Differentiation Factors; the reasons people starts to buy from you and just from you — with profit increasing as the scales do.

Nov 17, 2024

Continuous innovations in the market from industry leaders, competitors, and entrants puts businesses at the risk of being commoditised. Therefore, being different is not just an effort to be efficient, but to be effective in allowing the business to cultivate the right competencies that produce sustainable long-term competitive advantage whether it’s in Value Propositions of Offerings & Deliverables, that others don’t provide, better Cost Management, or Market Distributions.

In this memo, I talk about the importance of differentiating — introducing the 3 competitive advantages and value propositions, and concluding the memo with 12 questions you can ask to start building your competitive advantages and value props.

If you have a lot of competitors and every single business looks the same to the buyer’s eyes (similar offerings), buyers might just choose the cheapest offerings. Because why bother confusing themselves between companies and offerings when they could just buy the cheapest and save their money right? So what will happen is one company will gain a huge advantage over the others and the price wars will begin because competitors and imitators also want to gain the market shares by lowering their prices and being the number one choice for buyers.

Who will win this price war? The ones with the most resources and leverage — big companies and conglomerates. Because they operate at a larger scale — their Overhead and COGS are much much lower than those of smaller companies. So they can still make a profit even by selling cheap. We call this advantage Scale Economies; where your scale increments lead to shrinking cost margins and hence, enlarging the profit margin. (Hamilton Helmers explains about this including 6 other concepts thoroughly in his book — 7 Powers. Highly recommend you to give it a read!)

We saw a simple example of a market being a commodity — meaning companies have failed to establish unique features or values that distinguish them from their competitors. In such cases, these companies are perceived as interchangeable, similar to basic commodities like oil, wheat, or steel, where the product from one source is virtually identical to that from another. Joining a commodity market means you don’t have any values other than your prices.

We know that’s inefficient. That’s why we differentiate, not just to be efficient, but to be sustainable. That’s why businesses should have their own unique Competitive Advantage and Value Propositions. So they can be the best at what they are good at, and charge premiums at the same time. Having Competitive Advantage and Value Proposition is how innovative companies retain customer loyalties, make lots of money, continuously grow, and stand among the best in their respective markets.

That’s your goal; to be an Innovative Company that Differentiates

But what exactly is Competitive Advantage and Value Proposition?

As discussed, you don’t want to be a commodity business because you would have to aggressively fight in the price war. Yes, customers might prefer the cheaper option but that’s a zero-sum game. Every point of market share won by reducing margins (either by offering a lower price or by incurring higher costs) invariably reduces the value of the sales gained. Since competitors can easily retaliate with similar price reductions, they probably will and at least partially eliminate any gain in share while reducing the value of a sale even further. But why create value through excessive, unsustainable, questionable consumer surplus (consumer’s cost saved by buying the cheaper option from you by selling things cheaper) when you can create value through other forms of benefits that are more sustainable? What about value through better product performance and accessibility? What about better convenience?

Having Competitive Advantage is having the (operational) means to Value Propositions (unique offerings) that allow you to deliver better value (more cost-effectively) than competitors.

Often, the First-Mover Advantage (FMA) plays a huge role in it — First to Cost-Innovate, First to Outcome-Innovate, First to Access-Innovate.

Being the first to innovate, FMA gives you an early advantage of differentiating from competitors and market alternatives by;

Selling products/services that generate better outcomes than market alternatives — you Outcome-Innovate by innovating products/services that will generate better outcomes and new demand, behavior, and purchases.
Selling products/services similar to market alternatives or (No. 1) cheaper than the prices in the market — you’re able to do so because you Cost-Innovate your supply, operation, or distribution chains, hence, you’re able to sell them cheaper while still making good profit margins.
Selling products/services in a more accessible manner so you make a lot in profit margins through high-volume purchases — Access-Innovate.

These are ultimately your Value Propositions and your Competitive Advantage to be the first to bring them to markets. But I want to remind you that Market Scale matters here. Some markets are under-performing (market alternatives not providing satisfactory enough outcomes) and over-performing (market alternatives not providing cheaper alternatives to the cost-conscious market — alternatives are too expensive or only limited in access to certain segments, geographies, verticals, and industries).

