RFM and CLV: Using Iso-value Curves for Customer Base Analysis

Peter S. Fader
The Wharton School, University of Pennsylvania

Bruce G.S. Hardie
London Business School

Ka Lok Lee
Catalina Health Resource

July 2004
Revised December 2004
Revised February 2005


We present a new model that links the well-known RFM (recency, frequency, monetary value) paradigm with customer lifetime value (CLV). While previous researchers have connected the two conceptually, none has presented a formal model that requires nothing more than RFM inputs to make specific lifetime value projections for a set of customers. Key to this analysis is the notion of "iso-value" curves, which enable us to group together individual customers who have different behavioral histories but similar future valuations. Iso-value curves make it easy to visualize and summarize the main interactions and tradeoffs among the RFM measures and CLV. Our stochastic model, featuring a Pareto/NBD framework to capture the flow of transactions over time and a gamma-gamma sub-model for dollars per transaction, reveals a number of subtle but important non-linear associations that would be missed by relying on observed data alone. We conduct a number of holdout tests to demonstrate the validity of the the model's underlying components, and then focus on our iso-value analysis to estimate the net present value for a large group of customers of the online music site, CDNOW. We summarize a number of substantive insights and point out a set of broader issues and opportunities in applying such a model in actual practice.