PERSISTENCE MODELS FOR CUSTOMER EQUITY

Customer Equity is defined as a sum of Customer Lifetime Values of all the current and the future customers and is a priceless tool which enables us to measure the firm's performance. One of the methods that can be used to examine Customer Equity is an application of a vector autoregressive model (VAR). The method captures dynamic relationships between the number of customers acquired by marketing actions, number of customers acquired by word of mouth and the firm's performance. The estimated VAR model can then be used to define not only effects of acquisitions on performance, but also effects of firm's performance on new acquisitions, effects between marketing and word of mouth acquisitions or their behaviour in time, which can serve as valuable insights for managers. In this paper, we will describe the VAR model and impulse response function in the context of Customer Equity analysis, and we will apply them to customer data sets from two companies.