Comparative analysis of selected probabilistic customer lifetime value models in online shopping

Abstract

The selection of a suitable customer lifetime value (CLV) model is a key issue for companies that are introducing a CLV managerial approach in their online B2C relationship stores. The online retail environment places CLV models on several specific assumptions, e.g. non-contractual relationship, continuous purchase anytime, variable-spending environment. The article focuses on empirical statistical analysis and predictive abilities of selected probabilistic CLV models that show very good results in an online retail environment compared to different model families. For comparison, eleven CLV models were selected. The comparison has been made to the online stores’ datasets from Central and Eastern Europe with annual revenues of hundreds of millions of euros and with almost 2.3 million customers. Probabilistic models have achieved overall good and consistent results on the majority of the studied transactional datasets, with BG/NBD and Pareto/NBD models that can be considered stable with significant lifts from the baseline Status quo model. Abe’s variant of Pareto/NBD have underperformed multiple criterions and would not be fully useful for the studied datasets without further improvements. In the end, the authors discuss the deployment implications of selected CLV models and propose further issues for future research to address.