Applications of Monte Carlo Simulation in marketing analytics

Abstract

Monte Carlo Simulation (MCS), originally developed in the 1940s for use in nuclear weapons design, is playing an increasing role in commercial applications, including marketing and Customer Relationship Management (CRM). It provides an efficient way to simulate processes involving chance and uncertainty and can be applied in areas as diverse as market sizing, customer lifetime value measurement and customer service management. This paper examines the history of MCS and presents an illustrative example to explain the basic principles of the technique. Three case studies from marketing and CRM, which underline the importance of MCS to marketing analytics, are described. Some key issues, including the drawbacks and pitfalls of MCS, are covered. The paper also considers the future, with MCS applied in the digital world, and concludes with a review of relevant software tools. © 2011 MacMillan Publishers Ltd.