Which of the following is a potential pitfall of pursuing a differentiation strategy in competitive markets?

• A. Firms may experience lower costs due to economies of scale.
• B. Market demand for differentiated products always increases.
• C. Differentiation guarantees immunity from competitive pressures.
• D. Customers may not perceive enough value in the unique features to justify higher prices.

Answer: (D)

Verified step by step guidance

1. Understand the concept of a differentiation strategy: it involves a firm offering products or services with unique features that are valued by customers, allowing the firm to charge a premium price.
2. Recognize that a key goal of differentiation is to create perceived value that justifies higher prices compared to competitors' offerings.
3. Identify potential pitfalls by considering what could go wrong: if customers do not perceive enough additional value in the unique features, they may not be willing to pay higher prices.
4. Note that differentiation does not guarantee immunity from competitive pressures because competitors can imitate features or offer alternatives, and customer preferences can change.
5. Conclude that a major risk is that the cost of differentiation may not be recovered if customers do not value the uniqueness enough, leading to lower profitability despite higher prices.