Predicting e-commerce CLV with neural networks: The role of NPS, ATV, and CES

Abstract

Accurately predicting Customer Lifetime Value (CLV) is paramount in optimizing customer relationship management. This study introduces a novel deep learning approach, employing a neural network model to forecast CLV for a leading international e-commerce retailer. This investigation delves into the interplay of key performance indicators—Net Promoter Score (NPS), Average Transaction Value (ATV), and Customer Effort Score (CES)—and their collective impact on CLV. The research utilized a dataset of 15,000 customer profiles and crafted a sequential neural network with dense layers optimized through hyperparameter tuning and regularization to thwart overfitting. The model's efficacy was assessed on a 10 % test set, revealing its adeptness at capturing intricate, nonlinear predictor-customer lifetime value (CLV) relationships. Consistency in training and test performance metrics underscored the model's generalizability, while high R-squared and explained variance scores confirmed the predictive strength of the chosen factors. This research seeks to provide a solution for building an artificial intelligence model with an artificial neural network algorithm to predict customer lifetime value. By incorporating this principle, the study aims to leverage the power of neural networks to forecast CLV, enabling retailers to make informed decisions and optimize customer relationships accurately. This study finds that Net Promoter Score (NPS) and Customer Effort Score (CES) have a powerful impact on the neural network model's ability to predict Customer Lifetime Value (CLV) accurately. On the other hand, while Average Transaction Value (ATV) exhibits the least impact, it still significantly contributes to the accuracy of Customer Lifetime Value (CLV) predictions. These results underscore the importance of incorporating customer feedback metrics like NPS and CES when building predictive models for CLV estimation. Integrating critical customer metrics into neural networks gives retailers enhanced insights, enabling precise customer segmentation, resource allocation, and strategic growth. The study paves the way for future research to refine further CLV prediction, including dataset expansion, customer profile enrichment, and prescriptive marketing optimization.