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“Counting Your Customers” the Easy Way: An Alternative to the Pareto/NBD Model

Author

Listed:
  • Peter S. Fader

    (The Wharton School, University of Pennsylvania, 749 Huntsman Hall, 3730 Walnut Street, Philadelphia, Pennsylvania 19104-6340)

  • Bruce G. S. Hardie

    (London Business School, Regent’s Park, London NW1 4SA, United Kingdom)

  • Ka Lok Lee

    (Catalina Health Resource, Blue Bell, Pennsylvania 19422)

Abstract

Today’s managers are very interested in predicting the future purchasing patterns of their customers, which can then serve as an input into “lifetime value” calculations. Among the models that provide such capabilities, the Pareto/NBD “counting your customers” framework proposed by Schmittlein et al. (1987) is highly regarded. However, despite the respect it has earned, it has proven to be a difficult model to implement, particularly because of computational challenges associated with parameter estimation. We develop a new model, the beta-geometric/NBD (BG/NBD), which represents a slight variation in the behavioral “story” associated with the Pareto/NBD but is vastly easier to implement. We show, for instance, how its parameters can be obtained quite easily in Microsoft Excel. The two models yield very similar results in a wide variety of purchasing environments, leading us to suggest that the BG/NBD could be viewed as an attractive alternative to the Pareto/NBD in most applications.

Suggested Citation

  • Peter S. Fader & Bruce G. S. Hardie & Ka Lok Lee, 2005. "“Counting Your Customers” the Easy Way: An Alternative to the Pareto/NBD Model," Marketing Science, INFORMS, vol. 24(2), pages 275-284, August.
    • Handle: RePEc:inm:ormksc:v:24:y:2005:i:2:p:275-284
    DOI: 10.1287/mksc.1040.0098
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    References listed on IDEAS

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