Paying a Lot More for the Same Thing: Deep Innovation v. Clever Product Differentiation

It’s not groundbreaking news that products often have tiers. Whether it is cars, washing machines, or airline tickets, you have some iteration of bronze, gold, and platinum. You have the entry-level, the mid-grade, and the premium. The workhorse and the ultra-luxury model. But looks and labels don’t always tell the whole story. Sometimes when buying a product or service, you may be getting a whole lot of the same thing and not even realize it.

First, a short primer on price discrimination. This is a concept in economics that, simply-put, means that a seller can get some people to dole out more money for the same thing than it can others. How is that possible? In part, this is influenced by the fact that not everyone has the same amount of money they’re willing, or able, to spend. Second, it is also a function of desire. One person who has a stronger desire for the product, may be willing to pay more for it than another person who desires the same product less. “But everyone is price-savvy,” you might exclaim. Especially because it is so easy to do an online search for the lowest priced seller, right? Not quite. Even if someone is price savvy, they first need to realize that two products are essentially the same thing. That is the mystery that is fun to analyze and mull through a bit.

Let’s take a hypothetical dishwasher. It may have Model-A and Model-B. Let’s say that, overall, the manufacturer has a pretty good history and decent reputation for producing solid machines. But they market Model-A as the core or entry model and Model-B as the ultra-premium, platinum, whatever-you-want-to-call-it™ model and they charge nearly double the price. Take further as a given that 90% of the hardware, engineering, and components are essentially the same. Does it make sense then to pay so much more for 10% difference? Maybe it does, if that 10% is transformative, but often that marginal difference is a combination of aesthetic appeal, customer-calibrated refinements to user experience, and a good deal of branding and focused advertising.

This starts to make more sense when we think of examples. Let’s conceptually break down that dishwasher into elements. We have core parts and functions (Hardware). We have the aesthetic elements, including finish and user experience (Experience). Finally, we have the branding and associated advertising (Fanfare). Since it is called a dishwasher and not kitchen wall art, we’re going to assume that our customer cares most about the Hardware and core functionality. But, often, Hardware, whether it is the materials or the engineering applied to it, is some of the costliest elements of product development.  Whereas the Experience and Fanfare are more malleable and often the most noticeable aspects of the product. Let’s delve a bit deeper. Say that both Model-A and Model-B have the same core Hardware functionality, illustrated below.

Jets	20
Water Pressure	30
Max Temp	170
Clean Time	120

 

The numbers above are arbitrary units, but they’re intended to illustrate a point. That essentially both models have the same Hardware specs. What then makes Model-B different? With respect to the Hardware, the manufacturer has created more nuanced controls or options. Where Model-A washes everything with hot water, Model-B might wash everything, by default, at a lower set temperature of 140 and give you an extra button for a sanitize “boost” to push it up to what the cheaper model can and does for all loads. Next, it might give you an option for a shortened cycle that could be noisier and wash less effectively, and add another button for expedient or “Spiffy” wash. The nuanced controls do indeed give Model-B some additional features, but marginal ones at best. What are you wiling to pay to wash something at a sub-optimal temperature or to get a faster, albeit not as thorough, cleaning?

To help differentiate the product, the aesthetic element of the Experience is also very important. The outer shell might use more visually-appealing materials that cost only moderately more than the base model, but nevertheless look immensely prettier under showroom lights. Finally, to get the word out, what we call Fanfare is also important. Model-B will probably have a Sci-Fi-esq name, some of the cycles will get creative descriptions or icons, and voila, we have Model-B™. The branding will help in presenting the Model-B as cutting-edge, different, smart, and better. But Fanfare is not complete until these differences are communicated to the right, high-paying, potential customer. Focused advertising will get the message to the customer who has the means as well as the stronger desire for a nifty dishwasher. Model-B is so much prettier, so much more advanced, if it were a precious metal, it is the platinum. The combination of these three differences then might be just enough to convince the second buyer to pay the mark-up. You might argue that the Experience and Fanfare are sufficient to justify the much higher price. While you can guess my take based on this article, I’ll leave the ultimate verdict to the tastes of each customer. But, thinking of differentiated products by breaking them down into these core components can help in assessing the relative advantages of product tiers. Sometimes, you must dig into the boring technical literature that an engineer-cum-writer wrote detailing the specs of the devices. The analytically-inclined buyer might choose to compare the specs vis-à-vis the price mark-up to determine the substantive difference between the two models and to decide, ultimately, if they want to pay the price delta for mostly creative branding and advertising and shiny chrome that went into the premium model.