UNLEASING PROFIT POTENTIAL: CUSTOMER LIFETIME

VALUE FOR SUSTAINABLE BUSINESS GROWTH

A PROJECT REPORT – Phase II

Submitted by

SAMIKSHA.V.T 142220205075
SUBHALAKSHMI.V 142220205092
SUPRAJA. G 142220205095
SUWAASHA.M 142220205097

in partial fulfilment for the award of the degree

of

BACHELOR OF TECHNOLOGY
in
INFORMATION TECHNOLOGY

SRM VALLIAMMAI ENGINEERING COLLEGE

(AN AUTONOMOUS INSITUTION)

SRM NAGAR,
KATTANKULATHUR,
CHENGALPATTU

ANNA UNIVERSITY:: CHENNAI 600 025

MARCH 2024
 ANNA UNIVERSITY::CHENNAI 600 025

BONAFIDE CERTIFICATE

Certified that this project report “ ” is the bonafide work of “Samiksha V.T,
Subhalakshmi.V, Supraja.G, Suwaasha.M” who carried out the project work
under my supervision.

Dr. S. NARAYANAN Dr.S.NARAYANAN

HEAD OF DEPARTMENT i/c SUPERVISOR

Associate Professor Associate Professor

Department of Information Technology Department of Information Technology

SRM Valliammai Engineering SRM Valliammai Engineering

College(An Autonomous College(An Autonomous
Insitution) Instituion)
SRM Nagar, Kattankulathur, SRM Nagar, Kattankulathur,
Chengalpattu- 603 203. Chengalpattu- 603 203.

Submitted for the viva voce held on ………………………

INTERNAL EXAMINER EXTERNAL EXAMINER

 ACKNOWLEDGEMENT

First and foremost, we would like to extend our heartfelt respect to the
Management, Director Dr. B. Chidhambara Rajan, M.E., Ph.D., Principal
Dr. M. Murugan, M.E., Ph.D., and Vice Principal Dr. Visalakshi Selvaraj
M.E., Ph.D., who helped us in our endeavors.

We also extend our heartfelt respect and gratitude to our beloved

Dr. S. Narayanan, B.E., M.Tech., Ph.D. Associate Professor Head sof the
Department for offering his sincere support throughout the project work.

We thank our Project Coordinator(s) Ms.U.Chindiyababy M.E., PhD.,

Assistant Professor (O.G) and Mr.S.Suresh Kumar, M.E., Assistant
Professor (Sr.G) for their consistent guidance and encouragement throughout
the progress of the project.

We thank our Project guide Dr.S.Narayanan, B.E., M.Tech., Ph.D.

Associate Professor for his valuable guidance, support, and active interest in
the successful implementation of the project.

We would also thank all the Teaching and Non-Teaching staff

members of our department for their constant support and encouragement
throughout the course of this project work.

Finally, the constant support from our lovable Parents and Friends is
untold and immeasurable.
 ABSTRACT

The Customer Lifetime Value (CLV) project integrates the Random Forest algorithm in
machine learning to accurately predict and optimize the long-term value of customers,
utilizing historical data encompassing purchase history, customer demographics, and
interaction patterns. The inclusion of a Customer Segmentation module enhances the
project's capabilities by categorizing customers based on their behaviors and
characteristics. This segmentation provides valuable insights into distinct customer
groups, enabling personalized strategies to maximize CLV. The Random Forest
algorithm, known for its adept handling of complex relationships, ensures precise CLV
predictions and identifies influential factors affecting customer value. Additionally, the
project offers a scalable and interpretable solution, empowering businesses with data-
driven decision-making. The combination of CLV prediction and customer
segmentation enhances the strategic approach to targeted marketing, allowing for
tailored campaigns and optimized resource allocation.

KEYWORDS:

Customer Lifetime Value, CLV, machine learning, Random Forest algorithm, customer
segmentation, personalized strategies, historical data, accuracy, targeted marketing.

iii
TABLE OF CONTENTS

CHAPTER TITLE PAGE

NO. NO.
ABSTRACT iii

LIST OF TABLE vi

LIST OF FIGURES vii

LIST OF viii
ABBREVATIONS
1. INRODUCTION

1.1 OVERVIEW

1.2 TECHNOLOGY
1.2.1MACHINE
LEARNING
1.2.2DATA
COLLECTION AND
MANAGEMENT

1.3 SYSTEM ANALYSIS

LIST OF TABLE

TABLE PAGE
TABLE NAME
NO. NO.
FIGURE NAME

FIGUR FIGURE NAME PAGE

E NO. NO.
LIST OF ABBREVATIONS

RF Random Forest

CS Customer Segmentation

K-Means K-Means(Clustering )

