Helping your ad agency client calculate the ROI of investing in a customer segmentation model can be a powerful way to demonstrate the value of your services. By breaking down the calculation of ROI into clear, quantifiable steps, you can show how data-driven strategies directly impact the bottom line. Let’s explore this concept in detail.
Defining Customer Segmentation
Customer segmentation is the practice of dividing a company’s prospective customers into distinct groups based on shared characteristics, behaviors, and preferences. This approach allows businesses to tailor their marketing efforts, product offerings, and customer experiences to specific segments, ultimately leading to more effective and efficient marketing strategies.
The ROI Formula
To calculate the return on investment (ROI) for customer segmentation, we use the following formula:
ROI = (Net Profit / Cost of Investment) * 100
This simple yet powerful equation helps quantify the financial impact of implementing a customer segmentation strategy.
Understanding the Formula
To fully grasp the ROI calculation, let’s break down its components:
Net Profit: Incremental Units Sold x Net Profit per Unit Sold
Cost of Investment: The cost of investing in the segmentation analysis
Breaking out the components of Net Profit further:
Incremental Units Sold: The number of additional products or services your client stands to sell as a result of the customer segmentation analysis, over the period of effectiveness.
Net Profit per Unit Sold: For every additional service or product sold, subtract your client’s cost of delivering that product or service (COGS) from the revenue your client will earn for that sale.
How a Customer Segmentation Model Returns a Positive ROI
Customer segmentation can increase the number of units your client sells while spending the same amount on future advertising efforts, since it directs them to target those individuals who are 2-3 times more likely to buy – and who spend, on average, 2-3 times as much once they do buy. That’s a potential 6-9x the lift in marketing return.
But let’s go super conservative and say that our segmentation model will just allow us to get 1.5 times the conversion value out of our campaigns.
Your client can apply their segmentation model for the next 3-5 years after delivery to all of their marketing and advertising activities. But let’s go conservative here, too, and say that model is useful for 3 years post-sale, for our example.
Example ROI Calculation
Suppose your client sells and installs custom showers for upscale homes. Let’s share some facts and make some assumptions so that we can perform a calculation.
Facts:
Average Shower Installation Sell Price: $5,000
Average Cost of Goods Sold per Installation: $3,000
Net Profit per Unit Sold: $2,000
Cost of Investment in Segmentation: $10,000
Assumptions:
Projected Units Sold Next 3 Years, Without the Model: 200
Projected Units Sold Next 3 Years, with the Model: 300
Incremental Units Sold with the Model: 100
ROI Calculation:
Net Profit: (100 incremental units sold * $2,000 net profit per unit sold): $200,000
Cost of Investment in Model: $10,000
Drumroll Please. . .
ROI Calculation for Your Client: $200,000 / $10,000 = 2,000% (or 20 times return on investment)
This result means that by investing in the customer segmentation model, your client can reasonably stand to get a 20x return on their investment through additional sales.
By presenting this clear, data-driven analysis to your clients, you can effectively demonstrate the tangible benefits of customer segmentation. This approach not only justifies the investment in your agency’s services but also provides a roadmap for measuring success over time. Remember, while the example uses conservative estimates, the potential for even greater returns exists, making customer segmentation a powerful tool in any marketer’s arsenal.
