4 Levels of Differentiation: New Marketing Truths Challenge Old Strategies by Josiah Go

There is a saying that “If you give a man a hammer, he will see everything as nails”. Similarly, when a person learns about the marketing mix (product, price, place and promotions) as a way to attain marketplace advantage, he may apply it without questioning the bigger picture for validity. My journey in analyzing marketing as a lifelong student continues to allow me to discover new truths and discard old truths that are inadequate in order for me not to fall into the trap of seeing everything with a myopic view. Below are two truths being practiced by over 99% of marketers but which present problems seldom challenged even in the boardroom.

Old truth 1: To win in the marketplace, your marketing mix must be superior to that of your competition. In the convenience store industry, players have mostly parity products and even higher pricing, yet 7-Eleven is a clear leader because of its superior supply chain and not because they have a superior marketing mix. Their supply chain is exploited to the max with daily store delivery as each convenience store typically offers 2,000 items in a small 100-square-meter space. With stores close to each other, it is regularly delivering three times a day to ensure fresher food, a lesson they learned from the Japanese who like to eat fresh sushi and sashimi. 7-Eleven has been able to exploit this advantage by redefining their differentiation to the franchisees (daily store replenishment) rather than to the consumers (parity product and higher prices). Note that in the business model framework, supply chain is part of a company’s operating model and does not tackle directly the usual marketing concerns which is the offering model.

Old truth 2: Partition the market via market segmentation and periodically talk to your users about what they like and dislike as inputs to your marketing plan. The tutorial industry began with its core market as students with flunking grades thus, the stigma associated with having a tutor where some parents avoid admitting their children are being tutored. Yet clearly, there are more non-customers than customers, or more students doing well than those at the bottom of the class, thus providing a bigger business opportunity which a good marketing plan should include. To improve market penetration then, marketers must speak with non users whose opinion matter more to improve market penetration. As these two groups’ needs are different, so must the value proposition differ. Ahead Tutorial has succeeded in tapping the non-users (students who want to get ahead even if they are already doing well).

Marketing strategy must be consistent with business strategy. Differentiation, which should be the core of marketing, can be classified into four levels — two in the marketing strategy functional level and two in the business strategy level.

Level 1 is simply having a marketing mix differentiation where the marketers look at the market segment as is, attempt to optimize their marketing mix for growth so as to be the winning preference of consumers. Level 2 differentiation is having multiple market segments where the marketers assemble a different market mix to satisfy a new segment they are entering, aiming to have winning participation in these market segments.

Level 3 differentiation involves growing beyond winning market shares, going for winning market penetration, by being the pioneer in a new category or sub-category instead of merely competing for brand preference. Instead of doing the usual market driven, brand switching, promo-focused tactics, it identifies the biggest unserved and underserved markets and formulates a market-driving strategy to shift the consumer’s preference.

Finally, level 4 differentiation is where a firm innovates with their business model, to have a winning position in the marketplace. Here the firm deliberately questions each critical factor they compete in, aware that while firms in levels 1 and 2 try to be differentiated, they actually do so in the same way using exactly the same critical factors for success as other industry players. Firms in level 4 combine the lens of marketing, strategy and innovation to find new ways to create, deliver and capture value by not doing what some existing competitors are habitually doing, while also introducing a new element to the industry. The new business model escapes immediate retaliation as existing players tend to have a look-see attitude not knowing what to do with a level 4 player, and many times mistakenly in denial that they have other existing strengths to bank on.

In the hotel industry, many 5-star hotels compete in both levels 1 and level 2. Westin prides itself in differentiating with their heavenly beds and their heavenly baths while the Marriot Group competes in multiple segments: Ritz Carlton in the super premium segment, JW Marriot in the premium segment, Marriot in the high quality segment, Courtyard Marriot in the mid price segment and Fairfield Inn in the economy segment. With the entry of AirBnB, an online portal that connects hosts (condo owners) and travelers for cheaper lodging, a new market space (level 3) and a new business model (level 4) have disrupted the hospitality industry. AirbnB has been valued at over US$30 billion (as of late 2017) as a company, and they now want to be in the entire value chain of the hospitality industry to include airport transfers and restaurant reservations.

Today, instead of starting at the marketing mix level and the market segmentation level, I teach clients how to look at differentiation from the entire business model level, both in the five interconnected elements of the offering model and the five interconnected elements of the operating model, incorporating a focus on unserved and underserved markets using the nine new demand tools of market-driving strategy. If marketers see differentiation from the same marketing plus strategy plus innovation fusion lens, the result would be more strategic.

(Thanks to Inquirer for featuring this article)