CLV Customer Lifetime Value

ML Machine Learning

DT Decision Tree
 CHAPTER 1

INTRODUCTION
1. INTRODUCTION

In today's business landscape, ensuring the lasting value of customers is crucial

for ongoing success. The Customer Lifetime Value (CLV) project, utilizing the
Random Forest algorithm in machine learning, aims to reshape how businesses
manage customer relationships. By analyzing historical data, including purchase
history, customer demographics, and interactions, this project seeks to develop a
strong CLV model.

Distinguishing itself from standard approaches, the project includes an advanced

Customer Segmentation module. This module identifies distinct customer groups
based on behaviors and characteristics, offering detailed insights into the diverse
customer base. The alignment between CLV prediction and customer
segmentation forms a comprehensive strategy, allowing businesses to tailor their
approaches to different customer segments.

The Random Forest algorithm, chosen for its adept handling of complex
relationships, ensures precise CLV predictions and identifies key factors
influencing customer value. This project goes beyond mere prediction, providing
practical insights for informed strategic decision-making.

The goal is to provide businesses with a scalable, understandable, and data-driven

solution, optimizing customer relationships, guiding targeted marketing efforts,
and enhancing overall business strategy.
 1.1 OVERVIEW

This project aims to utilize the Random Forest algorithm in machine learning to
revolutionize how businesses manage customer relationships. Through a
meticulous analysis of historical data, including purchase history, customer
demographics, and interactions, the goal is to develop a robust Customer Lifetime
Value (CLV) model.

Objective: Revolutionize customer relationship management in businesses.

Algorithm: Utilizes the Random Forest algorithm in machine learning.

Data Analysis: Scrutinizes extensive historical data, encompassing purchase history,

customer demographics, and interactions.

Innovation: Integrates an advanced Customer Segmentation module for nuanced

insights into customer behaviors and characteristics.

Strategy: Aligns CLV prediction with customer segmentation for tailored

approaches to diverse customer groups.

Comprehensive Approach: Aims to maximize customer value through the

harmonization of CLV prediction and customer segmentation.

Precision: The Random Forest algorithm ensures accurate CLV predictions and
identifies key factors influencing customer value.
The Customer Lifetime Value (CLV) project can typically be divided into several
phases, including:

Data Collection and Preparation:

- Gathering historical data on customer interactions, purchase history, and
demographics.
- Cleaning and preprocessing the data to ensure its quality and relevance.

Exploratory Data Analysis (EDA):

- Analyzing and visualizing the data to gain insights into customer behavior.
- Identifying patterns, trends, and potential outliers.

Model Development:
- Selecting and implementing the Random Forest algorithm for CLV prediction.
- Integrating a Customer Segmentation module to enhance the precision of
customer categorization.

Model Training and Evaluation:

- Training the CLV model using historical data.
- Evaluating the model's performance and adjusting parameters for optimal results.

These phases ensure a systematic approach to developing, implementing, and

optimizing the CLV project, allowing businesses to leverage customer data
effectively for strategic decision-making.
1.2 TECHNOLOGY
1.2.1 MACHINE LEARNING
Machine learning algorithms are computational models that enable computers to learn
patterns and make predictions or decisions without being explicitly programmed.
These algorithms use statistical techniques to analyze and interpret data, identifying
patterns or trends that can be used for various tasks. The goal is to enable machines to
improve their performance on a specific task over time as they are exposed to more
data.
ALGORITHMS USED FOR IMPLEMETATION OF CLV
Random Forest:
- Random Forest is a machine learning algorithm used in the CLV project to predict
Customer Lifetime Value. It operates by constructing multiple decision trees during
training and outputs the average prediction of the individual trees for more accurate
and robust results.

K-Means:
- K-Means is applied in the Customer Segmentation module of the CLV project to
categorize customers based on their behavior and characteristics. It partitions
customers into clusters (k) to facilitate personalized strategies for different segments.

Support Vector Machines (SVM):

- SVM, employed in CLV prediction, is a classification algorithm that finds the
optimal hyper plane to separate different customer classes, aiding in accurate
prediction of Customer Lifetime Value and identifying factors influencing customer
value.
Gradient Boosting Machines:
- Gradient Boosting Machines enhance CLV prediction by combining weak
predictive models, boosting overall accuracy. This algorithm iteratively corrects
errors of previous models, producing a strong ensemble for improved precision in
estimating and optimizing Customer Lifetime Value.

