"Counting Your Customers": When Will They Buy Next? An Empirical Validation of Probabilistic Customer Base Analysis Models Based on Purchase Timing
49 Pages Posted: 9 Jan 2013
Date Written: January 8, 2013
This research provides a new way to validate and compare buy-till-you-defect [BTYD] models. These models specify a customer’s transaction and defection processes in a non-contractual setting. They are typically used to identify active customers in a com- pany’s customer base and to predict the number of purchases. Surprisingly, the literature shows that models with quite different assumptions tend to have a similar predictive performance.We show that BTYD models can also be used to predict the timing of the next purchase. Such predictions are managerially relevant as they enable managers to choose appropriate promotion strategies to improve revenues. Moreover, the predictive performance on the purchase timing can be more informative on the relative quality of BTYD models.For each of the established models, we discuss the prediction of the purchase timing. Next, we compare these models across three datasets on the predictive performance on the purchase timing as well as purchase frequency.We show that while the Pareto/NBD and its Hierarchical Bayes extension [HB] models perform the best in predicting transaction frequency, the PDO and HB models predict transaction timing more accurately. Furthermore, we find that differences in a model’s predictive performance across datasets can be explained by the correlation between behavioral parameters and the proportion of customers without repeat purchases.
Keywords: purchase timing, Bayesian estimation, probability models, Buy-till-you-defect models, customer base analysis
JEL Classification: M11, M11, M11, M11, M11, M11, M11, M11, C41, C11
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