Differentiation focus strategy describes a situation wherein a company chooses to strategically differentiate itself from the competition within a narrow or niche market. Differentiation simply means using product features or functionality, innovation, brand image or customer service to make products and services more attractive to the potential consumer.
Differentiation focus strategy is a hybrid of focus strategy and differentiation strategy. With focus strategy, a company chooses a small segment of the industry to focus its marketing efforts on. The advantage here is that there is less competition and, therefore, greater pricing flexibility. The company becomes more experienced and specialized at providing goods and services to a limited sector of consumers, and it can charge more for that expertise due to reduced competition. With differentiation strategy, a company makes efforts to appear unique from its competitors. It does this by emphasizing one or a few features that consumers consider important, such as brand image or durability, and by focusing marketing efforts on these features to lure consumers away from competitors. Differentiation focus strategy combines the advantages of both strategies; the company appears unique to its potential consumers in an already-narrow market with little competition.
A disadvantage of this strategy is that with limited competition, also comes limited demand. While a company using differentiation strategy is free to charge higher prices for its specialized expertise, focusing on a smaller market automatically alienates consumers in the broader market.