A model for predicting customer value from perspectives of product attractiveness and marketing strategy

Authors:
S. L. Chan;W. H. Ip;V. Cho
Affiliations:
Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong;Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong;Department of Management and Marketing, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong
Venue:
Expert Systems with Applications: An International Journal
Year:
2010

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Abstract

This paper proposes a model for customer relationship management (CRM) using iThink^(R), which incorporates the concept of system dynamics. The proposed CRM model consists of module 1: a customer purchasing behavior model, module 2: a Markov chain model, and module 3: a financial returns model. By considering the marketing activities and product attractiveness to the customer, the probability that a customer will (re)purchase can be modeled in module 1. The probabilities are then fitted into module 2 for the calculation of customer lifetime value (CLV). The estimated CLV for each customer is inputted into module 3 to predict the firm's return on investment in the long term. By defining the parameters on the attractiveness of a product and on user responses from historical marketing campaigns, a firm can easily evaluate its business strategy from both marketing and product development perspectives, thereby refining those parameters and adopting the best strategy for creating customer value and yielding the maximum profit. A case study of a listed firm in Hong Kong is employed to illustrate our model, which not only gives insights into the product development, but can also support the decisions related to marketing activities.