The ability to command a higher price is the essence of differentiation, a term Porter uses in this somewhat idiosyncratic way. Most people hear the word and immediately think “different,” but they might apply that difference to cost as well as to price. For example, “Ryanair’s low costs differentiate it from other airlines.” Marketers have their own definition of differentiation: it’s the process of establishing in customers’ minds how one product differs from others. Two brands of yogurt may sell for the same price, but you’re told that Brand A has “50 percent fewer calories.” Porter is after something different. He is focused on tracking down the root causes of superior profitability. He is also trying to encourage more precise and rigorous thinking by underscoring the distinction between price effects and cost effects. For Porter, then, differentiation refers to the ability to charge a higher relative price. My advice here: Don’t get hung up on the language, as long as you don’t get sloppy about the underlying distinction. Remind yourself that the goal of strategy is superior profitability and that one of its two possible components is relative price—that is, you are able to charge more than your rivals charge.
From Understanding Michael Porter by Joan Magretta.
The interesting thing here is that – if you agree with How Brands Grow – marketers’ definition of differentiation pretty much doesn’t exist in reality.