Measuring the Lifetime Value of a Customer in the Consumer Packaged Goods Industry

In this study, the authors propose a flexible framework to assess customer lifetime value (CLV) in the consumer packaged goods (CPG) context. They address the substantive and modeling challenges that arise in this setting, namely, (1) multiple discreteness, (2) brand switching, and (3) budget-constrained consumption. Using a Bayesian estimation, the authors are also able to infer the consumer's latent budgetary constraint using only transaction information, thus enabling managers to understand the customer's budgetary constraint without having to survey or depend on aggregate measures of budget constraints. Using the proposed framework, CPG manufacturers can assess CLV at the focal brand level as well as at the category level, a departure from CLV literature, which has mostly been firm centric. The authors implement the proposed model on panel data in the carbonated beverages category and showcase the benefits of the proposed model over simpler heuristics and conventional CLV approaches. Finally, they conduct two policy simulations describing the role of the budget constraint on CLV, as well as the asymmetric effects of pricing in this setting, and develop managerial insights in this context.