From Budget Allocation to Customer Value: A Strategic Guide to CLV and CAC in Marketing

Companies use a variety of methods to strategically manage and operationally optimize their marketing budgets and campaigns. These methods reflect the diversity of business models, varying levels of maturity, and complexity of control. Below, we present the most common control methods and shed light on their specific application areas and associated challenges:

• Budget Control: The goal is to optimally allocate the planned marketing budget. This method is often used in less experienced marketing organizations with soft goals and a small number of control KPIs.
• CPO / CPL Control: Focuses on generating a specific number of orders (Cost-per-Order) or leads (Cost-per-Lead) at target costs with the planned marketing budget. Often used in arbitrage business models such as price search engines, affiliate marketing, or 1-off models that do not or can only measure sustainable customer relationships to a limited extent.
• KNR / ROAS Control: The goal is to achieve a cost-demand ratio (KNR) / or Return on Ad Spend (ROAS) at variable transaction amounts with the planned marketing budget. Returns, cancellations, or the status of the customer relationship are not taken into account in operational control. This is common in e-commerce models or SaaS (Software-as-a-Service), which either have no significant challenges with returns or cannot reflect the status of the customer relationship in their marketing control.
• KUR Control: Intends to generate a cost-revenue ratio with the planned marketing budget, taking into account returns, cancellations, and unrealized sales in operational control. This method is common in e-commerce, which must deal with high return rates, but cannot reflect the status of the customer relationship in their marketing control.
• CLV Revenue Control: Focuses on the total revenue a customer generates over time, without considering the costs incurred in generating this revenue. This perspective is useful for assessing the growth potential of customer relationships, but neglects profitability.
• CLV DB II Control: In contrast, control based on the CLV contribution margin II takes both the revenue and the direct costs associated with servicing the customer into consideration. This method provides a deeper insight into the actual profitability of a customer by considering the contribution margin – the difference between the revenue generated and the variable costs – over the entire customer relationship. Frequently used by advanced retail brands, product brands, SaaS, as well as dominant market leaders.

These control methods represent a spectrum ranging from relatively simple approaches to complex, advanced strategies. The transition from simple budget control to sophisticated CLV DB II control reflects the increasing maturity and complexity in marketing control. In this blog post, we focus on the last two models – CLV Revenue Control and CLV DB II Control – and illuminate the differences and implications for companies striving for a deeper and more profitable customer relationship strategy.

While the first four control models are primarily budget-, transaction-oriented, and short-term, CLV control represents a paradigm shift by focusing on the entire customer relationship and accordingly the organization of marketing. This type of control enables companies to gain deep insights into their customers, significantly increase profitability, and precisely optimize their marketing activities. By focusing on the total value a customer generates over the course of their relationship with the company, CLV control opens up the opportunity to fully exploit the potential of each customer relationship. This makes it an indispensable strategy that every future-oriented company should integrate into its marketing repertoire.

CLV Revenue Control vs. CLV DB II Control: The Key to Comprehensive Customer Value Strategies

The fundamental difference between CLV Revenue Control and CLV DB II Control lies in their respective focus and approach to evaluating the customer relationship. While both models emphasize the long-term relationship with customers and put their lifetime value at the center, they differ significantly in how this value is calculated and optimized.

CLV Revenue Control:

• Focus: This method focuses on the total revenue a customer generates over the entire duration of their relationship with the company. The costs of acquiring, servicing, and retaining the customer are often not directly considered in this view.
• Advantage: Ideal for assessing the growth potential and maximum sales opportunities a customer can offer. This helps companies justify investments in marketing and customer relationship management.
• Application Area: Especially useful in business models where long-term customer retention and the expansion of customer relationships are paramount.

CLV DB II Control:

• Focus: In contrast, CLV DB II Control takes into account not only the revenue but also the direct costs associated with servicing the customer. This includes costs for product deployment, distribution, service, vouchers, print incentives, branding, reactivation, incentivization, and any specific customer acquisition costs.
• Advantage: Provides a deeper insight into the actual profitability of a customer by considering the contribution margin – the difference between the revenue generated and the variable costs – over the entire customer relationship. This allows for more precise control and optimization of marketing expenses.
• Application Area: Particularly valuable for companies that need a differentiated view of their customer profitability and want to maximize the efficiency of their marketing investments. This is especially true in sectors with high variable costs or where customer acquisition costs and customer values can vary significantly within segments, such as B2C / B2B Commerce / Retail, SaaS, and Banking.

