Benefits of Quantile Regression for the Analysis of Customer Lifetime Value in a Contractual Setting: An Application in Financial Services
AbstractThe move towards a customer-centred approach to marketing, coupled with the increasing availability of customer transaction data, has led to an interest in understanding and estimating customer lifetime value (CLV). Several authors point out that, when evaluating customer profitability, profitable customers are rare compared to the unprofitable ones. In spite of this, most authors fail to recognize the implications of these skewed distributions on the performance of models they use. In this study, we propose analyzing CLV by means of Quantile Regression. In a financial services application, we show that this technique provides management more in-depth insights into the effects of the covariates that are missed with Linear Regression. Moreover, we show that in the common situation where interest is in a top-customer segment, Quantile Regression outperforms Linear Regression. The method also has the ability of constructing prediction intervals. Combining the CLV point estimate with the prediction intervals leads to a new segmentation scheme that is the first to account for uncertainty in the predictions. This segmentation is ideally suited for managing the portfolio of customers.
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Bibliographic InfoPaper provided by Ghent University, Faculty of Economics and Business Administration in its series Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium with number 09/551.
Length: 34 pages
Date of creation: Jan 2009
Date of revision:
customer relationship management (CRM); database marketing; customer segmentation; quantile regression; prediction interval; customer lifetime value;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-05 (All new papers)
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