A Consumer Purchasing Model with Learning and Departure Behaviour

Author(s): C. Wu and H.-L. Chen

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A consumer purchasing model with learning and
departure behaviour
C Wul* and H-L Chen2
'National Taiwan University of Science and Technology; 2Ming-Chuan University, Taipei, Taiwan
The purpose of this paper is to extend the model of negative binominal distribution used in consumer purchasing models
so as to incorporate the consumer's learning and departure behaviours. The regularity of interpurchase time and its
unobserved heterogeneity are also included. Due to these extensions, this model can be used to determine during a given
period how many purchases are made by an experienced or an inexperienced customer. This model also allows the
determination of the probability that a customer with a given pattern of purchasing behaviour still remains, or has
departed, at any time after k > 1 purchases are made. An illustration of the approach is conducted using consumer
purchase data for tea. As assessed by comparing results with Theil's U, the integrated model developed gives the best
results and shows that learning and departure are important factors which influence consumer's purchase
behaviour,
especially, when evaluating the behaviour of inexperienced customers.
Keywords: customer purchasing; interpurchase time; learning; purchase behaviour
Introduction
The manner in which a customer makes purchases has long
been of interest to marketing researchers and practitioners.
The negative binomial distribution (NBD) model gives a
good starting point for research into consumer purchasing
behaviour. The so-called NBD-type models, by assuming a
Poisson purchase process and exponential interpurchase
time, and by adding gamma heterogeneity across a popula-
tion, give an approximate fit for frequently purchased
products.' Many researchers have further attempted to
improve the NBD model by adding marketing variables14
or by considering the covariance between these variables
and purchase rates.7>8 Gupta9 summarises this work by
noting that the alternative approaches of NBD-type
models capture the effect of marketing variables on custo-
mers' purchase time decisions, but do not directly extend
traditionally used stochastic models. However, only adding
marketing variables and not extending the model to fit real
consumers' purchasing behaviour is not nearly as useful as
first extending the model to encompass real customer
purchasing behaviour, then incorporating the effects of
marketing variables. This is true not only for predictive
purposes but also for diagnostic purposes.
Most of the NBD-type models are applied in steady state,
that is they assume all the consumers are sophisticated.
However, such an assumption can be too restricted, since
*Correspondence: Dr C Wu, Department of Business Administration,
National Taiwan University of Science and Technology, 43 Sec. 4, Keelung
Road, Taipei, Taiwan, R.O.C.
E-mail: wu@ba.ntust.edu.tw
the majority of a firm's customers may be inexperienced or
may even be new customers. Therefore, one of the surpris-
ing aspects of these models is the absence of 'learning'
effects. Learning is the process by which experience leads
to a change in knowledge, attitude, and/or behaviour, and
learning arises from a consumer's development of favor-
able or unfavorable attitudes toward a company and its
products. Therefore, customers may change their buying
behaviour through leaming and learning can affect the
customer's purchase behaviour. Estesl' and Bush and
Mostellerl1 proposed the stochastic learning model, and
showed how it could describe customer's purchase beha-
viour. Kuehn12 presented evidence that a buyer's behaviour
was a learning behaviour. Erdem and Keane13 studied the
effects of past consumption experience and advertising
exposure on consumer uncertainty about brand choice and
indicated that learning is an important factor to influence
purchasing behaviour.
Another surprising aspect of much research is the lack
of consideration of 'defections'. The assumption of 'ever
bought' is the weakness of these models. The 'ever bought'
definition of the relevant population implies a pure birth
process; people can enter the buying population but never
leave. Needless to say, the applicability of such models
would be restricted. Due to the existence of learning,
whether a customer will repurchase the product usually
depends on his previous consumption experience. If
product quality meets the expected quality or is even
better, then the customer is more likely to repurchase the
product; otherwise, he may abandon it. If a customer
abandons this brand of product permanently, he or she is
584 Journal of the Operational Research Society Vol. 51, No. 5
a departure. Customers may also become unsatisfied due to
changes in their habits, age, income, etc.
