MADIII_Customer Segmentation

Customer Segmentation

Definition

The process by which a market is divided into distinct subsets of customers with similar needs and features that lead them to respond in similar ways to a particular product offering and marketing program (Walker et al, 2005)

Target Customer Group

BMW is dedicated to providing products for the premium segments of the marketplace: It concentrates on a specific target audience of those who want the best in driving performance and technology&who are willing to pay a premium to get the better solutions, the better materials, and true innovation in technology and design. That is the best way to sustain value and meet competitive challenges. Customer Segmentation

1.Buyer Behavior

1)Business buyers

Business-to-business buyers are professionals and experts in terms of ‘functional benefits’of cars bought for employees. Thus, their consumption is ‘routine’ and ‘functional’.

CVD: performance, technology, security & reliability

2)Retail buyers

Retail customers are amateur purchasers who spend their own money for non-routineconsumption. Thus, they seek to gain ‘experiential’ or ‘symbolic’ benefits from thecar brand instead.

CVD: riding comfort, prestige & status, service

2.Demographic criteria

Age (19-25, 26-35, 36-49, 50-64, 65+)

Sex

Life cycle (young single, young couples, young parents, middle-aged empty nesters, retired)

Income

Social class (upper middle, middle, skilled working, unwaged)

Usage (heavy, light)

Benefits sought (performance, status)

Lifestyle (conservatives, trendsetters, sophisticates)

One thing all BMW customers have in common is their appreciation of driving fun and sporty, yet elegantly designed cars.

Based on demographic criteria, such as age, sex, lifestyle, views on motoring and the way in which cars are used, BMW customers could be segmented into 6 categories: 1)Socially conscious, open-mindedprofessionals with an active lifestyle

Some are former yuppies who have gone on to have kids. They are still professionally ambitious, but now take time out for family and demanding hobbies like skiing, triathlons, mountain biking, and water sports. BMW 3 Series and 5 Series Touring models, with stronger performance andmore room or flexibility for their active lifestyles, are usually their choice.X5, a SUV that BMW prefers to call a “sports activity vehicle”, is also designed to appeal to this group’s active lifestyle.

CVD: performance, riding comfort

Most profitable customers

2)Modern,upper-middle-class income families with children

The spaciousness and interior versatility of the BMW X Models, X3 and X5, attract modern families with children in their households (50%-60% having at least one child).

CVD: riding comfort

Next most profitable customers

3)Urban customers aged 39 years or younger (middle-class)

Like professionals, they are family-oriented and active. Typically they leaned toward near-premium brands Honda or Volkswagen: BMWs were too expensive for them. But increasing numbers of them are looking to move up above the middle class and are open to luxury-brand cars.

Together with the Z4, the BMW 1 series shows the highest share of urban customers aged 39 years or younger (40%). This truly makes the BMW 1 series, not only in terms of its launch date, a young model in the BMW portfolio.

CVD: prestige & status

Profitable customers: lower profit margins, but large sales volume

4)High-earning innovators e.g. architects, entrepreneurs and artists

They are highly individualistic and gravitate toward head-turners like Convertibles and Roadsters.

CVD: Technology, Performance

Profitable customers: reflects individualistic needs but is a small segment

5)Female customers

Female customers tend to prefer open driving, reflected in a preference for the BMW 3 Series Convertible and BMW Z4.

CVD: riding comfort

Least profitable customers:female drivers represent a small segment and care less about driving performance.

6)Wealthy, conservative customers

They are wealthy, traditional thinkers, normally in Asia, who consider luxury and comfort over driving performance. BMW 7 series appeal to them.

CVD: prestige & status, riding comfort

Least profitable customers:They’ve never been that in terested in driving sporty cars, and consider luxury and comfort over driving performance. They would normally purchase the Mercedes S-class and Jaguars as they strive for elegance and sophistication.

3.Geographic Segmentation & Profitability

BMW Group sales volume of vehicles by region and market(in 1,000 units) in 2010 Rest of Europe 369.3

North America 298.3

Asia 286.3

Germany267.2

UK154.8

Others 85.3

Total 1,461.2

1)Europe

Europe has long been BMW’s largest market, with Germany and the UK exhibiting the most dynamic sales.

BMW is proposed to reflect individualistic needs interms of functional and experiential benefits of customers in rich countries such as the UK and Switzerland. 2)North America

North America has the second largest sales volume after Europe in 2010, with a 10.1% increase compared to 2009. The US has become BMW’s second largest market after Germany.

Like those in Europe, driving is also a form of personal expression for the North American customers. Technology is another overriding factor.

3)Asia

In Asia, in particular, markets grew by 56.3% in 2010. BMWGroup sales volume in this region increased year-on-year by 56.3%,with the Chinese markets (China, Hong Kong, Taiwan) making the largest contribution.

Asian customers tend to be more oriented tofame and success but have limited ways to show off their wealth. Also,traffic is more congested & lower income level →fewer opportunities to enjoy the experiential and functional BMW.Thus, they seek non-product-related attributes(price, user and usage imagery) to ascribe symbolic benefits in order to display their social position,prestige, and status in the society.In this respect, BMW should highlight the uniqueness of association in social-material terms and become the brand as icon of‘luxury, quality, and status’ which self-express the symbolic prop erties of ‘luxury’ in the society.

China has become one of the 3 key markets of BMW, together with Germany and the US.

a)The luxurious and sophisticated style of BMW’s 7 series has attracted newly

rising Chinese wealthy consumers whosometimes have a greed-is-good, look-at-me attitude. For them, driving a BMWi s the perfect way of saying “I’ve made it.” Many of the wealthy consumers hire drivers and sit in the back seat.

