Product Hierarchy and Product Line length

The product hierarchy stretches from basic needs to particular items that satisfy those needs. We can identify six levels of the product hierarchy using life insurance as an example:

1. Need family – The core need that underlines the existence of a product family.
Example: security

2. Product family – All the product classes that can satisfy a core need with reasonable effectiveness.
Example: savings and income

3. Product class – A group of products within the product family recognized as having a certain functional coherence. Also known as product category.
Example: financial instruments.

4. Product line – A group of products within a product class that is closely related because they perform a similar function, are sold to the same customer groups, are marketed through the same outlets or channels, or fall within given prices ranges. A product line may be composed of different brands or a single family brand or individual brand that has been line extended.
Example: life Insurance

5. Product type – A group of items within a product line that share one of several possible forms of the product. Example: term life insurance

6. Item (also called stock-keeping unit or product variant) – a distinct unit within a brand or product line distinguishable by size, price, appearance, or some other attribute. Example: Prudential renewable term life insurance.

Company objectives influence product line length. One objective is to create a product line to induce up-selling. Thus General Motors would like to move customers up from the Chevrolet to the Buick to the Cadillac. A different objective is to create a product line that facilitates cross-selling. Hewlett-Packard sells printers as well as computers. Still another objective is to create a product that protects against economic ups and downs;

Electrolux offers white goods such as refrigerators, dishwashers, and vacuum cleaners under different brand names in the discount, middle-market, and premium segments, in part in case the economy moves up or down. Companies seeking high market share and market growth will generally carry longer product lines. Companies that emphasize high profitability will carry shorter lines consisting of carefully chosen items.

Product lines tend to lengthen over time. Excess manufacturing capacity puts pressure on the product-line manager to develop new items. The sales force and distributors also pressure the company for a more complete product line to satisfy customers. But as items are added, costs rise: design and engineering costs, inventory-carrying costs, manufacturing-changeover costs, order-processing costs, transportation costs, and new-item promotional costs. Eventually, someone calls a halt.

Top management may stop development because of insufficient funds or manufacturing capacity. The controller may call for a study of money-losing items. A pattern of product-line growth followed by massive pruning may repeat itself many times.