Many studies still assume that interpurchase times follow
an exponential distribution. When the customer's buying
incidence is more regular than a Poisson process, using
NBD-type models could cause bias. Chatfield and Good-
hardt14 provided some empirical evidence of purchasing
behaviour which followed a more regular distribution than
a Poisson process. They argued that an Erlang-2 distribu-
tion is more appropriate for interpurchase times, yielding
a 'condensed' negative binomial model (CNBD). Some
studies, such as those by Lawrence15 and Gupta,16 support
an Erlang-2 distribution. However, special care is necessary
since customer purchase behaviour can be more regular.
For example, there are some consumer goods for which
habitual usage behaviour can be easily formed, that would
cause their interpurchase time to be more regular than
Erlang-2. In order to take into account such behaviour,
the interpurchase time distribution should be extended to
Erlang-c, c >o 1. The Erlang distribution is an important
generalisation of the exponential distribution, which is
flexible and can effectively capture the spirit of regular or
irregular interpurchase times.
One alternative model was developed by Jeuland et al.8
Under the assumption of independence between the zero-
order choice process and the Erlang purchase timing
process, the output of the developed model includes analy-
tical expressions for market share and penetration. However,
a disadvantage of this model is that it lacks information on
learning and departures.
Another alternative model was developed by Schmittlein
et al,6 which examined consumer purchase patterns by
considering 'death rates.' In their study, for an individual
customer, besides the Poisson purchases, the exponential
lifetime and gamma heterogeneity for death rates were also
taken into account. The socalled NBD/Pareto model they
developed allows the company to determine the number of
'active' and 'inactive' customers over time. They proved
that the model provided answers to the following questions
that are often asked by marketing practitioners:
1. How many retail customers does the firm now have?
2. How has the customer base grown over the past year?
3. Which individuals on the list are most likely to represent
active customers? Inactive customers?
4. What level of transactions should be expected next year
by those on the list, both individually and collectively?
However, the assumption of an exponential lifetime of
each individual and then gamma heterogeneity across the
population is a restriction. In practice it is hard to evaluate
the lifetime distribution of each individual since we observe
only one 'death' occurrence of an active customer who
becomes an inactive customer. Also, the change of
an individual's purchase behaviour often arises from
past experience. A customer's departure is not merely
determined by the duration of his usage. Major determi-
nants are past experience and purchase behaviour. Usually,
the last purchase occasion or use experience will signifi-
cantly affect whether a customer will make another
purchase or not. Therefore the learning behaviour should
be taken into account and should be involved in the models.
The objective of this article, therefore, is to extend the
NBD-type models, while incorporating consumer's learn-
ing and departure behaviour and Erlang interpurchase
times, and their unobserved heterogeneity. By these exten-
sions, the model allows us to determine the probability that
a customer with a given pattern of purchasing behaviour
still remains, or has departed, at any time after k ? 1
purchases are made. The model also can be used to
determine how many purchases are made by an experienced
or an inexperienced customer during a given period. Our
model promotes the influence of learning on consumers'
purchasing behaviour, which would be more useful in the
market since customers' purchase decisions significantly
depend on past experience. Using the consumer purchase
data for tea, the empirical results substantially indicate that
learning and departure behaviours are the important factors
while predicting the purchase frequencies of inexperienced
customers.
In the following sections; Firstly the interpurchase time
model with gamma heterogeneity and learning and depar-
ture behaviour is specified; Secondly, an integrated model
is developed; Thirdly, the estimation procedure and empiri-
cal results are reported, and finally, we conclude with a
discussion of implications of our findings and suggestions
for future research.
The model
Imagine that you are the marketing manager of a company
selling product Alpha. You have a list of customers who
have ever done business with the company in the past, as
well as information on the frequency and timing of each
customer's transactions. You are interested in understand-
ing the individual's purchasing behaviour across the popu-
lation of customers and predicting the growth of the
company's customer base, which would be helpful in
planning marketing strategies. To address these managerial
issues, let us start with a brief review of the interpurchase
time models.
