The Buy Till You Die (BTYD) model is an early customer lifetime value (CLV) model that estimates the total value a customer brings to a business over their entire relationship. The pain point it addresses is the invisible churn event – the fact that your when you customers leave they don’t tell you they are leaving.
The model is based on the idea that customers will continue to make purchases until they “die” or simply churn. This model helps businesses understand customer behavior, predict future sales, and make informed decisions about marketing and retention strategies.
In this post I look at the first such model, the Pareto/NBD model in which the authors mapped out the behavioral story and developed a hierarchical Bayesian framework for “counting your customers”. As such the model has some challenging mathematics as well as some baked in assumptions.
In the next two posts we will cover two models that made the mathematics much simpler and those are the ones usually implemented in practice. So in this post I’ll go over the assumptions, the behavioral story, then try to present a simple hierarchical model with a plate diagram that can help understand what is going on at a glance.
Besides this I will also try to explain the terminology, unpack the business questions. Finally I would also like to outline why the model got the technical name Pareto / NBD, and the authors approach to estimating its parameters. (There are two parameters per customer)
Citation
@online{bochman2021,
author = {Bochman, Oren},
title = {Customer {Lifetime} {Value} - {Pareto/NBD} {(BTYD)} {Model}},
date = {2021-09-14},
url = {https://orenbochman.github.io/posts/2021/2021-09-10-clv-models-1/},
langid = {en}
}