"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

See all articles by Evsen Korkmaz

Evsen Korkmaz

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management

R. Kuik

Erasmus Research Institute of Management (ERIM)

D. Fok

Econometric Institute - Erasmus University Rotterdam; Erasmus Research Institute of Management (ERIM); Tinbergen Institute Rotterdam

Date Written: January 8, 2013

Abstract

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

Suggested Citation

Korkmaz, Evsen and Kuik, R. and Fok, Dennis, "Counting Your Customers": When Will They Buy Next? An Empirical Validation of Probabilistic Customer Base Analysis Models Based on Purchase Timing (January 8, 2013). ERIM Report Series Reference No. ERS-2013-001-LIS. Available at SSRN: https://ssrn.com/abstract=2198260

Evsen Korkmaz (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Technology and Operations Management ( email )

RSM Erasmus University
PO Box 1738
3000 DR Rotterdam
Netherlands

R. Kuik

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Dennis Fok

Econometric Institute - Erasmus University Rotterdam ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1333 (Phone)
+31 10 408 9162 (Fax)

Tinbergen Institute Rotterdam ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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