False positives and false negatives in predicting customer lifetime value


Kellogg Insight

I found this 2008 article on the research of Edward Malthouse and Robert Blattberg very instructive.  Malthouse and Blattberg’s attempts to predict customer lifetime value consistently resulted in two types of errors:

“A false positive occurred when the model predicted that a customer would be a future best customer when in fact the customer was not. For example, a customer who used to conduct quite a bit of business with a company was predicted to continue to be a great customer in the future. However, if the customer lost her job, she might not have been able to spend as much, and thus did not actually continue to be among the best customers.

Similarly, false negatives occurred when customers were not predicted to be especially valuable, even though their future purchasing behavior proved to be extremely beneficial to the company. For example, a customer who did little or no business in the past due to lack of disposable income was predicted to be a poor customer in the future. But if the customer took a new, lucrative job, he could actually become a potential gold mine for the company.”

“Roughly a quarter [25%] of all customers were misclassified, falsely positive or negative.”

Malthouse and Blattberg therefore recommended to:

“… allocate rewards based on actual future behavior rather than predicted future behavior. The distinction was subtle but important. Rather than trying to guess which customers would be valuable, Malthouse and Blattberg encouraged companies to wave a carrot in front of all of their customers and reward those who behaved in the desired way. This is what airlines do with miles programs— any customer who flies a certain number of miles gets the reward. Credit cards and supermarkets that offer cash-back bonuses also follow this approach.”

About Arie Goldshlager

Customer Insight, Customer Strategy, and Innovation Consultant
This entry was posted in Customer Insight, Customer Value. Bookmark the permalink.

2 Responses to False positives and false negatives in predicting customer lifetime value

  1. Pingback: 71 useful articles on online behavior change in 2013 you can choose not to read | Mats Stafseng Einarsen

  2. Pingback: What We Read This Week, New Year 2015: | Enterprise Software Customer Support

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