Can we predict customer lifetime value?

Edward C. Malthouse*, Robert C. Blattberg

*Corresponding author for this work

Research output: Contribution to journalArticle

119 Scopus citations

Abstract

Relationship marketing assumes that firms can be more profitable if they identify the most profitable customers and invest disproportionate marketing resources in them. While intuitive, such strategies presume that a firm can accurately predict the future profitability of customers. In particular, we argue that the feasibility of such strategies depends on the probabilities and costs of misclassifying customers. This paper presents a detailed empirical evaluation of how accurately the future profitability of customers can be estimated We evaluate a firm's ability to estimate the future value of customers using four data sets from different industries. Out-of-sample estimates of predictive accuracy are provided. We examine (1) the accuracy of predictions, (2) how accuracy depends on the length of time over which estimates are made, and (3) the predictors of the firm's best customers. We propose the 20-55 and 80-15 rules. Of the top 20%, approximately 55% will be misclassified (and not receive special treatment). Of the future bottom 80%,approximately 15% will be misclassified (and receive special treatment). Thus, a firm cannot assume that high-profit customers in the past will be profitable in the future nor can they assume that historically low-profit will be low-profit customers in the future.

Original languageEnglish (US)
Pages (from-to)2-16
Number of pages15
JournalJournal of Interactive Marketing
Volume19
Issue number1
DOIs
StatePublished - Jan 1 2005

ASJC Scopus subject areas

  • Business and International Management
  • Marketing

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