A Modified Pareto/NBD Approach for Predicting Customer Lifetime Value

Posted: 20 Nov 2007

See all articles by Nicolas Glady

Nicolas Glady

KU Leuven - Faculty of Business and Economics (FEB)

Bart Baesens

KU Leuven - Faculty of Business and Economics (FEB)

Christophe Croux

KU Leuven - Faculty of Business and Economics (FEB)

Date Written: 2007

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.

Keywords: Customer lifetime value, Value, Yield, Companies, Order, Model, Product, Expected

Suggested Citation

Glady, Nicolas and Baesens, Bart and Croux, Christophe, A Modified Pareto/NBD Approach for Predicting Customer Lifetime Value (2007). Available at SSRN: https://ssrn.com/abstract=1031349

Nicolas Glady (Contact Author)

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Bart Baesens

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Christophe Croux

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

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