Interpurchase time model
To generalise the NBD model, we first suppose the custo-
mer's interpurchase times follow an Erlang distribution
(c, u):
ucXc1
e-uX
f(XIc, u) = (cXc) 0
e
o < X
+ 0o for c integer
(1)
C Wu and HiL Chen-A consumer purchasing model with learning and departure behaviour 585
where Xis the time to next purchase and the purchase rate is
u/c. We assume that heterogeneity of u exists
among
customers. For c = 1, (1) is an exponential density. Suppose
the customer makes his or her initial purchase at time 0. Let
XI,
X2, ...,Xk
be a sequence of interpurchase times which
are assumed to be independent and let
k
Tk= XI,
k=1,2,3,..., (2)
1=1
where Tk can be regarded as time of the kth purchase, if the
customer keeps purchasing k times.
Customer's learning
When a customer first enters the market, he may sample
brands to gather information. Quite often, the purchases
become more regular and the buyer may gradually intend to
buy a subset of brands repeatedly. If a brand is involved in
the subset, it may be purchased regularly; otherwise, the
company may lose this customer. In order to model this
situation, it is necessary to study the probability of repeat
buying. If learning exists, we can infer that these repurch-
asing probabilities should be nonstationary, since through
learning, people acquire beliefs and attitudes which in turn
affect their repeat buying behaviour. Also, due to learning,
people's repurchase decisions are influenced by past
experience. Repurchase probabilities should be highly
correlated and should exist functional relationships with
each other, that is
Pk
=
f(Pk-l 1 Pk-2. P1) (3)
where Pk iS the repeat buying probability of the kth repur-
chase. In (3), Pi is the probability of a customer's first
repurchase of product Alpha and P2 is the likelihood that a
customer purchases product Alpha again after the first
repurchase, etc. Similar to the purchase rate, the repeat
buying probability can be studied for an individual or
entire population. In this paper, we assume that a functional
relationship as (3) exists across the population of customers,
and there is heterogeneity of each individual for each
repurchase. The heterogeneity of the repurchase probability
among customers is assumed to follow a normal distribution
with mean 0 and variance c2. In addition, we have the
independent assumption of repurchase probabilities and
interpurchase times. This assumption would be more
reasonable when a customer's purchase decision depends
primarily on his past experience, or when the influence of
marketing activities on repurchase timing is not significant.
Customer's departure
If a customer abandons product Alpha permanently, then he
is a departure. We let
qk
=
1
-
p, that is,
qk
is the prob-
ability that a customer abandons the brand of product after
k - 1 repurchases have been made. As the vast majority of
customers do not notify the company when they leave, the
counting of inactive customers would be difficult. However,
there are two kinds of transaction information on each
customer to verify customer's departure:
1. The interpurchase process during the past time period
being analysed.
2. The elapsed time since last transaction until the end of
observation period.
Consider two different customers, each having made three
transactions during the past calendar year. Customer B made
one purchase in each of the following months: February,
June, and October, but Customer A made all three purchases
in January. Clearly, B is much more likely to be an active
customer than A. According to our data, there is no record
of a customer coming back to make purchase when the time
which has elapsed since the last transaction is more than
three standard deviations of the previous interpurchase
process. Therefore, in our case, we use a simple method
to quantify this qualitative assessment, that is to identify
inactive customers, is that if the time elapsed between the
last transaction and the end of the observation period
exceeds the triple standard deviations of the interpurchase
times, then the customer is marked 'inactive.'
Integrated model
Without loss of generality, we assume the customer makes
his first purchase at time 0. At time t, the customer may
either be active or he may have abandoned product Alpha
(he is inactive). For an active customer, the probability that
the customer has purchased k times is
P(Tk > t,
Tk_1
< t, and the customer has repurchased
k - 1 times)
=
Pk-1
(ck -j)!
