ScholarlyCommons

Title

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

Author(s)

Peter S. Fader, University of Pennsylvania
Bruce G. S Hardie
Ka Lok Lee

Document Type

Journal Article

Date of this Version

5-2005

Publication Source

Marketing Science

Volume

24

Issue

2

Start Page

275

Last Page

284

DOI

10.1287/mksc.1040.0098

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.

Copyright/Permission Statement

Originally published in Marketing Science © 2005 INFORMS

This is a pre-publication version. The final version is available at http://dx.doi.org/10.1287/mksc.1040.0098

Keywords

customer base analysis, repeat buying, Pareto/NBD, probability models, forecasting, lifetime value

Recommended Citation

Fader, P. S., Hardie, B. G., & Lee, K. (2005). "Counting Your Customers" the Easy Way: An Alternative to the Pareto/NBD Model. Marketing Science, 24 (2), 275-284. http://dx.doi.org/10.1287/mksc.1040.0098