Differentiation strategy intends to distinguish a product or service, from other similar products, offered by the competitors in the market.
It involves development of a product or service, that is unique for the consumer or business customers, in terms of product design, features, brand image, quality, or service.
- Cost leadership: focus on cost efficiency to be able to offer the lowest prices, often accompanied with ‘no frills’ service. Cost efficiency can be derived from new technology, efficient operations and a low-cost base, and can be supported by economies of scale. This strategy requires companies to continuously improve their efficiency and reduce cost.
Example: Santander is among the largest retail banks worldwide and has one of the lowest cost-income ratios. Their successful result is driven by a strong cost efficiency culture, a continuous focus on innovation and digitization, a large degree of standardization, simple products and processes, and striving for top-3 positions in its home markets with deep customer relationships.
- Differentiation: focus on offering a difference, typically with a premium product or service that is more desirable to customers. Differentiation is derived from innovation, strong branding and the ability to offer high-quality service. There is a risk of other companies following suit, which requires companies using this strategy to continuously improve their proposition.
Example: Nameless Private Bank has a unique organization model that is largely decentralized. It has a strong focus on customer satisfaction over cost (e.g. no call centers but instead designated account managers), selective growth focusing on the best clients in selected segments (e.g. SME and mass-affluent), and conservative risk management. Yet it is also one of the most efficient operations due to their lean organizational model and short decision lines.
- Specialization: focus on a niche segment of the market with propositions tailored specifically to that segment, for instance centered around specific products, themes, type of clients or geographical areas. Derived from specific expertise, this strategy drives lower cost and strong customer loyalty within the niche.
Example: most fintech start-ups are in this space, targeting one specific part of the banking value chain. There are also numerous examples from incumbent banks that have a clear specialization, for instance wealth managers such as UBS, the Nordic banks focused on their home region.
Advantages of Differentiation
There are some advantages to using a differentiation strategy:
- You do not have to compete on price alone.
Since you have distinguished yourself from your competitors the prospective client cannot reduce their choice to the dimension of cost alone.
- You have greater appeal to your target audience.
Since you are different, and presumably better, you make a more appealing choice. This makes it easier to generate interest and attract new customers.
- There is no direct substitute.
This is a related point to the appeal of your difference. Lack of direct comparability forces the prospect to focus on the incremental value of your difference. This adds value that other options do not have.
- You increase loyalty.
Greater value and a lack of comparable substitutes result in greater loyalty to your bank or credit union. There is no good reason to switch and no comparable alternative to switch to.
- You can command greater fees.
Assuming that your differentiation is one that adds value and is not available elsewhere you are able to command higher fees. This is especially true if your differentiator is around specialized expertise.