Article: Modeling Customer Equity: A Stochastic Modeling Approach for Arrival and Departure of Customers Journal: Journal of Business and Management (JBM) 2007 Vol.13 No.2 pp.167 - 182 Abstract: Customer Equity (CE) is an important concept for marketers in managing their customers. It allows them to better evaluate the contribution of existing customers and the potential purchases of new customers to their overall value. Such valuation provides better segmentation schemes that eventually lead to better financial performance. Various models in the literature aim at modeling CE with different structural forms and assumptions but most commonly are based on evaluating the value of current, active customers. This paper introduces a different approach for evaluating CE that consider current and future (potential) customers by developing a two-stage model that is based on stochastic and actuarial calculations. In the first stage, we consider the value of current customers and relate it to their remaining potential consumption lifetime. In the second stage, we use stochastic arrival and departure processes to account for potential new customers using stochastic calculations of remaining purchasing lifetime. As a result, the model can better predict current and future value of customers compared with current approaches. Inderscience Publishers - linking academia, business and industry through research

Title: Modeling Customer Equity: A Stochastic Modeling Approach for Arrival and Departure of Customers

Authors: Oded Lowengart; Rami Yosef

Addresses: Author address listing can be found in the "About the Authors" section at the end of the article.

Abstract: Customer Equity (CE) is an important concept for marketers in managing their customers. It allows them to better evaluate the contribution of existing customers and the potential purchases of new customers to their overall value. Such valuation provides better segmentation schemes that eventually lead to better financial performance. Various models in the literature aim at modeling CE with different structural forms and assumptions but most commonly are based on evaluating the value of current, active customers. This paper introduces a different approach for evaluating CE that consider current and future (potential) customers by developing a two-stage model that is based on stochastic and actuarial calculations. In the first stage, we consider the value of current customers and relate it to their remaining potential consumption lifetime. In the second stage, we use stochastic arrival and departure processes to account for potential new customers using stochastic calculations of remaining purchasing lifetime. As a result, the model can better predict current and future value of customers compared with current approaches.

Keywords: Customer equity; stochastic modeling; customer lifetime value; segmentation; financial performance.

DOI: 10.1504/JBM.2007.141156

Journal of Business and Management, 2007 Vol.13 No.2, pp.167 - 182

Published online: 05 Sep 2024 *

Title: Modeling Customer Equity: A Stochastic Modeling Approach for Arrival and Departure of Customers

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