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Differential advantage is a unique characteristic that gives a company an advantage over its competitors, allowing it to charge a premium price. This benefit can apply to any stage of the business-customer relationship and is subjective. It should not be confused with comparative advantage, which is based on objective and measurable factors.
Differential advantage describes an advantage a company has over its competitors that results from a unique characteristic. Contrast this with comparative advantage, which is where a company has superiority to a directly comparable measure. Differential benefits are arguably more subjective than other benefits and usually allow a company to charge a premium price.
One way to think about this benefit is in terms of the benefits it brings to a consumer. For example, a company may make widgets that are more reliable than a competitor. This means that the widgets are more useful to the customer, who will have less concern about potential problems and less disruption in dealing with failed widgets. This can apply to many different aspects of a product: a fast food burger might be bigger, fresher, healthier, tastier, or more customizable than those provided by competitors.
However, it’s not just a case of product quality. Differential advantage can apply at any stage of the relationship between the business and the customer, sometimes described as the value chain. For example, a company can offer customers orders seamlessly thanks to a dedicated sales contact. On the other hand, a company can acquire a reputation for providing good after-sales service.
The key to this benefit is that the customer must not only appreciate the benefit it brings, but be prepared to pay a premium price for it. Economic models usually assume that the customer makes rational decisions. According to this logic, a customer will therefore only see a differential advantage if he believes he cannot obtain the same advantage from another company.
Some companies use differential advantage as an analysis tool. This may involve listing all the benefits a customer could gain from choosing a particular product or service, then placing them in the likely order of preference of the target audience. This can show advantages the company already has that it should highlight in marketing or changes it could make to deliver the required benefits in a way that rival companies cannot match.
Differential advantage should not be confused with comparative advantage, sometimes known as competitive advantage. This is where the benefit is based on something objective and measurable. In most cases this means that a company can supply the same or a similar product at a lower price. It could also mean that a larger company is able to fulfill a larger quantity order within a given time frame.
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