' (4)
where
Pk-l
=
PI -P2 Pk-1l
Detailed
computations
are
provided in the Appendix. Expression was developed
under the independency assumption of the repeat buying
process and the purchase timing process.
On the other hand, if the customer has departed by time t,
but k purchases have already been made, the probability is:
P(Tk < t and repurchases k
- 1 times and departs)
= P(Tk -
t)Pk-qk (5)
=
P(Tk-
<
t)Pk-qk
-
P(Tk-I
< t,
Tk
>
t)Pk_Iqk,
where k > 1,
qk
= 1 -Pk and p0 1. Equation (5) can be
computed inductively and details of the computations are
provided in the Appendix.
586 Journal of the Operational Research Society Vol. 51, No. 5
Adding (4) and (5), we obtain the probability that a
customer makes k purchases by time t (no matter whether
the customer is still active or not):
P(Tk- I t)pk-Iqk
+
P(Tkl
- t,
Tk
>
t)pk. (6)
The desired result is already derived. However, since
there is diversity across customers, normalising the
repurchase probability across the entire population and
adding gamma heterogeneity with respect to u in (4)
would lead to a better result.
Gamma heterogeneity
We wish to estimate the distribution of u in (4) over all
customers. A general treatment is to let u follow a gamma
distribution. This is a flexible distribution and can capture
the essence of most of the reasonable shapes of the para-
meter u.17 Accordingly, u is assumed to follow a gamma
distribution with parameters y and a over the population of
customers, with probability density function
g(ujy, ac) = u, , y > O. (7)
F(y)
The coefficient of variation of u is 1/, so the higher the y
value, the more homogeneous are the customers.
If the gamma distribution exactly governs an individual
customer's purchase pattern, we can add up all the custo-
mers to find the average probability of purchase for a
random population member."7'9"6 With gamma hetero-
geneity of u, and normalising the repurchase probabilities,
(4) becomes:
p Eck + -j-
I
( t
\CkJ V
P-j=1 \. Yl
I t + o/\t +
for
(8)
This gives the probability of the number of purchases made
in time period (0, t] while a customer is still active. The
formula is the NBD model of Ehrenberg' for c = 1 and
Pk-I = 1-
The combined model we call the integrated model. To
compute the distribution of purchases by the inactive
customer, (5) and (6) still hold under conditions of normal-
isation of repurchase probability and gamma heterogeneity.
Empirical Analysis
The model is fully determined when the following types of
parameters are known: the repeat buying probability,
Pk,
k >
1,
the order of the Erlang timing process, c, and
two parameters which describe the heterogeneity over the
population of the purchase rate, a shape parameter, y, and a
scale parameter, oc.
Our approach is illustrated with consumer purchase data
for tea provided by Ten Ren Tea Co., Ltd., the largest
company in the Oriental tea market. The dataset covers a
panel of customers at one selected store. There are 901 new
customers made purchase during July 1994 to May 1996
(96 weeks). The data contains records of the complete
purchase history of these customers (sex, age, purchasing
duration, etc.). To examine the efficiency of the integrated
model and explore the importance of learning and departure
factors, we divided the observation duration into two
periods of 48 weeks each (verify the model twice). In the
first period, there are 363 new customers and 538 new
customers in the second period. From the summary of the
customers' characteristics, for both periods, frequent buyers
are older than light buyers and have higher incomes.
Frequent buyers who are older may have more purchases
due to their higher income (less financial constrain), and the
fact that they are more likely to form a habit of drinking
tea. In addition, males are more likely to be frequent buyers
than females.
