What Is an Augmented Product?

An augmented product has been enhanced by its seller with added features or services to distinguish it from the same product offered by its competitors. Augmenting a product involves including intangible benefits or add-ons that go beyond the product itself.

Examples of the features used to create augmented products might include free delivery or in-home installation of a service. Cosmetics companies tend to offer free makeovers and travel-size samples to augment their products.

How an Augmented Product Works

To marketing professionals, every product comes in at least three versions: The core, the actual, and the augmented.

Core Product

The core product is not a physical object. It is the product’s benefit to the consumer. For example, a lipstick will make its buyer attractive; a pair of sneakers will make her healthier; a new phone will help you communicate more efficiently.

Actual Product

The actual product is the item for sale, including the unique branding, design, and packaging that is attached to it. The actual product and its features must deliver on the core-product expectations that consumers want from the product. A car, for example, should function seamlessly with all of its features to deliver the core product and create customer value.

Augmented Product

The augmented product adds on features and services that distinguish it from similar products offered by the competition. The add ons don’t change the actual product and may have a minimal impact on the cost of producing the product. However, an augmented product may have a perceived value that gives the consumer a reason to buy it. The added value may also allow the seller to command a premium price.

Examples of Augmented Products

It’s no secret that companies that can effectively create augmented products create a positive buying experience and have the best chance of developing a loyal base of repeat customers.

Apple TV

Apple Inc. (AAPL) launched its video and TV streaming service in 2019. To boost awareness of the new product and increase sagging iPhone sales, the company created an add-on or augmentation for anyone purchasing a device as stated below from the company’s website.

“Starting today, customers who purchase any iPhone, iPad, Apple TV, iPod touch or Mac can enjoy one year of Apple TV+ for free.”

Discounts and Freebies

A discount coupon for a future purchase is a product augmentation, as is an offer of a refund if the customer is dissatisfied. A free recipe book offered with the purchase of a kitchen appliance such as a crockpot creates an augmented product.

More expensive purchases often come with enhanced augmentation. In-store financing for furniture purchases, a free trial, or free delivery all augment the product being offered. A cable company competing for new business might offer a more convenient home installation schedule to attract customers.

Service Sells

Good customer service and store ambiance are augmentations that brick-and-mortar retailers add to their entire range of products. A generous return policy and in-store demonstrations are others. A retail store that sells cooking supplies might offer free cooking classes with each purchase. Apple, for example, offers teaching and guidance for how to use their products through their retail locations. An engaging website to help customers learn about a product or service, as well as an online support team, are product augmentations.

In considering almost any purchase, consumers have a wealth of options. An augmented product has been made to stand out from other products, or the same product offered by other sellers.

What Are the Actual Deferral Percentage (ADP) & Actual Contribution Percentage (ACP) Tests?

The Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests are two tests that companies must conduct to ensure that their 401(k) plans don’t unfairly benefit highly-paid employees at the expense of others.

Companies that offer 401(k) plans must conduct the tests in order to retain the qualified status of their plans under IRS rules and the Employee Retirement Income Security Act (ERISA).

If the plan fails either test, the employer must take corrective action in the 12-month period following the close of the plan year in which the oversight occurred. Failure to do so can result in the IRS imposing pecuniary penalty fees, plan disqualification, and fiduciary liability on the part of the employer. 

How ADP and ACP Tests Work

The ADP test compares the average salary deferral percentages of highly compensated employees (HCE) to that of non-highly compensated employees (NHCE). An HCE is any employee who owns more than 5% interest in the company at any time during the current or previous plan year or earned more than $130,000 during the 2020 tax year. 

The ADP test takes into account both pre-tax deferrals and after-tax Roth deferrals, but no catch-up contributions, which may be made only by employees age 50 and over. To pass the test, the ADP of the HCE may not exceed the ADP of the NHCE by more than two percentage points. In addition, the combined contributions of all HCEs may not be more than two times the percentage of NHCE contributions.

The ACP test uses a similar method as the ADP test except that it uses matching contributions or employee after-tax contributions.

Correcting an ADP/ACP Test Failure

When employers fail the ADP/ACP tests, they can remedy the failure by refunding excess contributions back to HCEs in the amount necessary to pass the test. However, these refunds will be liable for income tax for the HCE individuals. 

Some companies set buffer zones within their plan documents to steer plans away from potentially failing the ADP/ACP test in the first place. One option is setting a cap on contributions by HCEs. Another option is to place a contribution limit on HCEs at the point where the plan would fail an ADP/ACP test. Setting plan buffer zones may require employers to conduct ADP/ACP test projections, typically in the middle of the plan year, to determine if any restrictions need to be applied. 

Still, some companies use a Safe Harbor 401(k) plan to avoid the ADP/ACP test entirely.

What Is a Safe Harbor Plan? 

Safe Harbor 401(k) plans allow sponsors to bypass ADP/ACP and other non-discrimination testing in exchange for providing eligible matching or nonelective contributions on behalf of their employees.

To qualify for Safe Harbor, a company must provide a basic match, such as a 100% match on the first 3% of deferred compensation and a 50% match on deferrals of 3% to 5%. They may also provide each employee with a nonelective contribution of at least 3% of compensation, regardless of how much the employee contributes or if they contribute at all.