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A simple heuristic for obtaining pareto/NBD parameter estimates

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  • Pablo Marshall

Abstract

In an influential study, Schmittlein et al. ( 1987 ) proposed the pareto/negative binomial distribution (P/NBD) model to predict purchase behavior of customers. Despite its recognized relevance, this model has some drawbacks as follows: (1) it does not allow a zero transaction rate, (2) it assumes convenient but not necessarily realistic gamma distributions for the transaction and drop-out rates across customers, and (3) the estimation procedure requires complicated computations. The purpose of this study is to relax the assumption that purchases and drop-out rates are distributed according to a gamma distribution and propose a simple estimation procedure for the individual parameters that can be applied even if the number of customers is large. A simulation exercise and empirical applications to real datasets compare the simple model proposed with the P/NBD model. The results show that the simple procedure is better in cases where the number of transactions and/or the observation period is large. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Pablo Marshall, 2015. "A simple heuristic for obtaining pareto/NBD parameter estimates," Marketing Letters, Springer, vol. 26(2), pages 165-173, June.
    • Handle: RePEc:kap:mktlet:v:26:y:2015:i:2:p:165-173
    DOI: 10.1007/s11002-013-9272-z
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    References listed on IDEAS

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    1. Peter S. Fader & Bruce G. S. Hardie & Ka Lok Lee, 2005. "“Counting Your Customers” the Easy Way: An Alternative to the Pareto/NBD Model," Marketing Science, INFORMS, vol. 24(2), pages 275-284, August.
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    6. David C. Schmittlein & Donald G. Morrison & Richard Colombo, 1987. "Counting Your Customers: Who-Are They and What Will They Do Next?," Management Science, INFORMS, vol. 33(1), pages 1-24, January.
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