Statistical Methods in Customer Relationship Management

3.5 Firm's Performance (LTV, CLV, and CE)

Making customer acquisition selection decisions on the basis of the response probability, initial order quantity, and duration is not enough. Companies should select prospects to acquire based on their lifetime contribution, which can be termed as LTV, CLV, or CE. Hansotia and Wang [5] in the last scenario of their studies considered that prospects' LTV varied due to their profiles and the promotion packages they received. These authors modeled the present value of revenue (PVR) and estimated LTV by subtracting the present value of cost of goods and the estimated marketing and operation costs for that customer. A common issue that occurs in the estimation of CLV is that observations may be right-censored. Some of the customers may have already lapsed in the observation period while others may still use the product or service beyond the observation period. Estimating the lifetime value of the customers who are still active over the observation period by OLS regression may underestimate their lifetime contribution to the companies. Hansotia and Wang [5] used the Tobit model to estimate the PVR for customers. The Tobit model assumes that there is a latent variable which linearly depends on via a vector of parameters . And there is a normally ...