The choice between CLV Revenue Control and CLV DB II Control ultimately depends on the specific goals and conditions of a company. While revenue control provides a broad overview of a customer's revenue potential, contribution margin control provides more precise insights into profitability, thereby enabling more effective resource allocation.

Unit Economics in Focus: The Proper Handling of CLV and CAC

In the fiercely competitive race for customers, understanding and properly applying Customer Lifetime Value (CLV) and Customer Acquisition Costs (CAC) is crucial to a company's success. Although some organizations have already implemented a CLV model, it often happens that the calculations are not done correctly, which can lead to faulty strategic decisions.

The True Value of CLV: The CLV represents the accumulated value in Euros, which is calculated from the contribution margin II, discounted with an appropriate discount factor. It reflects the money a company earns before a customer churns. This value is essential to measure and optimize the long-term success of customer relationships.

Measurement of Customer Acquisition Costs (CAC): CAC (Customer-Acquisition-Costs) quantifies how much a company spends to acquire a new customer. The standard method for calculating CAC is to divide the total amount spent on customer acquisition/advertising in a given period, such as a month, by the number of new customers in that period. This metric is essential to evaluate the efficiency of marketing activities in periods and to determine how much can be spent on customer acquisition and retention.

Two crucial relationships between CLV and CAC:

1. The CLV:CAC Ratio: This ratio provides insight into the contribution customers make in relation to acquisition costs. A ratio of 4:1, for example, means that for every Euro invested in customer acquisition, 4 Euros are earned. This ratio is an indicator of the health of the business model and varies by industry.
2. The Difference between CLV and CAC: This metric shows the net profit a customer generates for the company. It is a critical indicator of the effectiveness of marketing activities. For example, a difference of 150 Euros (with a CAC of 50 Euros and an average CLV of 200 Euros) suggests that each customer contributes a net 150 Euros. This can provide insight into whether a company is operating efficiently, losing momentum, or possibly investing too much in customer acquisition.

The parallel analysis of CAC and CLV provides the most valuable insights into a company's business model. A high CAC or CLV viewed in isolation offers little meaningful information without the context of the other. By comparing both metrics, companies can make informed strategic and operational decisions that ensure long-term growth and profitability.

In addition, the CLV:CAC ratio provides a valuable benchmark to compare one's own performance with that of competitors and other industries, which is invaluable for the strategic direction and optimization of marketing investments.

Insightful Insights through CLV DB II Control: Answers to Key Business Questions

Implementing control based on the Customer Lifetime Value (CLV) DB II provides companies with a solid foundation to answer essential questions regarding their customer acquisition and retention. This strategic perspective not only enables precise calibration of new customer acquisition expenses per marketing channel but also accurate forecasting of future revenues per marketing channel and long-term profitability enhancement. Through the focused consideration of Contribution Margin II (DB II), companies can address key questions, such as:

1. Optimization of Acquisition Costs: How much realistically can and should be spent on acquiring a new customer in each marketing channel to ensure a positive ROI?
2. Forecast of Future Revenues: What revenue and DB II can be expected from a customer over the course of their relationship with the company, and how does this impact long-term business planning?
3. Efficiency Improvement in New Customer Acquisition: How can the acquisition costs for new customers be optimized to maximize the contribution margin II?
4. Investment in Customer Retention: How much budget should be allocated for retention measures to strengthen customer loyalty and increase CLV?
5. Adapting to Changes in the Business Model: How does a significant change or expansion in the business model affect the contribution margin II?
6. Segmentation and Target Group Optimization: How can the contribution margin II be expanded and optimized for specific customer segments to increase overall profitability?
7. Questioning Marketing Campaigns: Which marketing channels, campaigns, and actions do not lead to incremental and recurring DB II?

By answering these questions using CLV DB II control, companies can not only refine their marketing and sales strategies but also develop a deeper understanding of the value creation through their customer relationships. These insights are crucial to promote sustainable growth, secure long-term business success, and develop profound experiments for innovation in the business model.

In the next blog post, we will deal with the most common mistakes companies make when analyzing CLV and CAC, explain the correct calculation of CLV, highlight the importance of cohort analyses and segments, and examine the calculation of the payback period. These topics are crucial to understand the nuances of customer value optimization and secure a company's financial robustness from customer relationships.

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