Estimating the Size and Composition of Customer Base Using Retail Transaction Data

ABSTRACT The knowledge of the number of customers is the pillar of retail business analytics. In our setting, we assume that a portion of customers is monitored and easily counted due to the loyalty program while the rest is not monitored. The behavior of customers in both groups may significantly differ making the estimation of the number of unmonitored customers a nontrivial task. We identify shopping patterns of several customer segments which allows us to estimate the distribution of customers without the loyalty card using the maximum likelihood method. In a simulation study, we find that the proposed approach is quite precise even when the data sample is very small and its assumptions are violated to a certain degree. When a major violation is suspected, we suggest an interval approach. In an empirical study of a drugstore chain, we validate and illustrate the proposed approach in practice. The actual number of customers estimated by the proposed method is much higher than the number suggested by the naive estimate assuming the constant customer distribution. The proposed method can also be utilized to determine penetration of the loyalty program in the individual customer segments.