The classical economic perspective holds that perfectly competitive markets are characterized by undifferentiated products sold based only on price. Any departure from such a characterization is viewed as evidence of an imperfect market. This view of markets has given rise to strategic thinking that focuses on the identification of market imperfections and the creation of structural barriers to market entry and the creation of supply-side competitive advantage.
This view of markets leads to a focus on avoiding competition. For most markets, at least in relatively affluent developed nations, this view is demonstrably wrong. Wrong because it ignores individual differences among both customers and suppliers.
In contrast to the “perfect” markets described by economists, a marketing view of a perfect market is one in which individuals can exercise their idiosyncratic preferences for goods and services. They do this by matching their preferences with the idiosyncratic skills of producers and suppliers. Any “competitive advantage” arises from a producer’s unique skills and willingness to serve consumers’ idiosyncratic needs. This might be a single customer, if the customer is willing to pay enough, but often, it is a group of customers who share similar preferences. Firms that offer a poor match with market needs ultimately leave the market. This is why undifferentiated products rarely succeed in the marketplace.
Of course, differentiation can take many forms. In most markets, there are price sensitive customers who will sacrifice other potential differences in products or services to obtain the lowest possible price.
Differentiation: A Business Imperative
Thus, in most markets there is a low-cost supplier who differentiates its offering based on low price. Note however, that in the long run, there can only be one low-cost provider and that provider must have a cost structure that allows it to still make a profit even when offering a low price to customers. Firms that are not low-cost producers must find other points of differentiation and in many markets there is a large array of opportunities for differentiation: quality, service, convenience, features, and more. Even for such characteristics as quality, there are further opportunities for differentiation because customers differ in how they define quality. Thus, success in business is about finding positive net present value opportunities that match the needs of at least a portion of the market. Put another way, success in business is about finding a business model that provides a profitable match with a market segment.
Finding such business models is not an assurance of long-term success, but it certainly helps. There is always the possibility that a competitor will find a better way to serve customers with higher quality, a lower price, greater convenience or some other point of differentiation valued by customers. But the focus is not on being better than a competitor but on better serving customers. Such competitive pressures force firms to constantly innovate, even if in only small ways, in order to better serve customers. While no market is ever really perfect, this process has the effect of creating pressure on producers to offer ever better matches with customer preferences.
In this way, customers are well-served by markets that work well. The challenge for a business is to be responsive while finding ways to generate positive cash flow.
Contributed to Branding Strategy Insider by: David Stewart, President’s Professor of Marketing and Business Law, Loyola Marymount University, Author, Financial Dimensions Of Marketing Decisions.
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