Product Hierarchy

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A Kahnesky
Analyst, Denmark

Product Hierarchy

WHAT IS A PRODUCT HIERARCHY?
A Product Hierarchy is a method of classifying a firm's products/services based on their essential components into an organized and logical structure. This structure is made up of seven layers starting from the core product need to the individual final product.

DIFFERENT LEVELS IN THE PRODUCT HIERARCHY
The Product Hierarchy can be understood best by looking at an entire business market, as against to looking at individual products. Here, an example in the computing industry is considered.


  1. PRODUCT NEED: This is the primary reason behind the existence of the product, i.e. the Core or Basic need which is being satisfied due to the product.
    For example, need for Laptops or Smartphones or Calculators exist because of the underlying Core need of computing.
  2. PRODUCT FAMILY: Looking at the entire business market, all the product classes that satisfy the core need are classified as a Product family.
    For example, multiple devices such as computers, calculators, abacus, etc. can help in satisfying the computational need of the customer. Each of them can be considered a product family.
  3. PRODUCT CLASS: This includes a set of products within a product family that have coherent functionalities.
    For example, considering the product family of 'Computer', we come across various product classes such as Personal computers (PC), Server computer, Mainframe, etc. In the Computing Industry, we find that IBM sells products belonging to the Product Family of 'Computers' it currently sells products under the product classes of Mainframes and Servers (it used to sell Personal computers earlier).
  4. PRODUCT LINE: Under the product class, the Product Line comprises of products with comparable functionalities, which are sold to the same customer segments, marketed via the same channels, or sold within the same price band.
    For example, the Product class of 'Personal computers' can be categorized further as Desktop computers, Laptops, Hand-held devices, etc. Apple sells Desktops (iMac), Laptops (MacBook Pro, MacBook Air), and Hand-held Devices (iPhone, iPad).
  5. PRODUCT TYPE: This refers to the set of items within a product line that share one of the several possible forms of the product.
    For example, Smartphones, Tablets, E-Book readers, etc. can be thought of as the Product types within the product line of 'Hand-held devices'. Apple sells smartphones under the name of the iPhone (iPhone 11, iPhone 11 Pro, iPhone 11 Pro Max), and tablets under the name of the iPad.
  6. BRAND or MODEL: Brand can be defined as the name, term, design, symbol, or any other feature which identifies the goods or services of one seller from another. Each firm could have its own Models or variants which fall under a particular product type.
    For example, Apple manufactures various models of smartphones i.e. iPhone 3G, iPhone 4S, iPhone 5C, iPhone 6 Plus, etc.
  7. ITEM: Also referred to as Product unit or Stock-Keeping Unit (SKU) or Product Variant, the Item is a distinct unit within a brand that can be differentiated based on attributes such as size, price, appearance, etc. The seller maintains a unique identifier for each SKU.
    For example, iPhone 11 has three SKUs based on the internal storage (64 GB, 128 GB, 256 GB); each of these SKUs is priced differently.
RELEVANCE OF THE PRODUCT HIERARCHY. USAGE
  • CATEGORIZATION OF PRODUCTS: Firms having multiple products or Strategic Business Units (SBUs) (e.g. IKEA, Walmart, Coca Cola, P&G, etc.), use Product Hierarchy as a way of efficiently classifying the products. Typically, this categorization is very beneficial for online stores (the categorization enhances the customer experience due to easy navigation through the website). For example, the following hierarchy was found on the IKEA's online store:
    Furniture -> Bedroom -> Beds -> Full Bed -> Hemnes -> Bed Frame with 2 Storage boxes -> Colour: Black Brown
  • DIVISIONAL ORGANIZATION STRUCTURE: Firms selling multiple products use the Product Hierarchy as a way of structuring their own Organization, i.e. departments are often created based on the Product family/Product class. For example, P&G operates through six SBUs Fabric and Homecare, Baby and Feminine care, Family care and P&G ventures, Beauty, Grooming, and Health care.
  • COMMUNICATING A CONSISTENT MESSAGE: An effective product hierarchy helps in establishing a common language across the entire organization. Firms with complex product ecosystems (e.g. P&G) need to ensure that the decisions related to Branding, Advertisement, Pricing, Distribution, R&D, etc. in a department are consistent in terms of what the product does, who it serves, and the final value(s) delivered to the customer.
  • ADDITION OF NEW PRODUCT/CATEGORY: Firms should ensure that any new idea/product should serve the Core need that the firm is satisfying (e.g. Uber serves the Core need of transportation). Also, while creating a new product, the firm should check if the product fits (aligns) within the firm's product hierarchy; if it doesn't, the firm could create a new category (only if the category itself is in alignment with its parent category in the Product hierarchy).
⇒ Are there any other ways in which the product hierarchy is being used by firma?

Sources:
Kotler, P. & Keller, K. L. (2016) "Marketing Management", 2016, pp. 409, G1
Belyh, A. (2017) "Product Hierarchy", 2017, Cleverism.com
Chand, S. (n.d.) "Product Management: Product Levels, Product Hierarchy, Product Mix and other details", YourArticleLibrary.com
Hafer, T. (n.d.) "How to make a Product Hierarchy that scales", Better Product
Justesen, I. (2018) "What is a Product Hierarchy and Why Does it Matter?", 2018, Constant Content

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