Competitive advantage is a brand’s ability to provide customers with products or services that are better in quality or cheaper than competitors’ alternatives and can outperform them. It helps companies generate more sales and earn higher profit margins.
In this article, we’ll cover the importance, types, and examples of competitive advantage and also review the best ways to gain it.
Why is competitive advantage important?
Competitive advantage is essential because it makes a product or service look more attractive to consumers. To gain customers’ attention and make people choose their products or services, brands create unique and high-quality products, set lower prices, provide excellent customer service, unusual features, or flexible return and exchange terms. Doing this helps companies get high sales volume, profit margins, and a high level of customer loyalty.
A business with a superior offer is in great demand among buyers. It generates more sales and brings good revenue to its owner. To stand out among competitors and surpass them in some areas, different companies leverage advanced technology, hire a team of professionals, ensure excellent customer support, or create a fantastic service. These steps help them increase market share and get a bigger ROI. Entrepreneurs also aim to improve their productivity and efficiency, trying to build successful brands.
Since a lasting competitive advantage brings a lot of benefits to businesses, companies’ owners try to attain it in several ways. They implement something competitors don’t have, launch new innovative products others can’t duplicate, implement innovation, and more. Having a clear competitive advantage provides a company with certainty and enables the right allocation of resources.
Now that you know why competitive advantage is essential, let’s unveil its two main types.
Types of competitive advantage
Companies with a competitive advantage have a unique position that brings benefits to their stakeholders. There are two main types of competitive advantage you can use to make your business grow: comparative and differential.
Comparative advantage refers to the ability of a certain business to manufacture products more efficiently than its rivals. Simply put, it occurs when a company can produce products that are similar to its competitors’ alternatives but sell them at a lower price. The strategy helps bring in more customers and increase revenues. Let’s imagine that two companies offer perfect substitutes, but one of them sells the same product for a lower price. For sure, a customer will choose a cheaper one, especially if there’s no visible difference between the two.
For example, a person wants to buy sneakers of a certain brand in a retail store. This customer can choose between two open stores. One store sells these running shoes for $50, and the other one sets the price of $45. The client will buy from the second brand to save money.
Differential advantage refers to the situation in which a company creates products or services with superior quality, additional functions, benefits, or an interesting appearance. Brands often use new technology, a strong brand identity, and their best personnel to manufacture high-quality products. These crucial factors support a company’s increase in market share and ROI.
Apple is the best example of a brand with a differential advantage. The company manufactures innovative products like iPhones, MacBooks, AirPods, etc. The brand has a high level of customer satisfaction with product quality and appearance so that clients are even ready to pay a much higher price for its smartphone or laptop.
Let’s take a look at some strategies to obtain a competitive advantage.
Four ways to gain a competitive advantage
If you want to develop a competitive advantage, it’s worth thinking about a suitable strategy to reach this goal.
- Consider cost leadership. Companies often implement cost leadership strategies to take positions of industry leaders. You can use the approach if your company can provide consumers with product quality similar to your rivals’ alternatives but for a lower price. To apply the strategy, you should find how to manufacture the same goods at a lower cost or use your resources more efficiently. Remember that there shouldn’t be any additional costs since you still need to obtain a good profit margin. Pay attention to the factors that influence your efficiency, such as technology, equipment, personnel, etc.
- Implement differentiation. This strategy focuses on making a company different from others. Your brand shouldn’t necessarily stand out and be memorable only because of low-price products. There might be other attributes that encourage people to buy from you: unforgettable experiences, innovations, a wide variety of products, etc. Think about it to make your brand look more attractive. Once you have something that distinguishes your company from other businesses, search for a specific audience segment for which this attribute matters and communicate your message through the most suitable channels.
- Utilize focus strategy. To stay ahead and outperform your competitors, you should always maintain a competitive advantage. If you want to leverage the strategy, you should choose a market segment and focus on it. Do everything possible to develop a product or service that can satisfy your customers, solve their problems, and obtain great results. As an option, you can become a manufacturer of products with the lowest cost in this narrow segment or provide customers with unique products.
- Seek strategic alliances. This strategy is closely connected with business partnerships. If you want to gain a competitive advantage, consider teaming up with other companies in the same or related industry. Strategic alliances are similar to joint ventures and are used to pool resources and gain profit at the expense of other businesses.
Now that you are acquainted with four main strategies to gain a competitive advantage for your company, it’s time to walk you through some real-life examples.
Examples of competitive advantage
Both big corporations and startups can have a competitive advantage. Your company should provide customers with something essential or necessary for them: enjoyable experience, innovation, variety, or low price. We’ll review how established brands do it to help you get inspired.
Zara’s main competitive advantage is an efficient and organized supply chain and logistics. The clothing company controls all manufacturing processes and meets customer demand very fast. The brand’s team manages all the processes professionally and prevents possible problems. Zara produces and delivers clothes worldwide within a couple of weeks.
The main advantage of this famous fast-food company with a rich history is its products at affordable prices. You can conclude that the brand implements a cost leadership strategy. This indicates that McDonald’s can leverage economies of scale, produce fast food, and spend less money at the same time. This allows the brand to sell its products at a lower price than its main competitors.
One of the most important things each brand should bring is a positive experience – it should be unforgettable, exciting, and unique. This chain of coffeehouses has been doing it for years. Starbucks developed this almost legendary idea to put their customers’ names on coffee cups. Now no one can pass by this coffee house without stopping for a cup of hot cappuccino or iced caffe latte.
Now you know that competitive advantage helps attract more customers, establish brand loyalty, and make you differ from your competitors. Companies do a lot to gain it and utilize different methods to stand out among rivals because they know that it’s worth it in the long run.
- This article defines the term and uncovers the main types of competitive advantage.
- In this article, you’ll find examples and see how competitive advantage works.
- This article provides readers with practical examples of competitive advantage.
Last Updated: 16.02.2022