A Simple Method For Estimating The ROI Of Funnel Segmentation

Segmentation Is About Revenue

Not all your leads are made the same. They vary in their interests, preferences, and expectations. They access your messages from different devices and through different channels.

It is no wonder that the same message often elicits different responses from different prospects. This is both a challenge and an opportunity.

A challenge, because you can't use a one-size-fits-all approach. You have to spend time and effort on tailoring your acquisition tactics to the needs of individual prospects.

It is an opportunity, and a big one, because if every prospect gets a message that's right for them at each stage of the marketing funnel, then there will be more responses in total—and more revenue. That's why funnel segmentation is such a key marketing technique.

Two Common Mistakes

Some businesses still choose to ignore segmentation. They say they don’t want additional complexity. They say it’s a gamble they can’t afford. The truth of the matter is that they're missing out on an opportunity to grow revenue and improve the buying experience of their prospects.

Others, on the contrary, dive into segmentation without estimating its value for their business. They’ve heard it’s trendy to segment the funnel. It’s on their ‘best practices’ checklist. It’s something they will report to the leadership to show that steps have been taken to transition to a more innovative marketing. Their mistake, however, is to fail to justify a segementation effort from the profit standpoint.

In this post, we will give you the tools for estimating the return on a segmentation investment in a few steps. You will learn how to use your marketing metrics to make an informed business decision.

Step 1: Find an opportunity for segmentation

Not every marketing situation calls for segmentation. If different lead segments all respond best to the same message, then there is nothing to be gained from segmentation: one could use one message for all the leads in the pool. Segmentation makes sense only if the message (or its presentation) to which different segments respond best varies from one segment to another.

And by a ‘segment,’ I don’t just mean leads of a certain size and industry type (for B2B marketing) or age and other demographics (for B2C marketing). All sorts of lead attributes could enter the definition of a segment, including and especially the lead's previous interactions with your marketing. And, of course, there must be a reliable way to determine whether a given prospect belongs to one or the other segment: you cannot build a segmented funnel otherwise.

Once you have found a response differentiation among different lead segments, you should evaluate how much your business would gain from tailoring your marketing to these segments.

Step 2: Quantify the hike in conversion

To calculate how much your conversion rate would grow after segmentation, you must look at your retrospective data that tracks the impact of different messages on conversion.

Let me illustrate this procedure with an idealized example. Suppose that there are only two types of prospects, Red and Blue, and only two types of marketing tactics, A and B. Retrospective data shows that marketing tactic A converts 20% of Blue prospects and 60% of Red prospects, while tactic B converts 60% of Blue prospects and only 20% of Red prospects.

Fig. 1: Marketing tactic A is more effective at converting 'Blue' prospects, while tactic B is more effective at converting 'Red' prospects.

In this case, segmenting the funnel would increase the funnel’s overall rate of conversion. There is an opportunity here to capture additional converts by delivering distinct messages to each audience segment.

If you have this sort of data, then you can also quantify the hike in conversion produced by segmentation. Let’s assume for the sake of simplicity that your pool of prospects is divided equally between Red and Blue prospects. Without segmentation, one half of your prospects would convert at 20% and the other half would convert at 60%. (Notice that this is true no matter whether you choose A or B as your default tactic.)

Without segmentation, the overall conversation rate is at 40%, which is just the average of 20% and 60%. Yet with conversion, both Blue and Red prospects are converted at the rate of 60%, so that the overall rate of conversion is also 60%. The hike in conversion generated by segmentation is: 60% - 40% = 20%.

Fig. 2: When the 'Red' and 'Blue' segments receive different messages, tailored to their distinct preferences, the result is a hike in the overall conversion rate.

Step 3: Estimate the hike in revenue

By itself, a hike in conversion does not imply that segmentation is worth the investment. We must also estimate how much revenue this hike would add to the bottom line.

The additional revenue generated by segmentation equals the number of additional conversions multiplied by the dollar value of each conversion. In other words:

Revenue-Hike = Conversion-Hike x Number-of-Leads x Revenue-per-Lead

For every 1000 prospects, our segmentation program would increase the number of converts by 200: from 400 to 600. Suppose that each convert is worth $100. Then, for every 1000 prospects, the segmentation effort would increase the revenue by $20,000.

Step 4: Consider the costs

Next, you need to assess the costs of your segmentation program. Let’s assume that segmentation would add $10,000 to the cost of processing 1000 prospects through your funnel. Then an investment of $10,000 would generate $20,000 in return, or 100%.

The real costs of segmentation can vary dramatically. If your program is automated, then after an initial setup it would require only marginal maintenance. But if your program requires ongoing human attention, then a segmented funnel may end up costing you quite a bit. This is something to consider in advance.

Segmentation For Small Businesses

Even to a small business, segmentation offers an opportunity for real growth. If you evaluate your segmentation efforts in terms of ROI, even if your evaluation is only an approximation, you will be able to make an informed decision about how and when to segment your funnel. As you grow your business, add a diversity of products to your line, and expand your target audience, segmentation will become more and more important, and more and more profitable.

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