While there is not enough information to reliably esti-
mate Pk on an individual level there will generally be enough
to estimate across customers. The mean probability Pk can
be obtained by the following analytical expression:
(no. of people who buy less than
k times anddepart J
Pk -
no. of total
population
(
no. of people who buy less
than k-I times and departJ
Due to the one-time trials may have different purchase
behaviour with the customers who have made purchase
more than once, to find the leaming model, we do not
include Pl. Excluding Pl, the regression analysis shows
the linear learning model, Pk
=
a,
Pk-l +
ao,
has a signi-
ficant power of prediction with a high R2 for each period
(the R2 for the first and second periods are 0.9354 and
0.9432, respectively). We therefore employ the learning
model to estimate the series of Pk. From the calculation
we found that
ao
is 0.201 and 0.210 for periods 1 and 2,
respectively;
a,
is 0.772 and 0.780 for periods 1 and 2,
respectively. Learning behaviour does exist and it causes the
high
a,
value.
In order to determine the regularity of a customer's
purchase, the individual's distributions of the time intervals
between consecutive purchases are examined. In the data
available for this study, when a purchase was made, it was
recorded; therefore, we could directly calculate the mean
and standard deviation of an individual's interpurchase
times. For any random variable, the coefficient of variation
(CV) is determined by the ratio of the standard deviation to
the mean. The order of Erlang interpurchase time, c,
happens to be the inverse of square CV, that is,
c =
I/CV2. It is clear that there is some heterogeneity of
C Wu and H-L Chen-A consumer purchasing model with learning and departure behaviour 587
Table 1 Actual vs predicted number of purchases
k equals no. Observed Integrated
of purchases frequency model NBD CNBD Pareto/NBD
Period 1 k= 1 198 197.79 67.93 50.90 86.83
c=4 k=2 40 29.09 59.46 57.32 60.95
y = .13365 k=3 11 6.13 49.54 53.80 45.38
oc = 0.1968 k=4 15 9.34 40.24 46.25 34.79
ocO
= 0.201 k=5 9 11.14 32.18 37.75 27.12
oc,
= 0.772 k=6 9 11.84 25.46 29.78 21.36
k=7 1 11.75 19.99 22.92 16.95
k=8 8 10.16 15.60 17.33 13.52
k=9 2 10.26 12.13 12.91 10.82
k= 10 6 9.22 9.39 9.52 8.69
k= 11 8 8.15 7.25 6.95 6.99
k= 12 9 7.11 5.59 5.04 5.63
k= 13 3 6.15 4.29 3.62 4.55
k= 14 4 5.28 3.29 2.60 3.68
k= 15 2 4.50 2.52 1.85 2.97
k= 16 1 3.82 1.93 1.31 2.41
k= 17 8 3.23 1.47 0.93 1.95
k= 18 4 2.73 1.12 0.65 1.58
k= 19 6 2.30 0.86 0.46 1.28
k=20+ 19 9.85 2.06 0.74 4.50
Thiel's U - 0.0526 0.4424 0.5050 0.3718
Period 2 k= 1 315 314.99 110.81 88.98 139.81
c=4 k=2 59 52.59 96.48 95.67 96.87
y= 1.2305 k=3 12 14.19 78.73 85.63 70.70
oc=0.3201 k=4 18 14.71 62.09 70.18 52.90
o%o=0.78 k=5 10 14.48 47.95 54.61 40.15
oc,
= 0.210 k=6 19 13.80 36.50 41.06 30.75
k=7 15 12.86 27.50 30.12 23.68
k=8 2 11.79 20.56 21.70 18.32
k=9 2 10.68 15.28 15.42 14.21
k= 10 8 9.59 11.30 10.83 11.05
k= 11 9 8.54 8.31 7.54 8.61
k= 12 13 7.57 6.10 5.21 6.72
k= 13 7 6.68 4.47 3.57 5.25
k= 14 8 5.88 3.26 2.43 4.10
k= 15 0 5.16 2.38 1.66 3.21
k= 16 3 4.51 1.73 1.12 2.51
k= 17 4 3.94 1.25 0.75 1.97
k= 18 0 3.44 0.91 0.51 1.54
k= 19 9 2.99 0.66 0.34 1.21
k=20+ 25 16.97 1.23 0.45 3.47
Thiel's U -
0.0307 0.4429 0.4939 0.3735
Note: 1. Predicted number of customers is based on predicted probability of number of customers.
