Alfred J. Nanni

Using Simulation to Model Customer Behavior in the Context of Customer Lifetime Value Estimation

This article illustrates how simulation can be used in the classroom for modeling customer behavior in the context of customer lifetime value estimation. Operations research instructors could use this exercise to introduce multiperiod spreadsheet simulation models in a business setting that is of great importance in practice, and the simulation approach to teaching this subject could be of interest also to marketing and accounting instructors. At Babson College, the spreadsheet simulation exercise is part of an integrated one-case teaching day of the marketing, accounting, and operations research disciplines in the full-time MBA program, but the exercise is directly transferable to stand-alone courses as well. In our experience, students have felt empowered by the ability to incorporate their ideas about customer behavior directly into customer lifetime value models, and have appreciated the ease with which simulation enables them to obtain intuition about the sensitivity of their estimates to different assumptions.