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“Counting Your Customers” One by One: A Hierarchical Bayes Extension to the Pareto/NBD Model

  • Makoto Abe

    ()

    (Graduate School of Economics, The University of Tokyo, Bunkyo-ku, Tokyo 113-0033, Japan)

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    This research extends a Pareto/NBD model of customer-base analysis using a hierarchical Bayesian (HB) framework to suit today's customized marketing. The proposed HB model presumes three tried and tested assumptions of Pareto/NBD models: (1) a Poisson purchase process, (2) a memoryless dropout process (i.e., constant hazard rate), and (3) heterogeneity across customers, while relaxing the independence assumption of the purchase and dropout rates and incorporating customer characteristics as covariates. The model also provides useful output for CRM, such as a customer-specific lifetime and survival rate, as by-products of the MCMC estimation. Using three different types of databases—music CD for e-commerce, FSP data for a department store and a music CD chain, the HB model is compared against the benchmark Pareto/NBD model. The study demonstrates that recency-frequency data, in conjunction with customer behavior and characteristics, can provide important insights into direct marketing issues, such as the demographic profile of best customers and whether long-life customers spend more.

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    File URL: http://dx.doi.org/10.1287/mksc.1090.0502
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    Article provided by INFORMS in its journal Marketing Science.

    Volume (Year): 28 (2009)
    Issue (Month): 3 (05-06)
    Pages: 541-553

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    Handle: RePEc:inm:ormksc:v:28:y:2009:i:3:p:541-553
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    1. 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.
    2. David C. Schmittlein & Donald G. Morrison & Richard Colombo, 1987. "Counting Your Customers: Who-Are They and What Will They Do Next?," Management Science, INFORMS, vol. 33(1), pages 1-24, January.
    3. Füsun F. Gönül & Frenkel Ter Hofstede, 2006. "How to Compute Optimal Catalog Mailing Decisions," Marketing Science, INFORMS, vol. 25(1), pages 65-74, 01-02.
    4. Baohong Sun, 2006. "—Technology Innovation and Implications for Customer Relationship Management," Marketing Science, INFORMS, vol. 25(6), pages 594-597, 11-12.
    5. Roland T. Rust & Tuck Siong Chung, 2006. "Marketing Models of Service and Relationships," Marketing Science, INFORMS, vol. 25(6), pages 560-580, 11-12.
    6. David C. Schmittlein & Robert A. Peterson, 1994. "Customer Base Analysis: An Industrial Purchase Process Application," Marketing Science, INFORMS, vol. 13(1), pages 41-67.
    7. Young-Hoon Park & Peter S. Fader, 2004. "Modeling Browsing Behavior at Multiple Websites," Marketing Science, INFORMS, vol. 23(3), pages 280-303, May.
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