Customer and Marketing Analytics

Introduction to assignment 2

Kathleen Cleeren
Assignment 2
Goal:
• Calculate CLV for customers of CompanyX

• Exercise 2 and 3: CLV for the average customer

• Exercise 4 and 5: CLV per customer

2
Data
• Purchase history for 81 customers

• Data organized per purchase:

o One observation is one purchase occasion of one
customer

3
Calculating CLV for the average
customer
30
𝑟𝑡 𝑀𝑡
𝐶𝐿𝑉 = ෍
(1 + 𝑖)(𝑡−1)
𝑡=1

• 𝑟𝑡 is the average retention rate per purchase occasion t

Chance of
repurchase given Chance of making
Retention rate t that t-1 purchases t-1 purchases
were made

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Occasion-specific retention rates

Chance of
repurchase given Chance of making
Retention rate t that t-1 purchases t-1 purchases
were made

o Hypothetical example:
o 100 customers make a first purchase, 80 make a second
purchase and 50 make a third purchase
• r1 = 1
• r2= 80/100 * r1 = 0,8 -> customers that make a first purchase have a chance of 80%
of making a second purchase
• r3= 50/80 * r2 = 50/80 * 0,8 = 0,5 -> customers that make a first purchase have a
chance of 50% of making three purchases

5
Calculating CLV for the average
customer
30
𝑟𝑡 𝑀𝑡
𝐶𝐿𝑉 = ෍
(1 + 𝑖)(𝑡−1)
𝑡=1

• 𝑀𝑡 is the average margin at occasion t

o Margin = revenue – direct cost
o For example 𝑀2 is the average (across all customers)
margin that is obtained at the second purchase
o Promotion cost is a direct cost which only takes place in
occasion 1 -> calculate for the average customer

6
Calculating CLV for the average
customer
30
𝑟𝑡 𝑀𝑡
𝐶𝐿𝑉 = ෍
(1 + 𝑖)(𝑡−1)
𝑡=1

• (1 + 𝑖)(𝑡−1) :
o Discount rate
o Calculate for each purchase occasion
o Assume that time between purchase occasions is 3
weeks

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Calculating CLV for each customer
30
𝑟𝑡 𝑀𝑡
𝐶𝐿𝑉 = ෍
(1 + 𝑖)(𝑡−1)
𝑡=1

• Retention rates?

• Discount rates can be used from the average customer

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Customer heterogeneity
• What influences differences between CLV per customer?

• Regression analysis with CLV as dependent variable:

o Difference between customers that were acquired with
the coupon and other customers
o Demographic variables
o Impact of demographic variables on the effect of
coupons:
• What type of effect is this?
• How to estimate this effect?

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What is moderation?
A moderator changes the impact of an independent variable
on the dependent variable

Independent Dependent
variable variable

Moderator
Example of moderation

+
Service Satisfaction

Male
Example of moderation

+
Service Satisfaction

Male
Example of moderation

+
Service Satisfaction

+/-

Male

• Effect of service on satisfaction is different for men than for

women
How to test for moderation?

Compute an interaction term

How to test for moderation?

Add the interaction term to the regression

Interpretation of moderation effect

Main effects
Interpretation of moderation effect

Interaction effect = moderation effect

Deliverable
• Word document of max 15 pages (all included!)
• Show excel tables when asked for
• Only include output that is strictly necessary
• Focus on interpretation
• Hand by e-mail (kathleen.cleeren@kuleuven,be) by April
29th at the latest

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