Marketing Science · 2005 · 454 citations · 18 references
Marketing AnalyticsCustomer SatisfactionCustomer ProfilingPareto/nbd “Consumer ResearchBusiness AnalyticsDecision AnalyticsMicrosoft ExcelDifficult ModelManagementConsumer BehaviorCustomer Relationship ManagementStatisticsQuantitative ManagementPreference ModelingCustomer ProfitabilityPredictive Analytics“ CountingMarketingProduct ForecastingCustomer Journey AnalysisFinancial AnalyticsPareto/nbd ModelBusinessEasy WayData-driven Decision-making
Managers increasingly seek to forecast customers’ future purchasing patterns for lifetime‑value calculations, and while the Pareto/NBD framework is respected, its computational complexity hampers practical implementation. This study introduces the beta‑geometric/NBD (BG/NBD) model, a slight behavioral variation of Pareto/NBD that is designed to be far easier to implement. The authors demonstrate that BG/NBD parameters can be derived straightforwardly using Microsoft Excel. Across diverse purchasing environments, BG/NBD produces results comparable to Pareto/NBD, suggesting it is a viable alternative for most applications.
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.
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