“Counting Your Customers” the Easy Way: An Alternative to the Pareto/NBD Model
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.
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The majority of early studies on churn were conducted from a management perspective, especially CRM.
“The majority of the early studies on churn were conducted from a management perspective, especially CRM (Customer Relation Management) [30] [31].”
From A Survey on Churn Analysis in Various Business Domains (2020) · cites this paper as [30]
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- Authors
- Fader, P. S., Hardie, B. G. S., & Lee, K. L.
- Affiliations
- University of Pennsylvania (US)
- London Business School (GB)
- Catalina Health Resource, Blue Bell, Pennsylvania 19422
- Venue
- Marketing Science
- Published
- 2005-05
- Volume
- 24
- Issue
- 2
- Pages
- 275-284
- ISSN
- 0732-2399 (ISSN-L)
- 1526-548X
- OpenAlex
- W2107581815
- Semantic Scholar
- eabacb3527277465831c12742a779304bdfd5fa4
- Cited by
- 450
- References
- 21
- Citations by year
- 2026: 19 · 2025: 24 · 2024: 19 · 2023: 21 · 2022: 33 · 2021: 23 · 2020: 26 · 2019: 21 · 2018: 15 · 2017: 21 · 2016: 19 · 2015: 26 · 2014: 28 · 2013: 28 · 2012: 13
- FWCI
- 64.91
- Type
- journal article
- Language
- en
- Open access
- closed
- Locations
- Marketing Science (publishedVersion)
- Funders
- Economic and Social Research Council
- Topics
- Social Sciences › Business, Management and Accounting › Marketing › Customer churn and segmentation
- Social Sciences › Business, Management and Accounting › Marketing › Consumer Market Behavior and Pricing
- Physical Sciences › Mathematics › Statistics and Probability › Statistical Distribution Estimation and Applications
- Keywords
- Pareto/NBD model, customer purchase patterns, customer lifetime value, parameter estimation, computational simplicity, count data models
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