2. Traditional models can't capture light buyers. According to the formula of Theil's U, it causes
high value of Theil's U.
the population with respect to the order of the interpurchase
time process. Therefore, Jeuland et a18 suggested that a first
step would be to assume the population is homogeneous
with respect to the order, and heterogeneous with respect to
the second parameter of the Erlang model, that is, u. Using
this idea, each customer's c is then averaged to yield an
overall population c. 16 We obtained the mode of the order of
the Erlang process and it approximates four in both periods.
Erlang-4 shows the customer's interpurchase times are much
more regular than suggested by the exponential distribution.
The final step is to allow the parameter u to vary over
customers. The CV of u is 1/, so y is a measurement of
the heterogeneity across the population of customers. From
our data base, we find that y is 1.3365 and 1.2305 for
periods 1 and 2, respectively; the other parameter of the
gamma distribution, c, is 0.1968 and 0.3201 for periods 1
and 2, respectively.
We composed a computer program in C-language to
calculate the probability of customers' purchases on the
integrated model, Pareto/NBD, CNBD, and NBD models.
588 Journal of the Operational Research Society Vol. 51, No. 5
Table 2 Actual vs predicted number of purchases
k equals no. Observed Integrated
of purchases frequency model NBD CNBD Pareto/NBD
Period 1 k=2 40 33.89 15.47 12.29 24.01
c=4 k=3 11 5.92 15.48 13.86 19.14
7= 1.3365 k=4 15 9.01 14.84 14.32 15.78
x=0.1968 k=5 9 10.75 13.88 14.08 13.27
io = 0.201 k=6 9 11.42 12.74 13.86 11.30
a,
= 0.772 k=7 1 11.34 11.54 12.39 9.73
k=8 8 10.76 10.35 11.28 8.43
k=9 2 9.90 9.22 10.12 7.34
k= 10 6 8.90 8.16 8.98 6.42
k= 11 8 7.86 7.18 7.90 5.63
k= 12 9 6.86 6.30 6.89 4.95
k= 13 3 5.93 5.50 5.98 4.36
k= 14 4 5.09 4.79 5.16 3.85
k= 15 2 4.34 4.16 4.42 3.41
k= 16 1 3.69 3.60 3.78 2.02
k= 17 8 3.12 3.11 3.22 2.67
k= 18 4 2.63 2.69 2.74 2.37
k= 19 6 2.22 2.31 2.31 2.11
k=20+ 19 9.50 11.68 9.90 15.35
Thiel's U - 0.1967 0.3314 0.3727 0.2472
Period 2 k=2 59 52.59 23.56 18.03 31.54
c=4 k=3 12 14.19 22.76 20.10 26.01
y=1.2305 k=4 18 14.70 21.24 20.54 21.89
x=0.3201 k=5 10 14.48 19.42 19.94 18.64
xo =0.78 k=6 19 13.80 17.50 18.72 16.00
a,
=0.210 k=7 15 12.86 15.61 17.14 13.80
k= 8 2 11.79 13.81 15.42 11.95
k= 9 2 10.68 12.15 13.68 10.37
k=10 8 9.58 10.64 12.00 9.03
k= 11 9 8.54 9.27 10.43 7.87
k= 12 13 7.57 8.06 8.99 6.87
k= 13 7 6.68 6.98 7.71 6.00
k= 14 8 5.87 6.03 6.57 5.25
k=15 0 5.16 5.20 5.58 4.60
k= 16 3 4.51 4.48 4.70 4.03
k= 17 4 3.94 3.85 3.96 3.53
k= 18 0 3.43 3.30 3.33 3.09
k= 19 9 2.99 2.83 2.78 2.71
k=20+ 25 16.69 13.89 10.99 18.11
Thiel's U - 0.1433 0.3368 0.3777 0.2853
Note: Predicted number of customers is based on predicted probability of number of customers.
