A modified Pareto/NBD approach for predicting customer lifetime value
A modified Pareto/NBD approach for predicting customer lifetime value
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.
Glady, N.
d4210592-9810-47c7-9fca-bfaf290ed425
Baesens, B.
f7c6496b-aa7f-4026-8616-ca61d9e216f0
Croux, C.
3e8e72a3-1592-4e8d-a99f-89b7cb9e3878
2007
Glady, N.
d4210592-9810-47c7-9fca-bfaf290ed425
Baesens, B.
f7c6496b-aa7f-4026-8616-ca61d9e216f0
Croux, C.
3e8e72a3-1592-4e8d-a99f-89b7cb9e3878
Glady, N., Baesens, B. and Croux, C.
(2007)
A modified Pareto/NBD approach for predicting customer lifetime value.
Statistics for Data Mining, Learning and Knowledge (IASC 07), Aveiro, Portugal.
29 - 31 Aug 2007.
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Conference or Workshop Item
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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.
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Published date: 2007
Venue - Dates:
Statistics for Data Mining, Learning and Knowledge (IASC 07), Aveiro, Portugal, 2007-08-29 - 2007-08-31
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Local EPrints ID: 51708
URI: http://eprints.soton.ac.uk/id/eprint/51708
PURE UUID: 8d46647d-34f9-436d-aad7-c3e28d8e71e0
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Date deposited: 01 Sep 2008
Last modified: 12 Dec 2021 03:27
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Author:
N. Glady
Author:
C. Croux
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