Companies use many business strategies to differentiate themselves in a market saturated with competitors. A business can leverage its pricing and product mix to give itself a competitive edge, according to Porter’s “Generic Business Strategies.” But when products or businesses are not generic, branding plays a significant role in securing market share.
From the time when an innovative product hits the market to when it's copied, a business can create a unique position for itself as a market leader. In this business differentiation strategy, a company uses its innovation to carve a position that sets it apart from the competition, and to dominate the marketplace. The product's profit is applied to the research and development needed to maintain a competitive position.
One example is in the technology sector, where Apple created a unique version of conventional computer units. The revenue gained was translated into similarly branded music and mobile phone devices, and tablet PCs, which all use linkable operational software. As a result, the computer company has a unique product line with large profit margins.
When all products are equal, or relatively homogeneous, pricing strategy is used to differentiate one product from another. There are two ways a business can use pricing strategy for product differentiation: premium pricing and under-cutting the competition. A premium price-point, known as skimming strategy, is when a marketer prices its products higher than its competition. The point of this strategy is to substantiate the perception that the product is better than the competition. This is often seen in luxury or heavily branded goods.
Setting prices significantly lower than the competition's is known as penetrating the market. This pricing strategy is feasible, provided that a business can benefit from economies of scale, meaning it produces large enough quantities to drive down manufacturing cost. This strategy depends on cost of production; if production costs are low enough, the business will reap the revenue rewards of undercutting the market.
If product innovation and pricing strategies are competitive across the board, a business can differentiate itself with branding. Branding has been practiced in business since Proctor & Gamble launched its first Ivory soap advertisement in 1881. Today it is a necessary tactic to differentiate a business and establish a competitive advantage. The purpose of branding is to gain and retain customer loyalty by assigning values to the brand--and in some cases, an entire subculture. Brands use logos, imagery, advertisements and new media applications to gain public appeal, retain customers and build equity. A branded product, such as Kleenex, can be so influential to popular culture that its name replaces the actual term in everyday conversation. This is one of the pinnacles a brand can achieve in differentiating itself from competition.