1.2.2 DATA COLLECTION AND MANAGEMENT

Data collection and management are crucial aspects of the Customer Lifetime
Value (CLV) evaluation and segmentation project.

Data Collection:
- Gather data from various sources, including transaction records, customer
interactions, demographics, and any relevant touchpoints. This comprehensive
dataset provides a holistic view of customer behavior.

Previous Data:
- Collect a sufficient historical dataset to capture trends and patterns over time.
The historical data should span a period long enough to encompass various
customer behaviors and interactions.

Data Intergrity:
- Ensure data quality by addressing issues such as missing values, outliers, and
inaccuracies. Clean and preprocess the data to create a reliable foundation for
accurate CLV predictions and effective customer segmentation.
Data Privacy and Compliance:
- Adhere to data privacy regulations and ensure compliance with relevant laws.
Implement anonymization and encryption measures to protect sensitive customer
information.

Customer Identifiers:
- Use unique customer identifiers to track individual customer journeys across
different touchpoints. This ensures accurate linkage of data and the creation of a
cohesive customer profile.

Feature Selection:
- Identify and select relevant features (variables) that contribute to CLV prediction
and customer segmentation. Consider factors such as purchase frequency, recency,
monetary value, and customer demographics.

Customer Segmentation Criteria:

- Define criteria for customer segmentation, considering behavioral attributes,
demographics, or any other relevant characteristics. This segmentation is essential for
tailoring strategies to specific customer groups.

Data Storage:
- Utilize secure and scalable data storage solutions, such as relational databases or
SQL databases. Cloud-based storage can provide flexibility and accessibility for data
processing.
1.3 SYSTEM ANALYSIS

1.3.1 EXISTING SYSTEM

Implementing real-time CLV systems requires sophisticated technology and
integration of various data sources. some examples of existing systems that utilize
CLV in real-time:

Marketing Automation Platforms: Platforms like HubSpot, Marketo, and Salesforce

Marketing Cloud offer real-time CLV analysis as part of their suite of marketing
automation tools. These systems integrate with customer databases, website analytics,
and transactional systems to provide insights into customer behavior and lifetime
value. Marketers can use this information to personalize marketing campaigns,
segment customers, and optimize advertising spend in real-time.

E-commerce Platforms: E-commerce platforms such as Shopify, Magento, and

WooCommerce often integrate CLV analytics directly into their dashboards. These
systems track customer transactions, behavior, and engagement in real-time to provide
insights into customer lifetime value. Retailers can use this information to identify
high-value customers, recommend personalized products, and tailor marketing
messages based on individual customer preferences.

Subscription Management Systems: Subscription-based businesses rely heavily on

CLV metrics to predict churn, optimize pricing, and maximize customer lifetime
value. Subscription management systems like Recurly, Chargebee, and Zuora offer
real-time CLV analytics to help businesses understand customer behavior and predict
future revenue streams. These systems integrate with billing, CRM, and analytics
platforms to provide actionable insights for subscription-based businesses.
Predictive Analytics Platforms: Advanced analytics platforms like Google Analytics
360, Adobe Analytics, and Customer Experience Analytics offer real-time predictive
modeling capabilities to forecast CLV and identify high-value customer segments.
These platforms leverage machine learning algorithms to analyze vast amounts of
customer data in real-time and provide actionable insights for marketers and business
leaders.

Custom-Built Solutions: Many companies develop custom-built CLV systems

tailored to their specific needs and requirements. These solutions often integrate data
from multiple sources, including CRM systems, transactional databases, and third-
party APIs, to provide real-time insights into customer behavior and lifetime value.
These systems may require significant investment in technology infrastructure, data
science expertise, and ongoing maintenance but can provide valuable insights and
competitive advantages for businesses.

Steps involved in Customer Lifetime Value (CLV) system used by an e-commerce

company:

Data Collection and Integration: The first step in building a CLV system is to
collect and integrate relevant data from various sources. This may include
transactional data (purchase history, order frequency, order value), demographic data
(age, gender, location), behavioral data (website visits, click-through rates, time spent
on site), and any other relevant customer interactions. This data is then cleaned,
transformed, and integrated into a unified dataset for analysis.
Feature Extraction: Once the data is collected, feature engineering is performed to
extract meaningful features that can be used to predict CLV. This may involve

creating variables such as recency (time since last purchase), frequency (number of
purchases over a certain period), monetary value (average order value), customer
tenure (time since first purchase), and various other customer attributes.