The scale matters, that’s why you have to look through some micro points of view too; how about a certain segment? a certain geography? a certain vertical? a certain industry? Are there opportunities to be the first to Outcome-Innovate, Cost-Innovate, or Access-Innovate?

“The amazing thing about Steve Jobs is that he knew where to find markets with second-rate products.” — Jony Ive.

As we can see from the 3 aspects of FMA advantages, they play a huge role in the scale of your purchase volume (revenue), cost margin (profit margin), and recurring purchases (loyal customers/customer-lifetime-value).

Therefore, the goal of a strategic plan should not simply be to become bigger than the competition (although that may happen) but to become better — being better at Supply & Operational Efficiency (cost management), Distributional Streams (market reach), and Value Delivery (customer satisfaction) than industry’s alternatives. *Although businesses are more dynamic than this, it’s indeed an overview of what needs to be understood.

Hard-to-copy competitive advantage that comes from coordination of operations and people within the organisation is a huge Differentiation Factor to your aggregate cost and profit margins. However, the second Differentiation Factor that dictates the scale of profit margins (and is also considered as a part of competitive advantage) is Value Propositions — the reasons customers buy from you again and again, and not from your competitors:

Functional Values (How I prefer your ways of solving my problems and why I prefer them monetarily)
Emotional Values (How I prefer what you mean as an organisation, what you mean to be there for me, and how you make me feel personally)
Social Values (How you make me feel socially by associating myself with you)

Above are the 3 buyers POV that you have to consider.

How do you start differentiating?

Building Value Propositions; Understanding your Target Buyer’s Consumption Chains

TRIGGER: When and Where do your target buyers have concerns about the problems you are solving? (eg: before an activity, after an activity, before or after a timeline of day, week, month, quarter, year — at work, commute, errands, vacation, home, online) + [Functional, Emotional, Social aspects].
VALUE PROPS 1: How are you better at solving the concerns and problems? (eg: better and faster outcomes, cheaper tangible and intangible costs, more accessible) + [Functional, Emotional, Social aspects].
VALUE PROPS 2: What are the metrics of success of those aspects can you use to communicate and compare with the industry’s standards? (eg: outcomes, costs, accessibility) + [Functional, Emotional, Social aspects].
SWITCHING COSTS: What tangible and intangible cost concerns would buyers have if they want to switch to your solution? How do you decrease the costs and make it easier for them to switch from whatever solution they are adopting now? (eg: additional cost, skill, data, asset disposal, time, guilt, anxiety) + [Functional, Emotional, Social aspects].
OBSERVABILITY: How do you show buyers the usage and outcome of your solution are monetarily cheaper and emotionally satisfying? How would you broadcast, materialise, and demonstrate your unique value propositions where your target buyers are having concerns [Question 1]? What are the elements present? (eg: refer Observability Factors).
REFERRALS: How do you make it emotional and social to encourage referrals? (eg: refer Observability Factors).
VALUE BARRIERS: How do you make it functional, emotional, and social for them to stay with you? How do you keep them from switching to others? (eg: new memo coming soon)

Building Competitive Advantage; Understanding Value Chains

Diagnose the factors (Cost Drivers ) of activities and how the linkages of activities impact the costs of your operation and margins including your supplier’s, channel’s, distributor’s, and user’s Value Chain.
What should you subtract/add/substitute (Assets, Processes, People) within the organisation to build competitive advantage in outcome, cost, and accessibility (refer the 3 aspects to FMA below) through Production, Logistic, Operation, Delivery, and Service Capabilities? — to offer the value propositions that you want to offer and deliver to buyers?
What’s the cost, reliability, and timeliness of the subtraction/addition/substitution of functions?
How much will it contribute to the organisation’s product/service consumptions and profit contributions?
Who will be responsible for it?

*First-Mover Advantage:

Selling products/services that generate better outcomes than market alternatives — you Outcome-Innovate by innovating products/services that will generate better outcomes and new demand, behavior, and purchases.
Selling products/services similar to market alternatives or (No. 1) cheaper than the prices in the market — you’re able to do so because you Cost-Innovate your supply, operation, or distribution chains, hence, you’re able to sell them cheaper while still making good profit margins.
Selling products/services in a more accessible manner so you make a lot in profit margins through high-volume purchases — Access-Innovate.