Sources of confusion – product differentiation and market structures as sources of confusion

Product differentiation and diversification are important methods to align company offerings with customer needs more closely while increasing prices, raising revenues, fostering profitability, and strengthening competitive advantages at the same time. Aligning a company’s offerings closely with the needs and wants of customers has gained increasing importance. Customer-centricity is also conducted to align a corporation’s offerings with customer needs, while customer experience helps to elevate customer satisfaction. Product differentiation describes the alteration of a product, whereas product diversification describes the provisioning of new products for untouched markets and is seen by some scholars as an extensive form of product differentiation. While fostering the differentiation of products, it is shown that further willingness to pay can be skimmed from a market through differentiated product offerings. Moreover, sales numbers are increased because every customer can find a product that best serves their needs. However, too many varieties can lead to company-sided diseconomies and increased complexity costs. This paper illustrates the assumptions, dynamics, and effects of product differentiations and the accompanying effects on markets and market positionings. It is shown that product differentiation is not always in line with theoretical assumptions and that a deviation from the theoretical optimal amount of variety barges the risk of over-differentiation.