A small business has two locations: its address and its positioning. An address tells customers where to find a business in the real world. Positioning, meanwhile, is a marketing concept: it’s (roughly) the location of a business in a customer’s mind relative to its competitors.

Positioning in a nutshell

Positioning was popularized by Al Ries and Jack Trout in their 1981 bestseller Positioning: The Battle for Your Mind. Their premise is that in an over-communicated world, consumers screen and reject much of the information being offered and only accept whatever matches their prior knowledge or experience.

Businesses have to adapt to this environment by oversimplifying their message and by concentrating on narrow targets, the consumer segments that are most likely to listen and respond to their marketing. By focusing, businesses can hope to find some unoccupied space in a target consumer’s set of perceptions and set up shop, if you will, at a safe distance from competitors.

The key is to be distinctive. Take Dyson for example: its line of vacuum cleaners stand out functionally (we’re more powerful and use much less energy than conventional motors!) and symbolically (the best-looking vacuum cleaner there is!). The sharper the distinction that marketing can draw from competitive offerings, the more the business stands out in the minds of its targets.

To go further, the distinction should be summed up in one word in a prospect’s mind, a word that the company owns. Volvo owns safety. FedEx owns overnight. Effective positioning is about limiting what a brand stands for and alertly avoiding the trap of trying to be all things to all people. Instead, successful companies position themselves to be one thing to some people.

Too much communication

The positioning concept highlighted the problem of too much communication, but it also contributed to it.

Consumer choice, a growing problem in Ries and Trout’s original work, has since exploded as companies have introduced an avalanche of new offerings to serve the slightly different needs of slightly different segments. Each new product or service has had to be supported and positioned by advertising that played to a large audience while appealing to an increasingly smaller one. Which leaves consumers feeling more harassed and more besieged.

But positioning demands that companies differentiate and ruthlessly zero in on targets. The approach has become orthodox for brands. But can small businesses play the same card, and, without massive advertising budgets and in the face of consumer fatigue, should they play it at all?

The principle of minimum differentiation

If differentiation is so critical to success, why are there so many similar products in the market? Consider tennis rackets, cell phones, video games, toothbrushes, or pasta as a very small list — similarities between products in these categories overwhelm differences. And why do similar businesses tend to locate in the same areas of a city? Why are there two gas stations on adjacent city blocks? Or a string of nightclubs down the length of a city street?

In economics, the tendency of businesses or products to cluster is known as Hotelling’s law or the principle of minimum differentiation. Harold Hotelling formulated this principle to explain spatial competition. He observed that consumers prefer the nearest of two options when purchasing fixed priced goods with identical features. This forces both firms to locate in the middle of the market, because a firm that chooses to locate to one side of the middle would leave the larger portion of the market to its competitor.

Spatial differentiation, or the lack of it, is a useful metaphor for quality or feature differentiation in products. Consumers choose products from one of two firms with a mix of features that are closest to their ideal mix. Some consumers prefer curly pasta; some prefer whole wheat pasta shells. (Everyone loves spaghetti.)

If consumer preferences vary uniformly across all possible feature combinations, it again pays for both firms to create products that (sort of) appeal to everybody. If instead one firm chooses a mix of features that appeals especially well to a small segment of consumers, it leaves the larger segment to its competitor.

The contrast between clustering and differentiation should be clear. Which, as an explanation of company behaviour, sounds more plausible? And which, as a small business strategy, is more advisable? Thoughts on these questions in a later post.