Title: Modelling customer lifetime value in contractual settings

Authors: Christoph Heitz; Marcel Dettling; Andreas Ruckstuhl

Addresses: Institute of Data Analysis and Process Design, Zurich University of Applied Sciences, Rosenstrasse 3, CH-8401 Winterthur, Switzerland. ' Institute of Data Analysis and Process Design, Zurich University of Applied Sciences, Rosenstrasse 3, CH-8401 Winterthur, Switzerland. ' Institute of Data Analysis and Process Design, Zurich University of Applied Sciences, Rosenstrasse 3, CH-8401 Winterthur, Switzerland

Abstract: Service provision is often governed by a contract (e.g., newspaper subscriptions, phone contracts, and credit agreements). Typically, such a contract includes rules that influence the dynamics of the customer in the marketplace. Typical examples are minimum contract durations, or fixed time instants for contract termination. The goal of these rules is to increase the future total profit gained from the customer, which is usually denoted with the term customer lifetime value (CLV). We analyse the problem of calculating the CLV under general contract structures. We show that classical Markov models for describing the customer dynamics are not appropriate and may lead to huge errors in the CLV. We propose a semi-Markov formulation which leads to substantially better results. We apply the framework to data of newspaper subscription.

Keywords: marketing; customer lifetime value; CLV; Markov chain models; semi-Markov model; direct marketing; mathematical modelling; contractual settings; customer dynamics; newspaper subscriptions; service provision.

DOI: 10.1504/IJSTM.2011.042595

International Journal of Services Technology and Management, 2011 Vol.16 No.2, pp.172 - 190

Published online: 18 Sep 2011 *

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