New study finds customers who binge consume are more valuable

CATONSVILLE, MD, February 3, 2015 - Marketing managers traditionally segment customers by three summary measures: recency – how long since their last visit, frequency – how often they visit, and monetary value – how much they spend on a visit (also known as the RFM model).   An upcoming Marketing Science paper by Yao Zhang, Eric Bradlow and Dylan Small shows that in contrast to this traditional segmentation, one based on “binge consumption” is worth more in the long run. Binge consumption is characterized by bursts of heavy buying interspersed by little or no buying. The authors call this pattern of consumption “clumpiness.”

The authors develop a new measure of clumpiness that extends the “hot hand” literature in statistics.  That is, just as sports athletes have periods of hot and cold performance (e.g., shooting), customers also have hot and cold periods of visiting (binge-visiting) and buying (binge-purchasing).   Even after controlling for frequency, visits and monetary value, clumpy customers provide more economic value to the firm than non-clumpy ones.

Imagine customers who purchase very frequently (high F) for a period of time but haven’t purchased in a while (low R). This behavior has two possible explanations.  One is the customer has quit or churned as we might expect them to have come back sooner.  The other possibility is that the customers are clumpy or between “bursts.” When they come back they will “burst” again.  Firms can make money on customers who are between bursts if they can successively encourage them (possibly via target marketing) to return!

The authors also show two important results for firms.  First, that by spending money on marketing, firms can increase the clumpiness of a customer with the hope of increasing their value. Second, not all customers are equally clumpy. Women, younger people and customers in loyalty programs appear to be clumpier than others.  A focus on customer clumpiness shows new insights into buying and does better than the traditional model of recency, frequency, and monetary value.

The author of the study is a member of ISMS, the INFORMS Society for Marketing Science. ISMS is a group of scholars focused on describing, explaining, and predicting market phenomena at the interface of firms and consumers. This press release was prepared by the author with the assistance of Gerard J. Tellis, Vice President for External Affairs of ISMS.

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About the Authors

	Yao Zhang Fixed Income Research Division Credit Suisse, New York, New York 10010 [email protected]
	Eric T. Bradlow The Wharton School University of Pennsylvania Philadelphia, Pennsylvania 19104 [email protected]
	Dylan S. Small The Wharton School University of Pennsylvania Philadelphia, Pennsylvania 19104 [email protected]

About Marketing Science

Marketing Science is an Institute for Operations Research and the Management Sciences (INFORMS) publication (SSCI indexed). We invite authors to submit for peer review their best marketing-oriented research. We accept many types of manuscripts. Please consider us as an author-friendly outlet for your research. We are THE premier journal focusing on empirical and theoretical quantitative research in marketing. The journal is governed by the INFORMS Society for Marketing Science.

About ISMS

ISMS is a group of scholars focused on describing, explaining, and predicting market phenomena at the interface of firms and consumers.

Peter T.L. Popkowski Leszczyc, Ph.D.,
V.P. of Electronic Communications Informs Society for Marketing Science

Director CampusAuctionMarket.com and Professor of Marketing
University of Alberta, 4-20 F School of Business
Edmonton, AB, Canada, T6G 2R6,
and Professor of Marketing Renmin University, Beijing, China

Hompage: http://www.business.ualberta.ca/PeterPopkowskiLeszczyc

SSRN Author page: http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=441780