Market Segmentation for Electric Vehicles

Nick Hodson and John Newman of McKinsey recently published a brief article proposing a segmentation approach for electric vehicles.  This study was driven by a concern about the expense of electric vehicles (driven by the cost of batteries) and the ambiguity around the market potential for such vehicles.  There are two aspects of this article worth discussing: the approach taken to segmenting the market, and the product development recommendations that this analysis yields.

The authors’ approach does follow some of the principles I laid out in a previous post on effective market segmentation.  To some extent, they characterize potential segments based on behaviors (driving patterns) as opposed to characteristics (such as age, area of residence, income, or even a specific average drive length).  Their focus on how vehicles are used (commute, around-town errands, delivery, sales calls) yields insights into specific customer needs, specifically the range that batteries must cover.  The differences between the segments they define are significant enough to be meaningful for product development and marketing purposes.

The use of these segments to propose differentiated product development is even better than the segmentation itself.  As I discuss in a prior post on using market segmentation to define pricing strategies, proper analysis can point out design approaches that yield a selling advantage into specific segments.  In this case, the “optimal” battery range for each segment provides the potential to design lower-cost options for the “driving around town” segment and more robust and flexible (and correspondingly pricier) products for commuters.

For automakers, deeper segmentation will be necessary.  The authors do not use actual customer interviews to determine additional behaviors that will impact preferences for electric vehicles such as level of concern for the environment, ability to understand and appreciate return on investment, or the desire to be seen as owning “the latest trend” (or aversion to new technology).  Such differences will be important in defining whether any reasonable premium for an electric vehicle over traditional IC engines is possible. It is going to be some time until the economics of electric vehicles provide a clear incentive for buyers, so appealing to non-economic criteria will be important to establishing a lead in the industry.

One-size-fits-all has never worked for the automotive industry, and this will become even more true as the various flavors of electric vehicles (hybrid, plug-in-hybrid, and plug-in) are introduced to the market.  Add to that competition from diesel engines, advanced internal combustion engines, and, potentially, hydrogen fuel cells, and the choices (and opportunity for mistakes) in a product roadmap will quickly become overwhelming without a clear line of site to customers based on thorough segmentation of the market. McKinsey has also published an outstanding article on the outlook for the automotive industry as they plan strategies for electric vehicles.

The authors have done a fine job of researching available information and wouldn’t be expected to carry the segmentation further.  Based on the history of US automakers (where a “Chevrolet” is simultaneously a $10,000 Cavalier and a $60,000 Corvette), I doubt this will be done effectively.  Smart management of the shift to electric vehicles will be the key determinant of winners and losers in the automotive industry over the next 20 to 30 years. Or, they can just wait for the current generation of children to be subject to propaganda pieces like They Might Be Giants’ song Electric Car (though I have to admit its a catchy tune, and my boys love it).

You may also find these interesting:

• Mitigating Strategic, Operational, and Organizational Business Risk
• Strategic Pricing Using Value Equivalence Lines
• Spreading More Crumbs of Cogitation
• A Market Segmentation Example
• Market Segmentation for Industrial Marketers – Why You’re Probably Doing it Wrong