Differentiation

A very simple and common yet powerful idea in business is the concept of differentiation.

If there’s nothing to separate your product from the competition, you are playing on price.

You can see it everywhere. 5 fruit sellers or grocery stores will all set up shop in the same place. If 100 customers come there everyday, each shop will get on average 20 customers a day.

If there was only 1 shop, it’d probably get 100 customers in a day.

Let’s say they all sold apples only. Each storekeeper bought apples at Rs. 80 and sold them at Rs. 100.

Assuming there was nothing to differentiate them, and one of the shopkeepers wanted more customers, he’d have to cut his prices. He’d offer apples at Rs.99 and get the whole market – because no one would pay Rs. 100 for the exact same product they could get at Rs. 99.

Everyone else would follow suit and cut prices to Rs.99. But one of the shopkeepers would realize that if he reduced prices to Rs. 98, he’d get the whole market to himself, and so he might do that.

This same process would play out and repeat until everyone started selling at Rs. 80, the same price at which they bought apples. No one would sell below that, because it makes no sense to sell at a price lower than what you bought at – you’d rather not run a business at all and make 0 than run one and make a loss.

As an aside, this is one reason why we say price = marginal cost in a perfectly competitive market and there’s no economic profit in the long run.

Escaping the race to the bottom

Here, everyone sold the same product.

Thus, there was nothing to compete on but price.

And playing on price is a race to the bottom. If you win, you still make barely anything (exceptions exist – as we’ll see with Walmart)

But imagine instead if 4 of the storekeepers sold the same boring apples, and a fifth one now started selling green apples instead.

He’s now “differentiated”. His product is no longer the same.

He doesn’t have to compete on price alone.

Maybe he can charge a higher price because he’s offering something different. There might be some customers who specifically want green apples – they’ll be willing to pay more and won’t even look at his competitors.

Unfortunately, such differentiation is often rare, especially in India. Look at most coaching centers / ed-tech : How different is one from the other? It’s hard to see much difference.

But perhaps it makes sense. Being different is extremely hard. A market like India is so big that all of them are willing to divide it among themselves without making the effort of differentiating themselves. They’ll still have enough customers.

Companies like Walmart appear to play on price – but their differentiation is their organizational setup and economies of scale, which is the real reason their prices are low. And yet even they probably will get hurt by Amazon.

Differentiating Ourselves

What is true for businesses is true for ourselves.

I’ve always hated competition and comparing myself with others (someone told me this was because I’d given so many competitive exams, but that’s not the reason).

Trying to run the same race as everyone, trying to fit into the “ideal” mould of a bureaucrat / corporate employee / academic / whatever field you’re in – that I think is the surest way to not be successful.

If everyone is doing and saying the same thing, and we follow them, then we’ll just remain another brick on the wall.

I see this in lectures all the time. The best lecturers are the ones who don’t speak in standard templates or say the “usual” things, or put on the typical style of a professor / executive / officer.

They engage because they just be themselves and forget about what other lecturers do or what a lecturer is “supposed” to be like.

There is something new, something different, and that captures our attention – because who’d pay attention if you were doing what 500 people have already done? No one wants to listen to Number 501.

Differentiation is not always “Necessary” nor “Desirable”

There’s nothing wrong with doing the same thing others are doing if you want to do that. And it might even be the best course of action.

For example, if 1 million people buy red apples, you’d be happy to be 1 among 1,000 red apple sellers. You’d be able to sell 1,000 apples.

And if the market for green apples was only 500 customers, then if you differentiated yourself from the rest, you’d sell only 500 green apples. You’d still be the number 1 green apples seller, but perhaps you’d make less than the 1000th red apple seller.

It’s ultimately a choice.

Some would rather be number 1000 in a crowded market and make more. Others might want to be the best in their niche, even if it meant making less.

Differentiation is not simply “Being Different”

Being different solely for the sake of being different means nothing.

Many people (whom we can call “Conformists”) let themselves be dictated by the crowd – so when everyone turns left, they’ll turn left.

But people who rebel only to be rebels (whom we’ll call “Rebels”) are dictated to by others just as much as they are. Their actions are determined by the crowd as well. The only difference is that when the crowd turns left, they’ll turn right.

In both cases, if you knew what the crowd was doing, you could correctly predict the action of both the Conformists and the Rebels.

They have no agency of their own to determine their own actions. They let others decide for them.

Differentiation is Authenticity, it’s Liberation

Differentiation is simply running a different race – running your own race.

It means applying your own mind to your decisions, having your own reasons for doing them, and taking ownership of those decisions.

Even if the race appears to be the same – it could be something “on the beaten track” like doing engineering or studying abroad or joining the civil services – the differentiation could lie in the motivations for following it. And that difference is noticeable – pick any college, and you’ll see that those who genuinely like their subject and voluntarily pursue it stand out from others, even though they all study the same subjects.

Because of this, differentiation is freedom.

You no longer need to compare with others or compete because you’re not even on the same track. The tracks may intersect occasionally but they’re not the same, it’s no longer a race.

It’s authenticity because I choose my own track based on what I want, not what others are doing.

I no longer need to look at what they’re doing, I no longer feel I’m missing out, I no longer need to copy – because we’re not in the same business. My product is different.