CIRJE-F-408 | ""Counting Your Customers" One by One: An Individual Level RF Analysis Based on Consumer Behavior Theory" |
Author Name | Abe, Makoto |
Date | March 2006 |
Full Paper | PDF file@ |
Remarks | Revised as CIRJE-F-537 (2008). |
Abstract |
In customer relationship management (CRM), ad hoc rules are often employed to
judge whether customers are active in a "non-contractual" setting. For example, a
customer is considered to have dropped out if he or she has not made purchase for over
three months. However, for customers with a long interpurchase time, this three-month
time frame would not apply. Hence, when assessing customer attrition, it is important to
account for customer heterogeneity. Although this issue was recognized by Schmittlein et
al. (1987), who proposed the Pareto/NBD "counting your customers" framework almost
20 years ago, today's marketing demands a more individual level analysis.
This research presents a proposed model that captures customer heterogeneity
through estimation of individual-specific parameters, while maintaining theoretically
sound assumptions of individual behavior in a Pareto/NBD model (a Poisson purchase
process and a memoryless dropout process). The model not only relaxes the assumption
of independence of the two behavioral processes, it also provides useful outputs for CRM,
such as a customer-specific lifetime and retention rate, which could not have been
obtained otherwise. Its predictive performance is compared against the benchmark
Pareto/NBD model. The model extension, as applied to scanner panel data, demonstrates
that recency-frequency (RF) data, in conjunction with customer behavior and
demographics, can provide important insights into direct marketing issues, such as
whether long-life customers spend more and are more profitable. |