Measuring Customer Lifetime Value in a Semi-Contractual Transaction Setting with Artificially Truncated Duration

Abstract

Abstract The measurement of customer lifetime value (CLV) has long been of primary interest to marketing research. To date, almost all CLV modeling studies have been conducted in either the contractual or the non-contractual transaction setting. The semi-contractual transaction setting, however, has been increasingly observed lately but rarely studied. In this article, we deal with the CLV measurement in one type of semi-contractual transaction setting, in which firms can unilaterally terminate their transaction relationship with customers under certain conditions, resulting customers’ survival duration being artificially truncated. We propose an innovative model to capture CLV in the setting, which consists of two sub-models. The first sub-model is a novel customer base analysis (CBA) model, BG-t/BB. It adds an “artificially truncated” feature to the classic BG/BB model. This BG-t/BB model is then augmented by a monetary value (MV) sub-model, Gamma-Gamma, so that we can capture each customer’s overall monetary value. We also develop and report a systematic plan for data collection and model testing, and then discuss how our model can be used to support managers to determine the optimal customer termination timing.