November 15, 2021

CARB-VARB: Linking Buyer Value to Marketing Investment to Guide New Business Planning

Blueprints Commercialization Market Landscape

7 minute read

Understanding the value of a repeat buyer (VARB) and the cost to acquire a repeat buyer (CARB) within each potential buyer population is critical to accurately allocating marketing resources and generating sustainable returns when launching a new business. However, for both the Big Company and the Entrepreneur, this can be difficult to achieve.

The Big Company is usually successful at generating a top-down understanding, however they miss which buyers are generating the highest returns. And while the Entrepreneur is able to build a bottom-up understanding of target buyer-level contribution, their in-market learnings can prove inaccurate when applied to the population as a whole.

At Frehner-Jens, we combine the best of the research-driven Big Company and the agile Entrepreneur to generate greater marketing value by understanding the VARB and CARB for distinct target groups, which delivers important insights when turning an innovation into a new business.

What the Big Company and the Entrepreneur’s approach to marketing investment misses

Both the Big Company and the Entrepreneur have their strengths when it comes to allocating marketing resources. However, their inherent weaknesses can often contribute to the eventual failure of a new business launch.

The Big Company typically uses a standard profit and losses or cash flow-based net present value (NPV) to assess overall marketing investment in the context of the total investment, with a research-based forecast of total revenues generated by a total marketing spending. This allows the business to generate a fairly reliable forecast through data on purchase interest and product satisfaction, while also creating professional “cover” should the launch fail. However, this does not give a bottom-up understanding of which buyers are generating the highest returns. For the Big Company, this creates two potential problems:

Incorrect Targeting: Without buyer-level understanding, the Big Company targets the average buyer because they don’t have the insight into how to focus marketing investment on the buyers delivering the most return.
Over- or Under-Investing: This top-down approach may lead teams to over- or under-investing because the average return across all buyers is likely not accurate for each target segment.

The Entrepreneur, who is more focused on cash spent and sales/gross profits generated, focuses on building a bottom-up understanding of target buyer-level contribution. They assess marketing investment by comparing revenues from individual buyers with the investment to acquire those buyers based on in-market learnings. This information is used to project total business potential based upon the Entrepreneur’s judgement of the market size and their expected share of buyers, assuming each will have similar value and cost to acquire.

The Entrepreneur is focused on buyer-level returns because they need to urgently find profitable buyers to generate the cash needed to stay open. Although this approach ultimately gives the Entrepreneur the bottom-up insights needed to identify and focus marketing investment on profitable buyers that keeps them in business longer, it also can lead to:

Blindly scaling: The customers secured in-market may not be a representative sample of the target audience, meaning that the Entrepreneur’s value per buyer at scale is more of a “hope” than a validated fact. This can lead them to believing that all buyers in their target will be valuable enough to achieve growth goals, but they quickly learn the early buyer’s value is skewed higher, creating shortfalls at scale.
Over- or Under-Investing: Because they have no research on the size of their target market at scale, the Entrepreneur also can fall victim to over- or under-investment.

While the Entrepreneur gets great in-market data on the value of each customer, the in-market learning does not give them an accurate understanding of the total potential customers, and without that understanding, it’s difficult to invest the right amount.

By combining the buyer-level analysis of the cost to acquire a repeat buyer (CARB) and the value of a repeat buyer (VARB) with a market research-based understanding of the total market, Frehner-Jens is able to better design — and quantitatively validate — the best buyer groups to target and overall marketing investment to make.

How CARB-VARB combines the best of both approaches

We leverage the best of both the Big Company and Entrepreneur approaches to clearly define both the market-wide projections and the buyer-level value assessment to help design the best plan to focus investment in the most valuable marketing vehicles and determine the optimal investment to deliver better marketing ROI when launching a new business.

First, the team at Frehner-Jens starts with the Big Company’s research methodology that delivers a revenue forecast based on expected marketing spend. We then apply this research-based approach to build the Entrepreneur’s buyer-level view using a CARB-VARB analysis:

CARB= Total cost to acquire buyers divided by # of repeat buyers acquired.
VARB= Total value delivered by a repeat buyer over a certain time period less an attrition factor.

With the combination of these two analyses, we’re able to build a value-based landscape that segments the market based on value, which is more useful than segmenting on population alone. We then conduct a CARB-VARB analysis for each key target group, generating a research-based assessment of the total marketing ROI for each target group.

CARB-VARB in practice

Our client had a novel technology and was ready to enter a new market. They believed they had a great product that provided a superior solution to existing products, but were struggling to architect a plan that delivered their financial goals.

Initially, our client was using a traditional approach with market research-based revenue projections. Despite an above-average appeal and average repeat and buying rates, the projected NPV was negative. Marketing was getting the blame for not being able to deliver enough volume for their marketing investment.

The Entrepreneur would have launched regardless, realizing that the cost to acquire the average repeat buyer exceeded the projected five-year value of that buyer and proving what finance thought all along: Marketing was not delivering a positive return. However, they would have eventually found that some segments delivered very positive buyer-level returns, which would have led them to invest.

With Frehner-Jens, our client was able to understand this without having to unnecessarily waste their time and resources in market. We used research-based sizing to segment the population of potential target markets, and then used CARB-VARB to determine the cost to acquire versus the value of a repeat buyer. This enabled a discussion on the merits of targeting different segments while also delivering clearer insights into the details of the chosen segment(s).

Our approach creates plans that target the most valuable segments, delivering research-based revenue projections and marketing ROI before ever going to market. The result for our client? They were able to meet internal company requirements while also delivering a positive CARB-VARB.

Launching successful new business plans with Frehner-Jens

If you’re interested in understanding how CARB-VARB could guide your new business planning, contact us with your availability to connect.

CARB-VARB is a key component of the Fast-Forward® process, our proprietary methodology that brings together the strengths of the Big Company and Entrepreneur approaches to turning an innovation into a successful business by enabling a team to rapidly design and optimize multiple plans to determine the best plan, pre-market. Learn more about Fast-Forward®.

Key Points

Entrepreneurs have led the way in creating measurement tools for buyer-level contribution, specifically the Value of A Repeat Buyer (VARB) and the Cost to Acquire a Repeat Buyer (CARB), but struggle to project from the buyer-level contribution to the total potential market, oftentimes leading them to blindly scaling the business.
Big Company research tools are great for generating a top-down understanding of the total market potential, but struggle to deliver the clear understanding of the profitability of different individuals, limiting their ability to skew marketing to subsegments with the most profit potential.
Combining the two approaches enables teams to creates plans that target the most valuable segments, delivering research-based revenue projections and marketing ROI before ever going to market and ensuring the target buyers are sufficiently profitable to deliver a sustaining business.