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

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, Morrison, and Colombo (1987) is highly regarded. But 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 it 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