Product differentiation: find the gap competitors leave

Product differentiation is the reason a customer picks your product over what they use today, including a homemade fix or doing nothing at all. For a small founder, it usually means being clearly better at a small number of things the current options do badly, and being willing to leave other things out.

The steps assume a physical product you plan to sell online with pre-orders, before it is made. If you have found competitors and wonder whether there is still room, read what to do if your business idea already exists first, which covers where to find their customers' complaints. The steps below turn those complaints into a difference you can test with pre-orders before you make anything.

What product differentiation means

Glossaries split it into horizontal differentiation (different but not better, like two flavors at one price) and vertical differentiation (better on a measure everyone agrees on, usually at a higher price). For a first product the labels matter less than knowing which alternative you beat, and for which customers.

Competitive positioning describes where that difference leaves you in the market: who the product suits, what it replaces and how its price compares.

A worked example: a paw cleaner for big dogs

The example and its numbers are invented. A founder owns an 80-pound retriever and wants to sell a paw-cleaning cup for big dogs at $35. The customers are owners of large dogs who drive to muddy trails. They want to get the dog from the trail to the car, and then into the house, without mud on the seats or the floor.

1. Write down everything customers do about the problem now

Your competition includes anything people already do about the problem, and products like yours are only part of it. For the muddy dog, the founder's list was:

• plastic paw-washer cups with silicone bristles, sold on marketplaces for about $20;
• an old towel kept by the back door or in the car;
• hosing the dog down outside the house;
• letting the dog in muddy and cleaning up afterward, sometimes with a $40 car seat cover to limit the damage.

Then find out which of these your customers actually rely on, because the best-known brand may not be the one you are up against. The founder searched dog owners' forums and found 12 threads where owners of big dogs asked how they deal with mud. The towel came up in 9, so it is the main rival and the cups come second.

2. Read what buyers say went wrong

Now look for where each option lets people down. The best evidence is in places where customers talk to each other, and the article on ideas that already exist covers which reviews to trust. Search with your customer's situation as well as the product name: "paw cleaner big dog", "paw washer car", "muddy dog towel smell". Reviews that mention the size of the dog are worth reading first.

Keep notes on what buyers judge the options by, in the buyers' own terms. "Cleans a big paw in one dip" tells you something you can check later. "Wide cup" describes the product and leaves out why anyone would care. Note price too, and anything the options include that nobody seems to use, because those are candidates to drop.

The founder read 90 two- and three-star reviews of the three best-selling cups. Of those, 27 (30%) said the cup was too small for a big paw, 18 (20%) mentioned water spilling in the car, and 9 (10%) said the bristles held mud and began to smell. From the reviews and threads, owners judged a fix by whether the paws came clean in under a minute, whether it fit a big paw, whether it worked at the car, whether it spilled, whether it smelled after a week, and what it cost. The cups also sell on choice of colors and a built-in treat holder, which no reviewer mentioned.

Draper's Find Your Wedge workshop does this research with you, if you'd rather not read the reviews by hand.

3. Choose the gap to close

Look down the "falls short" column for problems that come up again and again and that none of the options people use has solved. Those are the gaps worth closing. A problem customers rarely mention isn't worth building around, and something the current options already do well can only be matched. "Better quality" means little until you can say what a customer would notice.

Two well-documented companies started from a gap like this. Sam Farber saw his wife Betsey, who had arthritis in her hands, struggling with an old-fashioned peeler, and in 1989 founded OXO to make kitchen tools for people of all ages and abilities, according to the Cooper Hewitt design museum. Roy and Ryan Seiders, who founded Yeti in Austin in 2006 (YETI's 2018 SEC filing), wanted a cooler they could stand on while casting for redfish without it collapsing, Inc. reported in 2016. Inc. noted that ordinary coolers are glued together from two pieces of plastic, while Yeti's are molded in one piece.

The founder's reviews point to fit first and spills second. They wrote the gap as a promise with numbers in it, so anyone could check it: four big paws clean at the back of the car in under two minutes, with no water left in the car. That beats the cup, which is too small and spills, and the towel, which is slow and goes musty.

Before you settle on a gap, ask how long a competitor would need to close it. A cup seller could make a bigger cup without much trouble. Yeti's lead didn't stop others either: by 2016 Igloo sold a rotomolded cooler, and Cabela's sold its own version of Yeti's hard cooler at a similar price, Inc. reported. A small business whose customers the big sellers overlook can live with being copied, but it should know at the start how easy it would be.

4. Cut what nobody asked for, then set the price

Michael Porter wrote in a 1996 Harvard Business Review article that "the essence of strategy is choosing what not to do". One of his examples was Southwest Airlines, which offered no meals, assigned seats, interline baggage checking or premium classes. Decide your cuts by what customers value, even when something is cheap to include. Whatever customers won't buy without still has to be as good as the option they use most.

The founder's cup has to rinse clean under a tap, as the marketplace cups do. It launches in one color with no treat holder. No review asked for either, though nobody complained about them, and people seldom write about features they assume will be there. So both cuts are guesses, to check in the pre-order test or a few customer conversations before the product is final. Small-dog sizes are out too, because the product is for big dogs.

Price follows from the gap. At $35 the founder's cup costs $15 more than the marketplace cups and far more than a free towel, so the big-paw fit and the dry car have to justify the gap. A high price can work when the gap is real: Yeti's first coolers sold for about ten times the price of an average Igloo or Coleman, according to the same Inc. article.

5. Test the difference before you make it

You can find out whether people will pay for the difference before you order stock, with the same pre-order test you would use to check demand before building. Make one page or ad per promise, give each the same budget, and take pre-orders. Set the pass mark before you spend: the most you can pay to win one pre-order and still make money on it, which comes from your price and your landed cost.

The founder set the pass mark at $15 per pre-order and ran ads for a week, $150 on each angle:

• "Fits big paws": 500 visits, 15 pre-orders (3.0%), $10 per pre-order.
• "Clean at the car, nothing spilled": 500 visits, 6 pre-orders (1.2%), $25 per pre-order.

The big-paw angle passed and the car angle didn't. The product page leads with fit, and the no-spill design becomes a supporting point. If neither had passed, that would have suggested these owners are happy enough with the towel, and the founder would have found out for $300 instead of the cost of a mold.

When this method doesn't fit

• Commodity products, where buyers choose almost entirely on price. A small founder rarely wins on price alone, so look for a narrower group with a specific need, or a different product.
• White-label products bought ready-made. The product is the same as other sellers', so any difference has to come from who you sell to and how.
• Categories with few reviews or forum threads, such as new kinds of product or trade goods. The evidence then has to come from conversations, and the Mom Test covers how to run them without leading people.

Related questions

Whether there is room at all comes first: what if my business idea already exists? The ad set-up for the pre-order test is in how to run ads to test a business idea.