Even if you have a unique product it is difficult to benefit from this as a small business. Product-based differentiation relies on promotion of the differences and most small businesses simply don't have the budgets to accomplish such promotion effectively.
What small businesses can do to effectively differentiate themselves is to promote their natural advantages. This is differentiation which is easier for small businesses than for large corporations because the small business is closer to its customers. Where a large business tries to segment the markets, establish targets and then market to the targets in a differentiated way, a small businesses can examine the markets where it can most easily be active and differentiate itself by building on its strengths.
Thus if you're selling locally and noone else is, you differentiate by advertising your local address. If you or an employee are well-known in your field, you differentiate by using the names. If you're in a high-income area, you offer high quality products with time-saving features. As a small business, you need to study who you are selling to, ask yourself who else is easily accessible and differentiate yourself in order to appeal to this market. Being close to your customers will make this easier for you than for larger businesses.
For a more detailed discussion of differentiation, try this link on the Business Strategy pages. In addition to product differentiation, there is a section on channels, not that most small businesses are large enough to have channels but they might be one.
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