Lenny's Newsletter · Product & Work
TIER 4 2022-01-11
> ## Q: **I know differentiation is important, but why is that, and what are ways we can differentiate our product?** [Michael Porter](https://en.wikipedia.org/wiki/Michael_Porter), one of the most cited authors in business and economics and generally seen as the godfather of business strategy, spent decades studying what it takes to build a durable business. He found that there are only two paths to winning a market: 1. **Operational effectiveness:** Performing activities *better* than rivals 2. **Differentiating:** Performing activities *differently*, or performing *different* activities, than rivals You have to do it better or you have to do it differently. Even more interestingly, Porter found that even if you go the first route and beat your early rivals through operational effectiveness, you’ll probably still need to differentiate down the road: > #### “Constant improvement in operational effectiveness is necessary to achieve superior profitability. However, it is not usually sufficient. Few companies have competed successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. […] Competing to be unique is ultimately more sustainable than competing to be the best.” > > #### —Michael Porter, *[On Competition](https://www.amazon.com/Competition-Updated-Expanded-Michael-Porter/dp/142212696X)* Why? Because your competition will learn from your success, copy you, and eat away at your margins. It becomes a race to the bottom. If you can instead run a different race, the competitive field becomes less crowded. This is why [Etsy came back to its roots](https://www.nytimes.com/2017/11/25/business/etsy-josh-silverman.html) after trying (and failing) to beat Amazon, how Airbnb (unique) and Booking.com (cheapest) can both co-exist, and why Apple [continues to stay high-end](https://www.businessinsider.com/why-apple-wants-you-to-believe-it-is-a-luxury-goods-company-2015-3) in spite of the huge low-end technology market. > #### “If you stay in the shadow of your larger competitors and never establish your differentness, you will always be weak.” > > #### —Jack Trout, *[Differentiate or Die](https://www.amazon.com/Differentiate-Die-Survival-Killer-Competition-ebook/dp/B000U5I6QU/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=&sr=)* Differentiating becomes even more important if you’re entering a crowded market or coming after an established player. You need to give people a reason to choose you, and to even pay attention in the first place. Think about Robinhood coming after Fidelity and Schwab by offering a cheaper alternative (i.e. not trying to beat them at their own game), Whole Foods entering the grocery business by differentiating through quality (rare at the time) , and Signal going after the messaging space by obsessing over trust (before it was cool). As [Jack Trout](https://en.wikipedia.org/wiki/Jack_Trout) said, “differentiate or die.” Seeing how important differentiation is, I was surprised to find very little advice on *how* one can differentiate. There are great [books](https://www.amazon.com/Positioning-Battle-Your-Al-Ries/dp/0071373586) and [posts](https://www.lennysnewsletter.com/p/positioning) about positioning (i.e. how to communicate your product) and [counter-positioning](https://marginalfutility.substack.com/p/13-counter-positioning-as-a-business) (i.e. how to make it hard for your competitors to copy you), but not on how to actually *design and build* your product to be differentiated. What could you actually do differently? I spent this week looking at hundreds of companies and found that **there are seven common ways to differentiate**: 1. Be the cheapest 2. Be the highest quality 3. Be the most convenient 4. Be the safest 5. Sell a proprietary product 6. Sell something that makes people feel great buying 7. Focus on a niche underserved market If you’re having a hard time getting attention for your product, especially in a crowded market, consider picking one of these differentiators and going all-in.  ### 1. Be the cheapest The most obvious way to differentiate your product within a crowded market is to offer the lowest price. People love low prices. This is how ARCO differentiates within the gas market, Geico within the insurance market, and Wish within the very crowded e-commerce market.  