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What Is a Differential Advantage?

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  • Written By: John Lister
  • Edited By: O. Wallace
  • Last Modified Date: 02 September 2016
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    Conjecture Corporation
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Differential advantage describes a benefit a company has over its competitors that stems from a unique feature. It contrasts with comparative advantage, which is where one company has superiority in a directly comparable measure. Differential advantages are arguably more subjective than other advantages, and usually allow a company to charge a premium price.

One way to think of this benefit is in terms of the benefits it brings a consumer. For example, one company may produce more reliable widgets than a rival. This means the widgets are more useful to the customer, who will have less worry about potential problems and less disruption dealing with failed widgets. This can apply to many different aspects of a produce: a fast food hamburger could be bigger, fresher, healthier, tastier or more customizable than the ones supplied by rivals.

It's not just a case of product quality though. Differential advantage can apply at any stage of the relationship between the company and the customer, sometimes described as the value chain. For example, a company may give customers hassle-free ordering thanks to a dedicated sales contact. At the other end, a company may gain a reputation for giving good after-sales care.

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The key to this benefit is that the customer should not only appreciate the benefit it brings, but be prepared to pay a premium price for it. Economic models usually assume the customer makes rational decisions. By this logic, a customer will therefore only see a differential advantage if she believes she couldn't get the same benefit from another company.

Some businesses use differential advantage as an analysis tool. This can involve listing all the benefits a customer could get from choosing a particular product or service, then putting them in the target audience's likely order of preference. This can either show benefits the company already has that it should highlight in marketing, or changes that it could make to offer the required benefits in a way rival companies can't match.

Differential advantage should not be confused with comparative advantage, sometimes known as competitive advantage. This is where the advantage is based on something objective and measurable. In most cases this means one company can supply the same or similar product at a lower price. It could also mean a larger company being able to meet higher-quantity order within a particular timescale.

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