Thus, the spacious and luxurious back seat is designed to make them feel comfortable.

b)Series 5 and X have 2 groups of Chinese followers. One is young entrepreneurs

who have made a lot of money, the other is generally around 20 years old, and the single child in an affluentfamily. They are more influenced by the Western

value system, which is often regarded like a trend. Sometimes, they are hard to reach through traditional marketing channels and unpredictable with their taste. Future Changes

BMW should link future segments with the redesigns to its product line, with the new cars reflecting the predicted changes in consumer tastes and behavior. According to the then Chief Executive, Helmut Panke: ‘The product initiative allows us to be focused on market segments that we see developing in the future. Tastes are changing. Customers are slicing the market into more focused pieces. It's becoming more differentiated…. The market is shifting. But satisfying the market's demand for new niche products is a strategic risk anyone in the industry has to take. To be successful, you have to fulfill 100% p ercent of customers' expectations.’

On the geographic perspective

?China is the most dynamic market among all. As consumers get more savvy and sophisticated, the Chinese market will, in due time, be much more difficult and complicated to operate.

?European customers, with relatively stable growth, have a specific attention on fuel efficiency and environment preservation.

On a demographic segmentation

?Urban customers aged 39 years or younger (middle-class) might get married and more financially capable, thus switching to higher end models, such as 5 series or X5 and become the most profitable customers.

?Female customers, especially those in Asia, will continue to enjoy increasing buying power and independence, providing great opportunity for BMW to reap higher profits. More vehicle choices and more eye-catching designs are needed. ?Socially conscious, open-minded professionals with an active lifestyle could climb higher in terms of their social status, demanding more luxurious and exclusive car models, reducing the profitability for BMW.

Customer Profitability Analysis

Definition:the allocation of revenue and costs to customer segments or individual customers, such that the profitability of those segments or individual customers can be calculated.

CPA can help BMW identify the most profitable segment & provide direction for customer retention and development programs. ABC(rather than the traditional costing system) should be used; information technology system that makes it possible to record and analyze more customer data –both in type and in amount –should be adopted.

1.The CPA exercise reported here is an example of a retrospective analysis, i.e., an

analysis of past revenues and costs generated by customers over a specific period.

2.Managers will also be interested in prospective analyses of customer

profitability.Prospective CPA calculates the net present value of future expected costs and revenues associated with serving a customer over his entire future life.

Prospective CPA is also known as customer lifetime value analysis and is the basis for deciding whether to retain or discourage currently unprofitable customers.

To be able to estimate future costs and revenues, a retrospective analysis of customer profitability is a valuable, if not an essential, first step.

3.Benefits

1)It provides an insight about the uneven distribution of costs and revenues

over customers. This insight is in the extent three areas: cost management, revenue management, and strategic marketing management.

2)CPA uncovers opportunities for targeted cost management and profit

improvement programs. It opens up possibilities for segmentation and targeting strategies based on cost and profitability profiles. CPA, as a specific application of ABC, reveals the links between activities and resource consumption, and it therefore points directly to profit opportunities.

3)CPA provides a basis for well-informed pricing decisions, bonus plans, and

discounts to customers. It shows how some customers cost more than the others and enables companies to have their prices reflect those differences.

4)CPA helps showing unprofitable customers despite their large purchases. This

may help in revising existing discounting structures to improve profitability. 4.BMW - CPA

The 6 segments of BMW’s existing customers could be analyzed by using historical purchasing data, and the activity-based analysis could be used to trace every resources consumed by every segment according to different activities the company need to perform.

The most profitable cars combine high prices with impressive sales volumes and long production term, meaning that the investment was returned and higher profits were made. BMW 3 series & 5 series are among the Top10 most profitable car models of the world since 1990.

?Series 3:Est. profits since 1995: $17 billion

The 3-series is BMW's best known, and best-selling, car. Again, the actual profit figure is higher than that of the Mercedes-Benz S-class, but Warburton ranks it lower because the money is spread across more model variants.

?Series 5: Est. profits since 1995: $24 billion

While the estimated profit figure here is bigger than that for the Mercedes-Benz S-class, Warburton ranked it lower because the dollars are spread out across more model variants. (The X5 is included because it shares much of its engineering with BMW's 5-series cars).

The number 5 has stood for unmistakable drivingpleasure in the upper mid-range segment foralmost 40 years. Over those past four decades, the5 Series has brought driving pleasure to more than5.5 million customers across five continents.This is the uniquecombination of aesthetics and driving pleasure, which winseach generation and each model version of the BMW 5 Seriesmore and more enthusiastic customers.

BMW should convert the unprofitable customer into profitable via increased revenue (Marketing issue)or via cost cutting (Finance/process issue).The information of customer segmentation is used across all areas of the business, from the design and development of the cars themselves, to the way BMW advertises its brands.

5.Limitations

Reporting customer profitability alone does not give actionable information. You also need to know which products they buy and which channels they use for servicing their account. There are two ways of achieving this:

?select a true, multi-dimensional ABC application that can handle multiple cost objects such as customer, product and channel in a single model

?work at the transactional level and calculate the individual profitability of every account, then produce consolidated reports by customer, product and channel Customer profitability reports should be used more as a guide to inform decision making rather than providing definitive criteria for selecting and deselecting customers. Customers are not naturally profitable - companies have to work at getting them there. That means developing an in-depth understanding of what makes a customer profitable. It also entails trying to change the behavior of the entire customer base so they consume fewer resources and costs. This requires measuring and tracking the cost of key business processes, understanding which are fixed and which variable –and implementing initiatives that encourage people to change their habits.