Comment on “On Estimating Current-customer Equity Using Company Summary Data”

Abstract

In this paper Phil Pfeifer presents an approach for estimating current-customer equity using company-reported summary data when the reporting period spans multiple renewal periods. We sincerely admire a number of aspects of the paper, including: (1) its focus on a problem of genuine managerial interest, (2) its use of a “real world” dataset covering a lengthy period of time (and the author's decision to publish the full dataset in the paper, which facilitates future re-analyses of it), and (3) its aim to bring clarity (and methodological improvement) to approaches used in earlier papers while still retaining a highly practical perspective on the problem at hand. The accomplishment of such goal inevitability involves trade-offs; without access to the more disaggregated data lurking in the firm's customer databases, we cannot build models of a richness desired by many of our academic colleagues. Whenever undertaking such an exercise, we always keep in mind a saying attributed to Albert Einstein: “Make everything as simple as possible, but not simpler.” So while we like what Pfeifer has tried to achieve, we feel that the approach presented in this paper has overstepped the mark: it is “too simple” to properly address the problems it aims to deal with. One key assumption in this work, which is shared by virtually all other papers in the “valuing customers”/“customer equity” literature (e.g. Gupta and Lehmann 2003; Gupta, Lehmann, and Stuart 2004; Libai, Muller, and Peres 2009; Wiesel, Skiera, and Villanueva 2008), is that of a constant retention rate. Unfortunately this is not what we observe in real data. If we look at a cohort of customers acquired at a particular point in time, we (almost) always observe increasing retention rates as the cohort's