Customers buy products by weighing the benefits (usually gained through a product’s features) they receive from a product versus its cost. A company can choose a strategy of offering products differentiated, by features or functionality, from its competitors (possibly at a higher price), or offering products similar to its competitors, but at a lower price. In practice a company’s strategy usually includes both differentiation and low cost, but it is useful to try to determine which of these two is most prominent.

A company also must decide whether to pursue different strategies in different parts of the market (usually defined by different customer types). For example, Compaq Computer offers competitive prices for desktop computers, but offers various different features in its servers at a premium price.

We summarize these Price and Feature decision in the following:

I - commodity (DRAM)
II- going out of business (DEC in 1995)
III - buying market share with big price/performance leadership (usually a temporary promotion)
IV - premium products (Mac in 1984-1989)

Products can becomes standardized (PCs, DRAM chips, VCRs, etc.) making continued differentiation very difficult, and competition is then predominately on price.

It is often difficult to pursue a low cost strategy while focusing on one segment of the market while simultaneously focusing on a differentiated strategy in a different part of the market. For example United Airlines formed a separate subsidiary (United Shuttle) to compete with Southwest Airlines for price conscience (less interested in service) customers in the Western US.