You can go beyond being the cheapest option to differentiating by (1) being the completely free alternative, like Robinhood and Chime, or even (2) *making* customers money, like BlockFi and Compound. Long-term, this is a tough way to differentiate because it’s essentially winning through operational effectiveness—which we saw above, rarely lasts.  ### 2. Be the highest quality At the other end of the spectrum, you can also differentiate (and thus stand out) by selling the highest-quality product. This is Apple, Gucci, Whole Foods, Tesla, MasterClass, and Peloton’s differentiation strategy. You can choose from many alternatives, but when you want a great experience, you know where to go.  > #### “We never had an objective to sell a low-cost phone. Our primary objective is to sell a great phone and provide a great experience.” > > #### —Tim Cook, CEO of Apple ### 3. Be the most convenient Instead of being the cheapest, or offering the highest-quality product, you can also differentiate by offering the most convenient option. Products like Coinbase, TurboTax, Eaze, and Gopuff win by offering customers by far the most convenient option. Gopuff in particular is an interesting case study because it entered the crowded grocery space by pushing the convenience lever as far as it can realistically go. You thought getting your groceries in an hour was good? Try 10 minutes.  > #### “We’re all about convenience. How can we deliver the goPuff customer the variety of products they want, when they want, where they want it—and for an affordable price? Furthermore, how do we create an experience so unique and so unforgettable that when the customer thinks ‘I need’ or ‘I want,’ he or she immediately turns to goPuff?” > > #### —Rafael Ilishayev and Yakir Gola, co-founders of Gopuff ### 4. Be the safest A growing opportunity to differentiate is to become the safest, most trusted option. This is how Volvo has always positioned itself within the car market, DuckDuckGo within the search engine market, and, more recently, how Apple has come to position itself within the broad technology market. A sense of safety can come in many forms, from physical safety, to a sense of trust, to privacy.  > #### “Instant answers and spam filtering were really the initial focus there and still are in terms of product differentiation. But very quickly after that—I would have done it from the beginning had I actually thought about it, but I hadn’t—was privacy.” > > #### —Gabriel Weinberg, CEO and founder of DuckDuckGo ### 5. Sell something proprietary A fifth way way to differentiate from your rivals is to offer something no one else has. Netflix has exclusive content, Airbnb has exclusive homes, and Cameo offers access to a supply of celebrities no one else has. If you can sell something no one else has, you’re innately differentiated.  ### 6. Sell something that makes people feel great buying A rarely used but powerful differentiator is to be the product that people feel best about buying. Customers often choose Patagonia because of the company’s mission to help the environment, Toms because it donated a pair of shoes for every pair purchased, and Nike because it makes them feel like an athlete. This differentiator is tough to win with on its own, but combines well with other differentiators, like high quality (Patagonia) and low cost (Toms and Imperfect Foods).  > #### “Giving is not only the great authenticator, but the great differentiator from other brands. This is in our DNA, and it’s what sets us apart from the competition.” > > #### —Magnus Wedhammar, CEO of Toms ### 7. Focus on a niche underserved market Finally, an underappreciated differentiator, which is especially powerful in the early stages, is to laser-focus on a small, underserved market. By definition, if a market is underserved, there’s very little competition. Wish focused on [value-conscious shoppers](https://twitter.com/lennysan/status/1355564051724607491) in Florida and Middle America, while most e-commerce sites focused on affluent global shoppers. DoorDash started with [Tier 2 and Tier 3 markets](https://www.wsj.com/articles/doordash-loves-the-burbs-as-much-as-you-do-11605618001), while other food delivery products focused on big cities. Chime [targeted people making $35K-$70K](https://www.pymnts.com/news/banking/2019/digital-bank-chime-suffers-outage-affecting-5m-customers/#:~:text=Chime%20has%20described%20its%20target,their%20chances%20on%20a%20startup.), while most banks went after high earners. If you start with this differentiator, you can stick with it (like Wish and Chime have done), or you can use it as a foothold to expand to the broader market (like DoorDash has done). Here’s a fascinating look ([courtesy of a16z](https://a16z.com/2021/11/19/the-rise-of-many-in-consumer-fintech/)) at how the fintech space is playing out, with different startups going after different niches:  > #### “As consumer fintech continues to grow, we expect to see the rise of many winners, and while products may find an initial wedge innovating on one primitive (savings, spending, lending, investing), what will differentiate these products in the long run will be the features that are purpose-built for a specific community or audience.” > > #### —Anish Acharya, Sumeet Singh, and Alex Immerman of a16z ### Bonus: Combine differentiators and 🚀 You may have noticed when browsing the chart above, many companies have found their way to offering multiple differentiators. One differentiator is great, but more are better. A few examples: - **Patagonia:** Highest quality + makes you feel good - **Apple:** Highest quality + safest - **Airbnb and Uber:** Cheapest (at least initially) + proprietary supply - **Etsy:** Proprietary supply + focused on a niche market - **Figma:** Highest quality + most convenient To close, remember, you don’t absolutely need to have a differentiator, especially if you’re going after a new market or if you believe you can win by out-executing your competition. But you are going to have a much easier time if you do. > #### “Operational effectiveness means you’re running the same race faster. But strategy is choosing to run a different race because it’s the one you’ve set yourself up to win.” > > #### —Michael Porter Good luck! ## 📚 Further study 1. *[On Competition](https://www.amazon.com/Competition-Updated-Expanded-Michael-Porter/dp/142212696X)* by Michael Porter 2. *[Differentiate or Die](https://www.amazon.com/Differentiate-Die-Survival-Killer-Competition-ebook/dp/B000U5I6QU/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=&sr=)* by Jack Trout 3. [A quick-start guide to positioning](https://www.lennysnewsletter.com/p/positioning) by April Dunford *Have a fulfilling and productive week 🙏* ## **🔥 Featured job openings** 1. **Otta:** [Product Manager](https://www.lennysjobs.com/jobs/896bc872-ef34-44a5-85bd-74784e9bea89) (London) 2. **Sonar:** [Product Manager, Integrations](https://lennys-jobs.pallet.xyz/jobs/d830dd44-5885-452a-a0fc-681a667d20c5) (ATL, Remote-US) 3. **LiveAuctioneers:** [Senior Product Manager, Platform](https://lennys-jobs.pallet.xyz/jobs/4550e1ee-d35a-4975-9bb1-ec28725672cc) (NYC, Lehi UT) 4. **Writer:** [Product Designer](https://lennys-jobs.pallet.xyz/jobs/2da796a4-bd41-4797-b052-3224fc5adbf2) (SF, Remote-Global) 5. **Shortwave:** [Growth Product Manager](https://lennys-jobs.pallet.xyz/jobs/f67128c7-7420-4e94-8548-5c9bfdfbe66e) (Remote-US) 6. **Casual:** [Product Designer](https://lennys-jobs.pallet.xyz/jobs/c03a7db8-67f0-4b79-a82b-e4bf8ef624d1)(Remote-EU) *Browse more open roles, or add your own, at [Lenny’s Job Board](https://lennysnewsletter.com/jobs).* ## **🧠 Inspiration for the week ahead** 1. **Watch:** [Most people don’t know how bikes work](https://kottke.org/21/11/most-people-dont-know-how-bikes-work) [Watch on YouTube](https://www.youtube.com/watch?v=9cNmUNHSBac) 2. **Listen:** [Prophets of Doom](https://www.dancarlin.com/product/hardcore-history-48-prophets-of-doom/) by Dan Carlin 3. **Read:** [My first impressions of web3](https://moxie.org/2022/01/07/web3-first-impressions.html) by Moxie Marlinspike #### **How would you rate this week's newsletter? 🤔** [Legend](https://a.sprig.com/672d7967625042535f477e7369643a3434363132?r=5) • [Great](https://a.sprig.com/672d7967625042535f477e7369643a3434363132?r=4) • [Good](https://a.sprig.com/672d7967625042535f477e7369643a3434363132?r=3) • [OK](https://a.sprig.com/672d7967625042535f477e7369643a3434363132?r=2) • [Meh](https://a.sprig.com/672d7967625042535f477e7369643a3434363132?r=1) **If you’re finding this newsletter valuable, consider sharing it with friends, or subscribing if you haven’t already.** Sincerely, Lenny 👋