Customer Lifetime Value Analysis Based on Machine Learning
Xinqian Dai
University of Massachusetts Amherst, USA
daixinqian2022@163.com
ABSTRACT
Customer lifetime value (CLV) is a powerful tool to determine the
value of customers and filter customers most likely to attrite or
most likely to make their first purchase, especially for e-commerce
companies. This article reviewed machine learning models in an-
alyzing CLV and prospected some potential directions for future
research. Data of 8099 samples were collected and analyzed through
four kinds of machine learning methods: Linear Regression, Sup-
port Vector Machine, Random Forest, Neural Network. The correla-
tions between features showed that CLV are generally affected by
monthly premium auto, total claim amount, and coverage. Analysis
through machine learning models has high precision and Random
Forest performs best. CLV prediction and customer segmentation
are vital in business field today. Marketers could take advantage of
the huge amount of data and machine learning models to portrait
customer behaviors. Collecting browsing and purchase histories is
also beneficial for providing best offers to individual customers.
CCS CONCEPTS
• Theory of computation → Theory and algorithms for applica-
tion domains; Machine learning theory; Unsupervised learning and
clustering.
KEYWORDS
Customer Lifetime Value, E-commerce, Machine Learning, Regres-
sion
ACM Reference Format:
Xinqian Dai. 2022. Customer Lifetime Value Analysis Based on Machine
Learning. In 2022 the 6th International Conference on Information System
and Data Mining (ICISDM 2022), May 27–29, 2022, Silicon Valley, CA, USA.
ACM, New York, NY, USA, 5 pages. https://doi.org/10.1145/3546157.3546160
1 INTRODUCTION
Modern business is heavily based on customer service, and compa-
nies increasingly earn income from establishing and maintaining
long-term relationships with customers. Especially for e-commerce,
customer lifetime value (CLV) is one of the most important indi-
cators because it is used to estimate the financial viability of a
business [1-2]. Customer lifetime value is the total amount of value
a customer could provide to the business through the whole pe-
riod of their buying and selling relationship. High CLV is a symbol
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https://doi.org/10.1145/3546157.3546160
13
of high brand loyalty, and recurring economical value of existing
customers.
Machine learning is the study designed to analyze patterns with
data and make predictions based on these patterns and it has re-
cently made significant headway into business applications [3].
Unlike many empirical methods used in marketing, machine learn-
ing techniques can accommodate an extremely large number of
variables and promise a high scalability which is increasingly im-
portant for marketers because many of these algorithms need to
run in real time. Machine learning tools can deal with raw sequen-
tial data so that they are more efficient and can have results with
higher accuracy at the same time. The advantages are more obvious
when datasets are very large. Sampling is not needed when the
entire customer base is available. Sophistication in modeling has
also make it possible for marketers to make targeted strategies for
individual customers [4]. Machine learning methods can also au-
tomatically learn which factors affect user behavior and how they
interact with each other in the underlying purchasing process, in
order to explains user behavior virtually in real time. For example,
Machine learning methods can be used to explain how discount
rate effects purchase decisions while shopping online.
2 RELATED WORK
Early statistical models of CLV were restricted to lack data and
the Negative Binomial Distribution [5]. With the emergence of
large-scale e-commerce platforms, researchers started to try to
solve this problem with machine learning. Vanderveld et al. split
customers with predicted CLV greater than zero into five groups
and developed specific strategies for each group. They used these
simple machine learning methods to predict customer behavior [6].
SkipGram with Negative Sampling (SGNS) is popular in neural em-
bedding models [7]. Barkan and Koenigstein used SGNS to analyze
product information featured by a single customer several times
[8]. Chen et al. showed that Neural Networks can be used to predict
CLV of individual players in video games, and convolutional Neural
Network structures performs best [9]. These studies have shown
that basic machine learning methods, such as Neural Networks and
regression models, have good applications in the analysis of CLV,
because it has higher precision and accuracy.
3 DATA RESEARCH
The dataset used in this article is downloaded from Kag-
gle (https://www.kaggle.com/arashnic/marketing-seris-customer-
lifetime-value) and it has a sample size of 8099. The 23 features and
their statistics are shown in Table 1.
Figure 1 shows the correlations between all the features. Cover-
age, total claim amount and employment status all have a relatively
strong relation with monthly premium auto because greater cover-
age, larger claim amount and better employment status are more
likely to have a larger amount of monthly automatic renewal of
ICISDM 2022, May 27–29, 2022, Silicon Valley, CA, USA Xinqian Dai

Table 1: Styles available in the Word template

Features Description
State The state where the customer comes from
Response Yes/No
Coverage Basic/Extended/Premium
Education Education Level: Bachelor/College/High School or Below
Employment Status Employed/Unemployed
Gender Female/Male
Income Annual Salary
Location Code Suburban/Rural/Urban
Marital Status Married/Single
Monthly Premium Auto Number of monthly automatic renewal of premium subscription
Months Since Last Claim Number of months since last claim
Months Since Policy Inception Number of months since policy inception
Number of Open Complaints Discrete Variable
Number of Policies Discrete Variable
Policy Type Personal Auto/ Corporate Auto/ Special Auto

