Why Predictive Analysis Outperforms Descriptive Analysis

Descriptive analysis summarizes historical data, providing insights into past performance. Predictive analysis, however, uses historical data to forecast future behavior, making it more actionable for strategic decision-making. For Customer Lifetime Value (LTV), predictive analysis offers a more accurate and forward-looking measure by predicting future customer behavior and revenue potential.

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Steps to Calculate LTV Using Historical Data

1. Data Collection: Gather historical data on customer transactions (purchase frequency, amounts, and time intervals).
2. Segmentation: Group customers based on behavioral patterns.
3. Revenue and Cost Analysis: Calculate total revenue and costs for each segment.
4. Net Profit Calculation: Subtract total costs from total revenue for each customer.
5. Discount Rate Application: Apply a discount rate to future cash flows.
6. Survival Analysis: Estimate the likelihood of continued purchases using survival modeling.
7. LTV Calculation: Combine net profit and survival probability to estimate LTV.

Example: Comparing Two Customers from Different Segments

Survival Modeling Results with Variables

Predicted LTV with Survival Modeling

Example: Impact of Variables on LTV

By integrating the survival probabilities influenced by various marketing strategies, we can further refine the LTV estimates:

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Why Predictive Analysis is Better

Predictive analysis forecasts future actions, providing deeper insights. Using survival modeling, it estimates the likelihood of continued purchases, helping prioritize resources for high-value customers. For example, Customer A has a significantly higher LTV compared to Customer B, guiding focused marketing efforts.

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Conclusion

Predictive analysis goes beyond describing past behavior to understanding future trends, enabling businesses to target high-value customers effectively. This strategic focus ensures a better return on investment by maximizing customer retention and growth through more insightful LTV calculations.

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