What Is Market Differentiation in SaaS?
Market differentiation happens when you focus the features of your SaaS offering to benefit a particular audience — preferably, an underserved one. It means creating polarity in the value you provide. You deliberately are significantly worse in some areas while being dramatically better in others.
In competitive markets, a SaaS founder’s instinct is to create a better product than the competition.
While well-intentioned, this thinking is, at best, incomplete, and at worst, wrong for most companies.
The alternative to being better is being different — creating market differentiation.
“Better” implies I’m going to do what competitors do (but incrementally better in a few feature areas) or do what they do but be slightly less expensive.
This incremental game of “better” is one that is difficult to win.
The far easier approach that supports premium pricing, higher net revenue retention, and selling in a competitive vacuum is market differentiation.
Being different means strategically deciding which areas you will be worse in so you can invest those dollars to be dramatically better in a specific area. By choosing to invest in a particular area that your audience values, you narrow down your audience but also create more interest within that market segment.
The SaaS market is so saturated, there’s likely another business already offering exactly what you’re offering. But if you can find one small way to make yourself more valuable to your target audience, that’s enough to make you stand out.
When you choose the path of market differentiation, two things will occur:
- Some customer segments will be violently repelled by what you offer.
- Other segments will be thrilled.
You will have more haters and more wildly fanatical supporters.
This is what a differentiated market position provides.
Example of Market Differentiation
I recently changed email hosting providers for my company’s individual email addresses. The company we had been using for close to a decade decided to raise per-user prices by 500%.
I was stunned by the price increase and decided to move off the platform. I revisited their home page for the first time in a decade.
It turns out they’ve decided to be different.
Isn’t email hosting a commodity these days? After all, you can get personal email hosting for free from Google or Microsoft. You can get nearly unlimited email inboxes with any web-hosting provider.
It turns out that this company decided to bet their business on HIPAA-compliant email hosting.
For those not in the United States, HIPAA is a set of privacy laws governing organizations’ protection of medical and health care data.
There’s an extensive set of requirements to be HIPAA-compliant, including encryption of data at rest, regular privacy practice audits, and certification requirements.
About 90% of corporations do not require nor want to pay for those capabilities. However, 10% of companies — such as hospitals, doctors’ clinics, and other health care companies — must have it.
It turns out that our former email-hosting provider has several major hospital groups as HIPAA-compliant email hosting customers.
The company is focused. All they do is provide HIPAA compliant-based solutions around email and other related services.
I did not want to keep them and just take the 500% price increase. So, I’m in the “hater” category.
At the same time, it is super clear to me (and others) which type of customer is a good fit for them. I would highly recommend them to any doctor’s clinic or health care company.
In the grand scheme of the email-hosting market, their offering is not universally better for all customers than the competition. However, they sure are really different.
How to Gauge Market Differentiation
Here’s one way you can tell if your market position is different.
When your ideal customer compares you with the rest of the competitive field, within minutes, they disqualify 90%+ of the competition.
How Do You Create Market Differentiation?
There are many ways to achieve market differentiation. Here are a few:
- Features
- Price
- Reputation
- Service
1. Features
One of the most common ways to differentiate yourself is to offer different features. Where your competitor might offer the absolute best product on the market, maybe it’s not so user-friendly. People struggle to navigate it and end up hiring a specialist or paying for additional training.
In this case, you might choose to offer more user-friendly features. Not only will it be easier to use but it can also save costs spent on training and specialists.
2. Price
Pricing is also a useful tool in market differentiation. Let’s say your competition offers feature-rich software that’s used by all the pros. As such, the price is very high. The pros are willing to pay for it because they use all those features. However, there may be some who only need a few of those features, and the high price isn’t worth it.
You might offer software with only the most commonly used features and a significantly lower price. The pros who appreciate the extensive features of the competition may not be interested, but your offering would appeal to those who want the basics on a budget.
3. Reputation
Reputation is a powerful tool for differentiation. When you build your reputation in a particular industry, you benefit from word of mouth. That word of mouth translates into brand recognition, which helps build trust with your target audience before they even choose to buy from you.
4. Service
Differentiating your business with service can mean a lot of things. One option is to offer the best customer service in your industry. However, customer service is a priority for almost all businesses, so this may not do much to make you stand out.
Alternatively, you could offer better service in the form of more hands-on training or a consultant who is assigned to each customer. While these services will translate to higher costs, there is certainly an audience that’s willing to pay a higher cost to get that kind of service.
There are many ways in which you can achieve market differentiation; these are just a few ideas. Because these tactics are applied to draw in a particular audience, there is no one-size-fits-all solution. You need to first find your target audience, then find out what they value. From there, you can plan how you will differentiate yourself.
Making these types of decisions is the essence of strategy. It is one of the primary responsibilities of the CEO and one that should be thoughtfully considered.
Additional Resources
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