Policy Name of policies

Renew Offer Type Offer1-4
Sales Channel Agent/ Branch/ Web/ Call Center
Total Claim Amount Discrete Variable
Vehicle Class Two-Door Car/ Four-Door Car/SUV/ Luxury SUV
Vehicle Size Midsize/Small/Large
Customer Lifetime Value Calculated CLV

premium subscription. Policy type has a strong positive relation The estimator of the coefficient vector is obtained by the least
with type since every policy has a specific policy type. Employ- square method. Define the loss function as the sum of squares of
ment status has a strong negative relation with income because the fitting residuals of all N samples:
unemployed people have much lower income than those who are 2
employed. ÕN ÕP
J (w) = ­yi − w 0 − w j xi j ®
© ª
State, response, months since last claim, months since policy
inception, number of policies and number of open complaints have i=1 « j=1 ¬
extremely small correlation coefficients with any other features, so xij represents the j-th feature (factor) of the i-th sample, and yi
they are not related with each other. represents the label of the i-th sample. The estimation of model
Monthly premium auto, total claim amount, and coverage are coefficients is the value of w when the loss function is the smallest:
strongly related with CLV, so they are the main factors that reflect
customer behaviors and affect CLV. State, response, gender, location ŵ = min J (w)
code, months since policy inception, sales channel, and vehicle size
have extremely small correlation coefficients with CLV so they do Regularization is an approach that prefers some bias over high
not have a high analytical value. variance. It has a penalty term after the least squares loss function.
When the penalty term is the sum of the squares of the coefficient
w, this regression method is called ridge regression (also known as
4 MODELS L2 regularization), and the loss function is:
4.1 Linear Regression N P
2
P
Õ Õ Õ
Linear regression is the most basic supervised learning method. In J (w) = ­yi − w 0 − w j xi j ® + λ wj 2
© ª
machine learning, models are used to reflect the linear relationship i=1 « j=1 ¬ j=1
between features and labels as shown in Figure 2. Sometimes it is
more effective using the combination of three or more independent where the penalty term is the sum of the absolute values of the
variables to predict and estimate since a phenomenon is often af- coefficient w, this regression method is called Lasso regression (also
fected by multiple factors. The formula of multiple linear regression known as L1 regularization), and the loss function is:
is: 2
ÕN ÕP ÕP  
J (w) = ­yi − w 0 − w j xi j ® + λ w j 
© ª
y = w 0 + w 1x 1 + w 2x 2 + . . . + wp xp i=1 « j=1 ¬ j=1

14
Customer Lifetime Value Analysis Based on Machine Learning ICISDM 2022, May 27–29, 2022, Silicon Valley, CA, USA

Figure 1: Correlations between features

Figure 3: Support Vector Machine

Figure 2: Linear Regression
If we use to describe the line in the middle of the graph, we only
need to solve an optimization equation that maximizes b. In the real
world, it is not always possible to find a plane that can perfectly
4.2 Support Vector Machine
divide the data into two parts, so we need to add a loss term ( )
Support Vector Machine (SVM) is used to analyze classification and to the equation:
regression based on the data. SVM maximizes the width of the gap
yi w 1x i1 + w 2x i2 + ... + wp x ip ≥ b (1 − εi)


between categories by representing training examples as points
in the coordinate system (Figure 3). Then it is possible to make n
predictions about the category of new examples base on where
Õ
εi ≤ C
they fall. i=1

15
ICISDM 2022, May 27–29, 2022, Silicon Valley, CA, USA Xinqian Dai

The commonly used kernels of support vector machines are

divided into three types, linear kernels, polynomial kernels, and
Gaussian kernels. Their formulas are as follows:
p
Õ
K (x i , x i ′ ) = xi j xi ′ j
j=1

p d
Õ
K (x i , x i ′ ) = ­1 + xi j xi ′ j ®
© ª

« j=1 ¬

p 2
© ©Õ
K (x i , x ) = exp ­−γ ­ x i j x i ′ j ®
ª ª
i′
®
®
« « j=1 ¬ ¬
SVM is effective when there are more dimensions than samples
and it performs well when the margin of separation between classes
is clear. Figure 4: Random Forest

