It is based on the direct question which is asked to the random customers: How likely is it that you would recommend our company/product/service to a friend or colleague? The scoring for this answer is most often based on a 0 to 10 scale.
•Promoters are those who respond with a score of 9 or 10 and are considered loyal enthusiasts.
•Detractors are those who respond with a score of 0 to 6 - unhappy customers.
•Scores of 7 and 8 are ignored.
•NPS is calculated by subtracting the percentage of customers who are Detractors from the percentage of customers who are Promoters. Calculation example is represented below.
CLV
Customer lifetime value (CLV) is a metric that allows managers to understand the overall value of their customer base and to evaluate how well their management strategies are working.
A customer’s lifetime value is dependent on three different factors:
1. The cost to acquire the customer. Customer acquisition is generally done through marketing programs such as advertising and/or sales promotions.
2. The annual profits the customer generates for the firm.
Profits depend on both the amount of revenue the customer delivers to the firm and the variable costs incurred by the firm in serving the customer.
In CLV analysis, contribution margin (revenue-variable cost) is the correct profit measure to use.
In many marketing cases, variable costs are not known, but the cost of goods sold (COGS) is, then use gross margin (Revenues – COGS) as your annual profit number.
3. The number of years the customer is likely to purchase from the firm.
Some customers are highly brand loyal and, once acquired, will continue to buy from the firm for many years.
Other customers are less brand loyal and will buy from the firm for only a short period of time.
The Basic Customer Lifetime Value Formula CLV = m* L - AC where m is the contribution margin generated from a customer in a year (or another time period), L is the expected purchasing life of a customer (measured in years if the annual contribution margin is being used), and AC is the up-front cost of acquiring a customer.
Below you can find an example of calculation of both metrics.
Example:
Facts about the awareness of “Antaram”
To find out the level of awareness of “Antaram” we conducted an online survey. 200 people answered the questions if they are familiar with Antaram, have they ever tried it. It turned out that only 20% knows Antaram, which is bad for a company that exists so many years and only 5% of respondents have ever tried it.
Likelihood of recommending
To disclose consumers’ attitude towards Antaram's product we conducted another survey within a consumer sample of 48 people. We tried to collect objective data, so the people were chosen randomly. Samples more than 30 behave under central limit theorem and can provide an approximate information about research. After data collection we calculated Net promotion score, which is illustrated below:
Not at all likely (Detractors) - 25% = 12
Passives - 8, 33% = 4
Promoters - 66, 6% = 32
Net promotion score = Promoters (%) - Detractors (%) = 66,6% - 25% = 41.6%
Usually, when this score is higher than 50%, it is considered as excellent, but we can see that in our case it is lower. 41, 6% is a good value, but it is apparent that the company has work to do with this. Due to Fred Reichheld's loyalty theorem, 5% increase in NPS will cause an increase in profit from 25% to 95%. It is obvious that this can be an opportunity for Antaram. We also asked detractors and promoters their opinion and cause of their attitude. Most of the detractors were unsatisfied with the quality of teas with pockets. And Promoters were mostly satisfied with the medical effect of teas.
CLV: To anticipate how much money the company can spend on marketing purposes, we decided to calculate customer lifetime value for Antaram's average product.
CLV = GG x
d= 6,5 - Information from RA central bank
GG = 550*20%*10 = 1100 where 550 is the average price for product, 20% is the profit margin, 10 is the average quantity of used boxes of tea.
To calculate retention rate, we can fairly assume that it is highly probable that promoters and passive ones will return to buy Antaram's product but detractors will not.
So r = 36/48*100= 75% = 0.75.
Now we can calculate CLV which is:
CLV= 1100x = 2620 AMD
We can conclude that the company can spend on acquisition of one customer not more than 2620 drams.
