in different sizes, shapes or colors, that is aesthetic differentiation. This kind of differentiation is generally horizontal, because differences in color or shape do not automatically imply superior or inferior quality. The major exception here is in products where aesthetics are the main selling point. In packaged food, for example, differences in flavors can imply differences in quality, since when we buy food we are willing to pay more for better flavor. For example, a line of cars offered in different colors is differentiated horizontally, while a line of custom cars with highly artistic paint jobs may be differentiated vertically.
Sometimes, products can be differentiated in terms of add-ons or bundles. For example, suppose a game console maker offers two console packages, one with just the console, and one with the console, a game and a controller. This product is differentiated by the manufacturer in terms of accessories, because one product comes with everything you need to get started, while another product requires you to make additional purchases. When one product comes complete with accessories and another comes with only the basics, the two products are differentiated vertically, because a complete package is better than incomplete one. When two similar products are offered with different accessories, that is horizontal differentiation, because one set of accessories isn't automatically better than another.