The predicted results are reported in Tables 1 and 2 and
Figures 1 and 2. The predictive quality of the model is
assessed using Theil's U inequality coefficient. The U
ranges from 0 to 1, where smaller values indicate better
predictions. We see from Tables 1 and 2 that the integrated
model performs better than the Pareto/NBD, CNBD and
NBD models, as indicated by the relatively small U for both
periods.
Comparing Table 1 with Table 2, when the one-time
purchasers are included, the NBD-type models would have
much higher Theil's U, but the integrated model does not.
This is one of the advantages of the integrated model, which
is not provided by the NBD-type models. In case that the
first repurchase probability is much smaller than the other
repurchase probabilities, the integrated model still provides
the function to evaluate the consumer purchase behaviour
well.
Summary of substantial findings and managerial
implications
According to Tables 1 and 2, the NBD/Pareto model
performs better than the NBD and CNBD models in both
periods, which implies that when a firm observes a new
customer and wishes to predict his purchase pattem, the
C Wu and H-L Chew-A consumer purchasing model with learning and departure behaviour 589
45--- - Actual
---- El----- Integrated Model
40- -_--- NBD
-A-CNBD
35-l ........x
Pareto/NBD
Y30-
, 25-
020-
z ~~~~~~~t
10
8 zn- A3*>-
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Number of Purchases
Figure 1 Actual vs predicted number of purchases (Period 1).
70-
-40 Actual
60- ----E3- Integrated Model
-~-e-- NBD
- A- -CNBD
50-i --.
.
Pareto.NBD
? 40-
0 0
-
30-
z
20 .
10
2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Number of Purchases
Figure 2 Actual vs predicted number of purchases (Period 2).
'defection effect' should be utilised. Furthernore, apart
from the 'defection effect', the learning effect should also
be utilised. This is because before the customer gets
experience, there always exists learning effect. This is
evidenced from the result that the integrated model
performs much better than the NBD/Pareto model.
It is interesting to find that when the one-time purchasers
are included, the R2 of the linear learning model is much
smaller than the R2 of the case that one-time purchasers are
excluded. This has another important managerial implica-
tion. The one-time trial really exhibits different purchase
behaviour from the customers who repurchase at least once.
While there is lower sensitivity to the marketing mix, once a
customer repurchases, there is a higher possiblility to follow
the regular leaming model and purchase again. Also,
according to the learning model, the probability is that
the repurchasing will go steady once the customer gets
experience. This model explains why state dependence
wears out as a customer gains experiences and the tradi-
tional NBD-type models assume that the experienced consu-
mers are in a steady state.
These findings have substantial managerial implications.
For example, a retailer may induce high inertial households
to buy its store brands in various categories such as using
sampling programs on 'bundles' of store brands. As long as
the store brands are in the consumers' choice set, there is a
high probability that the household keeps purchasing in the
future.
Next, we would like to discuss the regularity assumption
of the interpurchase times. According to Tables 1 and 2, we
observe that Erlang-2 does not really improve the fit.
Interestingly, if we assume the interpurchase times are
exponentially distributed, instead of Erlang-4 distribution,
in most of the cases, the Theil's U is almost the same as
before. For example, when the one-time purchasers are
included, the Theil's U is 0.0498 and 0.0308 for periods 1
and 2, respectively; when the one-time purchasers are
excluded, the Theil's U is 0.2190 and 0.1424 for periods I
and 2, respectively. Due to this finding, if the majority of a
firm's customers just purchase once, to predict the firm's
sales, we can infer that the regularity assumption of the
interpurchase times may not be important. Also, it is
difficult to predict these customers' purchase behaviours.
However, in some cases, the regularity assumption may be
substantial, such as in period 1, when the one-time purcha-
sers are excluded, the difference of the Theil's U would be
significant. To avoid the prediction bias, a model should be
flexible and take most of the substantial factors into account.
With these concerns, the developed model would be more
useful in most of the cases.
