A cost transformation model - Kotlers five product level model
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A cost transformation model - Kotlers five product level model

Aug 02, 2018 · 2 min read

What is it?

No matter how well costs are driven or held down, no product can be profitable unless it sells. Therefore all products must satisfy customer needs and wants. As all customers are different and seek different benefits from products, businesses would ideally tailor their products to satisfy each customer's wants and needs. However, for many businesses this is not achievable, so they need a way of classifying products in a structure aligned to customer segments, as defined by their needs and wants. The more flexibility a business has to configure products to different customer segments at minimal cost, the more segments they can target with the core product. Which is why it is vital to develop new products with flexibility as a key feature. Philip Kotler, an economist, devised a model that recognises customers have five levels of need, ranging from functional or core needs to emotional needs. The model also recognises that products are merely a means to satisfy customers' varying needs or wants. He distinguished three drivers of how customers attach value to a product:

  • Need: a lack of a basic requirement.

  • Want: a specific requirement of products to satisfy a need.

  • Demand: a set of wants plus the desire and ability to pay for the product.

Customers will choose a product based on their perceived value of it. Satisfaction is the degree to which the actual use of a product matches the perceived value at the time of the purchase. A customer is satisfied only if the actual value is the same or exceeds the perceived value. Kotler attributed five levels to products:

The five product levels are:

  1. Core benefit:

    The fundamental need or want that consumers satisfy by consuming the product or service. For example, the need to process digital images.

  2. Generic product:

    A version of the product containing only those attributes or characteristics absolutely necessary for it to function. For example, the need to process digital images could be satisfied by a generic, low-end, personal computer using free image processing software or a processing laboratory.

  3. Expected product:

    The set of attributes or characteristics that buyers normally expect and agree to when they purchase a product. For example, the computer is specified to deliver fast image processing and has a high-resolution, accurate colour screen.

  4. Augmented product:

    The inclusion of additional features, benefits, attributes or related services that serve to differentiate the product from its competitors. For example, the computer comes pre-loaded with a high-end image processing software for no extra cost or at a deeply discounted, incremental cost.

  5. Potential product:

    This includes all the augmentations and transformations a product might undergo in the future. To ensure future customer loyalty, a business must aim to surprise and delight customers in the future by continuing to augment products. For example, the customer receives ongoing image processing software upgrades with new and useful features.

What benefits does the model provide?

Kotler's Five Product Level model provides businesses with a proven method for structuring their product portfolio to target various customer segments. This enables them to analyse product and customer profitability (sales and costs) in a structured way. By organising products according to this model, a business' sales processes can be aligned to its customer needs and help focus other operational processes around its customers – such as design and engineering, procurement, production planning, costing and pricing, logistics, and sales and marketing.

Grouping products into product families that align with customer segments helps modelling and planning sales, as well as production and new product planning.

Implementing Porter's Five Forces analysis? Questions to consider

  • How do our customers view our products?

  • How will they shop for our products?

  • Can we structure our products into families that align with how our customers value our products?

  • How can the product structure be optimised along common components to make cost and price structures logical and accessible?

Actions required

Actions to take / Dos

  • Start with customers.

  • Analyse and segment customers by their needs and wants.

  • Align products into families that align to customer segments.

  • Optimise product hierarchies along component and production process commonalities to help with cost and price structure management.

  • Strategically assess the profitability of products, product families and customer segments.

  • Report gaps and opportunities identified by the product hierarchy.

Related and similar practices to consider

  • Product Family Master Planning

Actions to avoid / Don'ts

  • Don't attempt to shoehorn customer segments into existing products and structures.

  • Avoid too many customer segments, leading to overly complex product and cost/price structures.

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