Customer lifetime value
Customer lifetime value
This is for:
DeveloperIn this article, we will look at the Customer Lifetime Value (CLV) model and how you can use it to predict visitor behavior.
What’s in this article?
We will provide an overview of how this model is built, its data requirements, and the predictions it can make. We will also provide details of use cases showing how this model can be integrated into your personalization efforts.
In particular, we will cover:

What our CLV model predicts

What it uses to make that prediction

Some potential use cases

How you can reach out to Qubit should you be interested in using the model to power your experiences
Intro
The CLV model is a custombuilt machine learning model that predicts the future spend for each customer–a person that has converted at least once–over a specified time horizon. Also, it estimates the churn probability, future purchase frequency, and future Average Order Value (AOV) for each customer.
The features used to train this model are constructed from a visitor’s previous transaction history and can be provided from a number of sources, including QProtocol or your own CRM/CDP system.
The following diagram provides a highlevel overview of how this model functions:
Input data
The model needs three data points for each historic transaction:

A unique customer identifier  User email or context Id

The time of the transaction

The transaction value or amount spent
All three of these are required for the model to function and can be provided from a number of sources, including QProtocol (QP), GA360, or your own CRM or CDP system.
The following table summarizes the data requirements for each data point:
Customer identifier  Data source  Vertical  QP Event(s)  Timestamp field  Order value field 

context_id 
QP 
ec 
event_ecBasketTransactionSummary 
meta_serverTs 
basket_total_baseValue 
context_id 
QP 
tr 
event_trPackageTransactionSummary 
meta_serverTs 
package_total_baseValue 
context_id 
QP 
eg 
event_egGamePlay 
meta_serverTs 
playValue_baseValue 
user_email 
QP 
ec 
event_ecBasketTransactionSummary, event_ecView,event_ecUser 
meta_serverTs 
basket_total_baseValue 
user_email 
QP 
tr 
event_trPackageTransactionSummary, event_trView,event_trUser 
meta_serverTs 
package_total_baseValue 
clientId 
GA360 
n/a 
n/a 
visitStartTime 
totals.totalTransactionRevenue 
varies 
CRM/CDP 
n/a 
n/a 
varies 
varies 
If one or more of the feature fields are missing or invalid, the model will often continue to operate, but with less input information, which can lead to lower accuracy. 
Note
We rely on historical customer behavior to train the model and make accurate predictions. Typically you should have training data that goes back as far into the past as you would want to predict into the future. For example, if you want to predict one year into the future, you need one year’s worth of past data. 
Model
The CLV model uses a Bayesian hierarchical framework to infer three parameters:

Churn probability

Effective Frequency

Average (mean) transaction value
Mean transaction value predicts how much each customer will spend, on average, in each future transaction. Churn probability and effective frequency are strongly related and can be illustrated by the following example.
Note
A customer converted three times, starting one year ago and ending after six months. Their historical order frequency is three per year. However, because the customer stopped buying six months ago, it’s more likely the actual (or effective) frequency is six per year; to this, we would also posit that the customer has a high churn probability– the customer has probably churned. 
Because churn is not observed in noncontractual settings, the model must be realistic enough to infer this latent variable by teasing apart churn and effective frequency.
Bayesian hierarchical modeling is a method of statistical modeling composed of multiple levels (hierarchies) that uses Bayes’s rule to estimate probability distributions using a combination of prior knowledge and observed data. Our CLV model has been crafted by our expert team of data scientists to ensure the best possible performance.
Our models produce high predictive accuracy relative to the domain. We measure predictive performance using a metric known as mean absolute error. Our models typically achieve a mean absolute error around 50x smaller than a benchmark model that takes the amount spent by customers in the past and extrapolates this into the future.
For example, the mean absolute error of the model could be around USD 92, with an average observed yearly transaction value of about USD 36. That error is significant compared with the actual average, but it’s still much better than simple extrapolation. Moreover, the error is mainly due to onetime purchasers that never buy again; for customers with even moderate loyalty, the model is far more accurate.
Predictions
Each customer’s CLV is calculated daily or weekly by a batch job.
This job outputs timestamped estimates of CLV and its component parameters into a table in the client’s BigQuery project, for example,clientName__v2.clv_output_user_email
.
In addition to CLV, several other (derived) quantities are calculated:

Churn probability over a month  this uses the churn probability parameter to forecast churn over time

Expected time until churn  the expected time it will take until the customer churns

Expected number of purchases  this is a direct input to CLV

Inter purchase time  the average time between purchases (inverse of effective frequency parameter)