Conclusions
We have attempted to provide a more general framework to
analyse the customer's interpurchase time by considering
the regularity of interpurchase time, adding learning and
the departure factors and including the heterogeneity of
customers. We provided these extensions by replacing
some NBD assumptions. Firstly, as regular purchases
exist, we adopted Erlang interpurchase times in our
model. We found that the customer's interpurchase time
can be extended to Erlang-c and still can be easy to
estimate. Secondly, consideration of the customer's learning
and departure is shown to be necessary when we treat the
buying population as having easy exit and entry.
Combining these elements with gamma heterogeneity
provides many good tools and is useful to the marketing
manager in solving managerial issues. Our model can be
used to analyse the company's annual sales and customer
base for a product. For example, the model can monitor the
ratio of customers retained and customers leaving, specify
the value and satisfaction of core customers and measure
590 Journal of the Operational Research Society Vol. 51, No. 5
business performance. By not eliminating light buyers, as is
often done in similar studies, the integrated model we have
developed achieves more precise results, which can be seen
by using Theil's U.
Further research in this area could try to take into
account the interrelationship between repeat buying prob-
ability and interpurchase time, and at the same time
incorporating marketing variables.
Appendix
The derviation of (5) and (6) can be expressed diagrama-
tically below:
P(T, <
t)ql
P(T2
<
t)p1q2
P(T,
< t)(
-
q,)
P
(T3
<
t)plp2q3
P(T,
:5 t) d t)p p i
P(T2?t)pt(p- 2)
=P(T2?<t)P1P2
more...
where P(Tk > t,
Tk-
t)pkl = P(Tk > t,
Tk-
I
t and
repurchase k - 1 times) is the
probability
that a customer
who arrives at time 0, is still active at time t and makes k
purchases, and P(Tk <
t)pk_lqk
is the
probability
of a
customer who makes k purchases, but is not active at time
t. Also due to
P(T1 > t) =1 (c -j)! (8)
t
P(T1
<
t, T2
>
t)
=
{P(T2
> t
-yIT,
=y)P(T1 =y)dy
0
(9)
t
c ~~(u(t
-
y))C-I
FeU(t
Y)
E _(c_j)!_]
!
Y:ud;y
;(t)c1u
(10)
F(c) } j=E (2c-j)!
and inductively,
P(Tk-l
< t,
Tk
>
t)
-
X
e-u(t-Y)
E
[(
(
y)]J
Jo j=i (c
-
)!
Uc(k-l)yc(k-1)-I eu y
F(c(k
-
1))
Y
j=i (ck-j)! k=3 ,***(1
Therefore, we are able to obtain the closed form of
P(Tk- I
!!
t, Tk
>
OPfk- 1,
Vk.
The probability that a customer is not active at time t but
has made k purchases would be obtained
recursively.
The
probability that the customer purchases twice and abandons
the product, is
P(T2 < t repurchases once and then departs)
=
P(T2
?
t) * p
Iq2
=[P(T1 t)(I
-ql)-P(T1
<
t,T2 k t)pl]q2
=p(T
t)pIq2
-P(T1 < t, T2 >
t)pIq2
(12)
Inductively, we have
P(Tk < t repurchase k - 1 times and then
departs)
-
P(Tk-I <O qk
-
P(Tk-I
< t, Tk >
t)p-I qk
(13)
Also from (11) and (13), we have the
probability
that k
purchases were made no matter whether the customer is
active or not. That is,
P(Tk < t repurchases k - 1 times and
departs)
+ P(Tk-l < t, Tk > t and repurchases k - 1 times)
=
P(Tkl1
<
t)Pk-lqk
-
P(Tkl I t, Tk
>
O) Ik
= P(Tkl
I
<-
ON-
I qk
+ P(Tk <- t, Tk >
t)k-(I
- qk)
=
P(Tk- I t)pk-lqk +P(Tk-I
< t,
Tk
>
t)pk. (14)
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Received January 1998;
accepted September 1999 after two revisions