Differential Advantage Details

Companies occasionally analyze their competitors' weaknesses to turn those weaknesses into their own strengths, eventually increasing their market share. In many cases, they may only focus on comparative advantage - for instance, by offering lower prices - but this is usually not enough. Differential advantage, while more complex since it is based mainly on the customer's overall satisfaction, is ultimately a more accurate metric of competitiveness.

We can also understand differential advantage as a benefit that is unique to a specific product or service. However, it does not stop at quality issues as it can extend over the entire connection between a company and its customers or the value chain.

In the end, the customer must be happy about the benefit or the differential advantage and willing to pay a higher price for it. Economic principles assume that people make rational decisions when making buying decisions. It logically follows that they will only realize the existence of a differential advantage if the benefit is unavailable elsewhere.

Differential Advantage Real World Example

When encountering the concept of differential advantage for the first time, people usually focus on better quality. The quality of any product or service is crucial to its success. Still, differential advantage is more related to the overall customer experience than just one feature, therefore making it more effective.

Some common examples of differential advantages that have worked for many companies are 24/7 customer chat service, expert personnel, patents, and advanced technology. For freight companies, especially FedEx, an overnight shipping guarantee always works. A more interesting example is coffee shops. If coffee lovers were to list down reasons for going to these places, they would most likely put "quality" at number one.

However, since most coffee shops are manned by professional baristas and are more or less on the same footing in terms of coffee-making expertise, customers will look into other features of the experience. This is where differential advantages come in - free and high-speed wi-fi, a loyalty program, seasonal concoctions, and so on.

Significance of Differential Advantage

Differential advantage is important to a company that wants a market share and a market in which they dominate. After all, shoppers are usually always all about advantage. When looking to buy something, they will compare different products or services and get what they think benefits them the most. For a business, this is obviously a critical point because it can dictate how much of a market eventually ends up theirs.

On top of that, differential advantage can come useful as a tool for analysis. For example, a company can create a list of all the benefits offered by one of their products and then rank them according to importance from a consumer's perspective. This way, the company can see what benefits it already offers but they must give more emphasis in marketing. It also shows them what changes are necessary to provide the needed benefits in a way that competitors can't top.

The whole idea behind differential advantage is giving consumers a solid reason to keep coming back to a product or service, no matter if it comes at a premium. If all companies created the same products in all respects, it would be impossible to lock in a relatively constant market share. But when people can find a feature they like in one product that they can't find in the rest, all other factors equal, then that product logically wins.

Types of Differential Advantage

Skills and resources become differential advantage only when the customer perceives their added value. There are three key types of differential advantages through which a company can provide benefits to its customers. These are:

  • Product Performance (richer flavor, increased speed, expert assistance, etc.)
  • Distrution and Accessibility (strategic mapping of purchase points)
  • Pricing Offers (discounts, promos, etc.)

However, when using low pricing as a way to attract customers, the company should ensure they have sufficient leeway in terms of resources. Otherwise, lower prices can only decrease profit margins without any reasonable benefit or even cause losses. Conversely, high pricing can become an advantage in the context of premium positioning. It tells people that while a certain product is more expensive than the others, it only offers concrete benefits that they couldn't get with the rest.

Difference Between Differential Advantage and Comparative Advantage

Differential advantage and comparative advantage are the two kinds of competitive advantages a company may have over its competitors. As mentioned, differential advantage is a unique feature about a product or service that consumers think is superior. This ultimately drives them to patronize it, even at a higher price. Differential advantages increase profit margins as well as expand market shares.

On the other hand, comparative advantage is tied to production efficiency, where the company minimizes its costs to offer its products or services at lower prices. Needless to say, this can also be used as a differential advantage since people will naturally be attracted to lower-priced alternatives, regardless of whether they are willing to make compromises in terms of quality or any other feature.

All in all, differential and comparative advantages form part of the bigger whole that all companies want - a competitive edge. While differential advantage reflects the overall quality of the customer experience, comparative advantage is the practical side of accessing that experience. Therefore, if only because consumers will generally always aim for a good balance between the two in the products or services they patronize, one should not exist without the other.