JSM 2005 - Toronto

Abstract #302483

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Legend: = Applied Session, = Theme Session, = Presenter
Activity Number: 175
Type: Invited
Date/Time: Monday, August 8, 2005 : 2:00 PM to 3:50 PM
Sponsor: Section on Statistics and Marketing
Abstract - #302483
Title: RFM and CLV: Using Iso-value Curves for Customer-base Analysis
Author(s): Peter Fader*+ and Bruce Hardie and Ka Lok Lee
Companies: University of Pennsylvania and London Business School and Catalina Marketing
Address: 3730 Walnut Street, Philadelphia, PA, 19104, United States
Keywords: customer lifetime value ; RFM
Abstract:

In this paper, we present a new model that links the well-known RFM (recency, frequency, monetary value) paradigm with customer lifetime value (CLV). While previous researchers have connected the two conceptually, none has presented a formal model that requires nothing more than RFM inputs to make specific lifetime value projections for a set of customers. Key to this analysis is the notion of "iso-value" curves, which make it easy to visualize and summarize the main interactions and tradeoffs among the RFM measures and CLV. Our stochastic model, featuring a Pareto/NBD framework to capture the flow of transactions over time and a gamma-gamma submodel for dollars per transaction, reveals a number of subtle but important nonlinear associations that would be missed by relying on observed data alone. We conduct a number of holdout tests to demonstrate the validity of the model's underlying components, then focus on our iso-value analysis to estimate the net present value for a group of customers of the online music site CDNOW. Finally, we summarize a number of substantive insights and point out a set of broader issues and opportunities in applying such a model in actual practice.

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Revised March 2005