4.3 Random Forest

Decision Tree is one of the methods closest to daily life. It sum-
marizes the decision-making process into the form of a tree. Each
upper-level node is split into the next-level leaf nodes through a
certain rule, and the terminal leaf nodes are the final classification
results [10]. The principle of node splitting is to maximize the in-
formation gain after node splitting. The "information" is defined by
entropy or Gini impurity. The concept of entropy is derived from
the information entropy is
n
Õ
i (p) = −



p ω j log2p ω j
j

The main advantages of decision trees are their high efficiency
and the feature that they can handle non-numerical features.
A Random Forest is obtained by integrating multiple decision
trees through Bagging (Figure 4). The first step of the random forest
algorithm to build each decision tree is called "row sampling", sam-
pling with replacement from all training samples to get a Bootstrap
data set. The second step is called "column sampling". Random m
features are selected from all M features (m is less than M), and the
m features of the Bootstrap data set are used as the new training set
to train a decision tree. All N Decision Trees are combined by voting
at the end [11]. Random Forest reduces overfitting and improves
the accuracy in decision trees, and it is more flexible to complex
regression problems.
4.4 Neural Network
Neural Network, as shown in Figure 5 was originally only used
in the field of artificial intelligence but it has attracted attention
and praise in many fields these years. Neurons in Neural Network
algorithms simulate the structure of neurons in the real world. By
connecting multiple neurons layer by layer, a Neural Network with
hidden layers is obtained [12]. Neural Network is very powerful,
and the multi-layer Neural Network can approximate any function.
The goal of model training is to find the optimal weight parameter
θ then minimize the mean square error of the prediction.
Figure 5: Neural Network
5 RESULTS AND DISCUSSION
Parameters in machine learning are essential to the prediction
of results. An important parameter in linear regression is about
whether to calculate the intercept for this model. In support vector
machine, the penalty parameter indicates how much the model
wants to avoid misclassifying training examples. Another parameter
specifies the kernel type to be used in the algorithm. Criterion
and splitter in decision tree are used to define the quality of each
split. For the tree itself, the maximum depth of the tree and the
minimum number of samples required to be at a leaf node are the
two most important parameters [13]. Besides the same parameters
as decision tree, random forest has another essential parameter
shows the number of random trees in the forest. In Neural Network,
the ith element shows the number of neurons in the ith hidden
layer; “alphafloat” is the L2 penalty (regularization term) parameter
1. Best Choices of parameters for each model are shown in Table 2.
The deviations in these models are calculated through MSE,
Friedman MSE and MAE and the equations of MSE and MAE are:
n 2
1 Õ
MSE = Yi − Ŷi
n i=1

16
Customer Lifetime Value Analysis Based on Machine Learning
Table 2: Best Choices of parameters for each model
Model
Linear Regression
Decision Tree
Random Forest
Neural Network
Table 3: Return results of each model
Model MSE
Linear Regression 3.9*107
Decision Tree 1.6*107
Random Forest 1.4*107
Neural Network 4.0*107
Ín Ín
|yi − x i |
i=1 |ei |
MAE = = i=1
n n
According to the results for each model showed in Table 3, Linear
Regression and Neural Network have close values of MSE and
MAE, and Decision Tree and Random Forest have much smaller
ones. Random Forest has the largest value of R2, 0.70, a little bit
than that of Decision Tree. Linear Regression and Neural Network
have values of R2 around 0.14. Considering the above three factors,
Random Forest is the best model because it has the smallest value
of MSE and MAE, and the largest value of R2.
6 CONCLUSIONS
CLV has become an essential concept in both academic and practice
these years because of the value of transaction data and the signifi-
cance of customer behaviors. This article collects data of CLV of
customers from different states and analyzes features using classical
models of machine learning. It can be seen from the correlation
coefficients that monthly premium auto, total claim amount, and
coverage are the main factors that affect CLV because they have a
strong relation with CLV. In contrast, state, gender, sales channel,
and vehicle size do not have a high analytical value. Among the
four machine learning models discussed in this article, Random
Forest is the best for analyzing CLV because it has the smallest
value of MSE and MAE, and the largest value of R2.
There are some limitations in this article that may inspire future
study in this field. This article has a sample size of 8099 and it
is quite enough for getting a conclusion, but it could be better if
there are more datasets of CLV that can be analyze together. This
article applies four models of machine learning and the largest
value of R2, 0.70, is obtained when using random forest. More
models with higher precision should be used, such as XGBoost. The
four models have their own characteristics in predicting results,
so model fusion could be considered in future research to further
improve the accuracy and analyze important factors.
17
ICISDM 2022, May 27–29, 2022, Silicon Valley, CA, USA
Choices for Parameters
’fit_intercept’: False
’criterion’: ’friedman_mse’, ’max_depth’: 8, ’max_features’: 15,
’min_samples_leaf’: 5, ’splitter’: ’best’
’max_depth’: 15, ’max_features’: 9, ’min_samples_leaf’: 3,
’n_estimators’: 160
’learning_rate’: 0.2, ’max_depth’: 10, ’min_child_weight’: 3,
’n_estimators’: 60
R2 MAE
0.14 3937.42
0.65 1671.02
0.70 1521.55
0.13 3951.53
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