A modified Pareto/NBD approach for predicting customer lifetime value


Glady, N., Baesens, B. and Croux, C. (2007) A modified Pareto/NBD approach for predicting customer lifetime value. In, Statistics for Data Mining, Learning and Knowledge (IASC 07), Aveiro, PT, 30 Aug - 01 Sep 2007. Aveiro, PT, International Statistical Institute.

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Description/Abstract

Valuing customers is a central issue for any commercial activity. The customer lifetime value (CLV) is the discounted value of the future profits that this customer yields to the company. In order to compute the CLV, one needs to predict the future number of transactions a customer will make and the profit of these transactions. With the Pareto/NBD model, the future number of transactions of a customer can be predicted, and the CLV is then computed as a discounted product between this number and the expected profit per transaction. Usually, the number of transactions and the future profits per transaction are estimated separately. This study proposes an alternative. We show that the dependence between the number of transactions and their profitability can be used to increase the accuracy of the prediction of the CLV. This is illustrated with a new empirical case from the retail banking sector.

Item Type: Conference or Workshop Item (Paper)
Subjects: H Social Sciences > HA Statistics
H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions: University Structure - Pre August 2011 > School of Management
ePrint ID: 51708
Date Deposited: 01 Sep 2008
Last Modified: 27 Mar 2014 18:34
Publisher: International Statistical Institute
URI: http://eprints.soton.ac.uk/id/eprint/51708

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