We adopt continuous mixture models, specifically,
the beta-geometric (BG)/NBD model (Fader et al.,
2005a). We prefer this approach to the Pareto/NBD
model (Schmittlein et al., 1987) because it creates fewer
estimation problems and offers clear interpretations.
The BG/NBD approach considers two processes,
purchase frequency and the ‘‘death’’ of the customer,
and it makes two fundamental assumptions about
purchase frequency and inactivity. For frequency (i.e.,
distribution of the number of purchases and heterogeneity
across customers), the number of purchases Y
follows a Poisson distribution with a transaction rate k.
The probability that a customer makes y transactions
during time t is PðY ¼ yÞ ¼ ðktÞy
y! ekt: This expression
means the interpurchase time follows an exponential
distribution. The process is withoutmemory, and there
is a constant probability of a transaction in each period.
The market is fundamentally stationary. These
assumptions have been well validated for frequently
purchased goods (Ehrenberg, 1959, 1988).
We adopt continuous mixture models, specifically,the beta-geometric (BG)/NBD model (Fader et al.,2005a). We prefer this approach to the Pareto/NBDmodel (Schmittlein et al., 1987) because it creates fewerestimation problems and offers clear interpretations.The BG/NBD approach considers two processes,purchase frequency and the ‘‘death’’ of the customer,and it makes two fundamental assumptions aboutpurchase frequency and inactivity. For frequency (i.e.,distribution of the number of purchases and heterogeneityacross customers), the number of purchases Yfollows a Poisson distribution with a transaction rate k.The probability that a customer makes y transactionsduring time t is PðY ¼ yÞ ¼ ðktÞyy! ekt: This expressionmeans the interpurchase time follows an exponentialdistribution. The process is withoutmemory, and thereis a constant probability of a transaction in each period.The market is fundamentally stationary. Theseassumptions have been well validated for frequentlypurchased goods (Ehrenberg, 1959, 1988).
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