Spent per purchase  this equals the average transaction value parameter and is a direct input to CLV
For each of these, alongside the prediction, two percentile columns are provided to indicate the degree of uncertainty in the predictions. Finally, we show the data that were used to train the model as well.
The following table provides a detailed overview of the output in the client project. This output can be actioned by using a Derived Dataset (DD).
Column name  Description  Type  Example 

customer_id 
user_email 
STRING 

total_order_value 
The total order value (input data) 
FLOAT 
56.0 
n_purchases 
The number of purchases (input data) 
INT 
1 
recency 
Time of last purchase (somewhere between zero and 'horizon'; input data) 
FLOAT 
0.0 
horizon 
Time since first purchase (in months; input data) 
FLOAT 
33.6594077660032 
churn_prob_month_pred 
The median (prediction) for monthly churn probability 
FLOAT 
0.950173113021867 
churn_prob_month_5th_perc 
The 5th percentile (lowend) for monthly churn probability 
FLOAT 
0.600931490503537 
churn_prob_month_95th_perc 
The 95th percentile (highend) for monthly churn probability 
FLOAT 
0.999331135251575 
time_until_churn_pred 
The median (prediction) for time until churn 
FLOAT 
13.695012237352 
time_until_churn_5th_perc 
The 5th percentile (lowend) for time until churn 
FLOAT 
0.254433688275367 
time_until_churn_95th_perc 
The 95th percentile (highend) for time until churn 
FLOAT 
2828.65668852401 
n_purchases_pred 
The median (prediction) for number of purchases over one year 
FLOAT 
0.169668618831138 
n_purchases_5th_perc 
The 5th percentile (lowend) for number of purchases over one year 
FLOAT 
0.0068908852383051 
n_purchases_95th_perc 
The 95th percentile (highend) for number of purchases over one year 
FLOAT 
1.17028945948419 
inter_purchase_time_pred 
The median (prediction) for inter purchase time 
FLOAT 
18.2889708302299 
inter_purchase_time_5th_perc 
The 5th percentile (lowend) for inter purchase time 
FLOAT 
2.40946077083366 
inter_purchase_time_95th_perc 
The 95th percentile (highend) for inter purchase time 
FLOAT 
329.870692032285 
spent_per_purchase_pred 
The median (prediction) for spent per purchase 
FLOAT 
58.2994385267867 
spent_per_purchase_5th_perc 
The 5th percentile (lowend) for spent per purchase 
FLOAT 
36.0385163299792 
spent_per_purchase_95th_perc 
The 95th percentile (highend) for spent per purchase 
FLOAT 
96.2416328688191 
clv_pred 
The median (prediction) for clv 
FLOAT 
9.86300874365342 
clv_5th_perc 
The 5th percentile (lowend) for clv 
FLOAT 
0.278750968839795 
clv_95th_perc 
The 95th percentile (highend) for clv 
FLOAT 
71.1121355784755 
prediction_date 
The date when the predictions were calculated (same for all in a given batch) 
STRING 
20200113 
In the following image, the predictions, clv_pred
and realizations–what has actually been observed, are plotted for a client with a period of 12 months and user_email
as primary key.
The model is able to capture the fact that there are two peaks in the distribution, corresponding to onetime purchasers and the average, loyal customer.
Example use cases
There are many use cases for CLV, including segmentation, investment decisions, and optimization.
Segmentation
Customers can be segmented based off of CLV, for example, into low, medium, and highvalue customers. This could inform a loyalty program, and it could even be used to promote loyalty program signup for highvalue customers.
Moreover, CLV segments could be an alternative to commonly used Recency, Frequency, and Monetary (RFM) based segments because it is a compression of RFM into a single, predictive number, hence simpler to segment on.
For example, you could provide Unique Selling Proposition
messaging or trending products to customers with a low CLV.
Investment decisions
Because companies have limited resources, it is important to know how to allocate marketing spend. CLV can help determine which advertising channels to invest in and how much to spend. In the context of CRM marketing, it could aid in deciding who to send discount vouchers to, by, for example, targeting valuable high CLV customers or basing the voucher amount on CLV. Clearly, you would not want to give customers a discount that is bigger than their future spend. It is even possible to improve customer service by prioritizing high CLV customers.
Aside from CLV, segmentation can be applied to any of the three parameters, particularly churn probability. Once you know which customers are at high risk of churning, you can target them with discounts or other offers. It can also be useful to combine these use cases with CLVbased ones. For example, if you segment on both churn probability and CLV, you will automatically find the atrisk customers that are valuable enough for marketing to invest in. This way, one model gives four (smart) attributes to create audiences.
Optimization
As total CLV is a measure of long term revenue, it is closely related to long term profits–a strategic objective, and most definitely a quantity businesses would want to optimize. Therefore, in the future, it could be used as a goal for the traditional optimization offered by A/B testing, the automatic optimization offered by MultiArmed Bandits, or more sophisticated methods. However, these are not use cases we currently support. It can also be used in reporting for businesses that wish to track movements.
More broadly, use cases can be joined. Suppose customers are segmented based on their CLV. One could then try to improve loyalty by trying to move customers from the low CLV segment into the medium CLV segment, etc. This makes the model useful for both segmentation and optimization.
Getting started
To start using this model in Qubit experiences, contact your Customer Success Manager and ask for the early access signup form. Submit this form and enter CLV as the project name you are interested in.