Definition of Product Differentiation

Product differentiation is a strategy used by businesses to differentiate their products or services from the products already available in the market. As the market entry barriers are reducing, companies are entering the market with a product differentiation strategy to gain a competitive advantage and offer unique selling prepositions (USP). Companies that have a product line of multiple products used this strategy to differ their products from each other and avoid cannibalization.


There are two kinds of product differentiation:

Horizontal differentiation: Differentiation in the same line of products that are not linked with the quality and price of the products. e.g. Coke vs Pepsi. The choice between 2 products is totally on user own preferences and taste.

Vertical differentiation: Differentiation is introduced in products that are competing on price and quality of the product. E.g. branded Nike t-shirt vs local t-shirt.

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