Model Development:

- Segmentation: One common approach is to segment customers into different

groups based on their behavior and characteristics. This could be done using
techniques like RFM analysis or clustering algorithms (e.g., K-means clustering) to
identify distinct customer segments with similar CLV profiles.

- Predictive Modeling: Once segmented, predictive models are built to forecast

future customer value for each segment. This could involve using regression models
(e.g., linear regression, Poisson regression) to predict future purchases or more
advanced machine learning algorithms (e.g., Gradient Boosting Machines, Neural
Networks) to capture complex patterns in the data.

Model Validation and Evaluation: The developed models are then validated and
evaluated using appropriate metrics such as Mean Absolute Error (MAE), Root Mean
Squared Error (RMSE), or Area Under the Curve (AUC) for classification tasks. This
ensures that the models are accurately capturing the underlying patterns in the data
and can generalize well to unseen data.

Deployment and Integration: Once the models are validated, they are deployed into
the production environment and integrated into the company's existing systems. This
could involve developing APIs for real-time predictions or batch processing pipelines
for periodic updates of CLV estimates.

Monitoring and Maintenance: The CLV system is continuously monitored to ensure

that it remains accurate and up-to-date. This may involve monitoring model
performance metrics, tracking changes in customer behavior, and periodically
retraining the models with new data to adapt to evolving trends.

Business Insights and Decision Making: Finally, the CLV estimates generated by
the system are used to inform various business decisions such as customer acquisition
strategies, retention campaigns, pricing optimization, and resource allocation. By
understanding the lifetime value of different customer segments, the company can
allocate resources more effectively and maximize long-term profitability.

1.a. Existing System Architecture

DISADVANTAGES
Data Quality and Integration Challenges: E-commerce CLV systems rely
heavily on accurate and integrated data from various sources such as CRM systems,
transactional databases, website analytics, and third-party platforms. However,
ensuring data quality and consistency across these disparate sources can be
challenging. Inaccurate or incomplete data can lead to flawed CLV calculations and
unreliable insights.

Complexity of Analysis: Analyzing customer behavior and predicting lifetime

value in e-commerce involves dealing with large volumes of data and complex
analytical models. Implementing and maintaining these models requires expertise in
data science, statistics, and machine learning. Small and mid-sized businesses may
lack the resources and technical expertise needed to develop and maintain
sophisticated CLV systems.

Cost of Implementation and Maintenance: Building and maintaining an e-

commerce CLV system can be costly, especially for businesses with limited budgets
or resources. It requires investment in technology infrastructure, data analytics tools,
and skilled personnel. Additionally, ongoing maintenance and updates are necessary
to ensure that the system remains accurate and up-to-date.

Privacy and Data Security Concerns: E-commerce CLV systems often collect
and analyze large amounts of customer data, including personal information and
purchase history. This raises concerns about privacy and data security, especially in
light of increasing regulatory scrutiny and consumer expectations regarding data
protection. Businesses must implement robust data security measures and comply
with relevant regulations such as GDPR and CCPA to protect customer privacy.

Limited Predictive Accuracy: Despite advancements in predictive analytics and

machine learning, accurately predicting customer behavior and lifetime value in

e-commerce remains challenging. Customer preferences, market dynamics, and

external factors can change rapidly, making it difficult to forecast future revenue
streams with certainty. As a result, CLV predictions may be subject to error and
uncertainty.

Overemphasis on Short-Term Metrics: In some cases, e-commerce CLV systems

may prioritize short-term metrics such as conversion rates and transactional value
over long-term customer relationships and loyalty. This can lead to a narrow focus
on immediate revenue generation at the expense of building sustainable, long-term
value. Businesses must strike a balance between short-term and long-term goals to
maximize customer lifetime value effectively.

1.3.2 PROPOSED SYSTEM

The proposed system utilizes machine learning capabilities to develop and deploy a
Random Forest model for calculating Customer Lifetime Value (CLV). It begins by
collecting and preparing historical customer transaction data, ensuring it is
formatted appropriately for analysis. Through data exploration and feature
engineering, relevant features such as recency, frequency, and monetary value are
extracted, alongside additional metrics like customer tenure and RFM scores.

Using the prepared dataset, a Random Forest regression model is trained and fine-
tuned using machine learning tools. This model is then evaluated for performance,
typically using metrics like Root Mean Squared Error (RMSE) or Mean Absolute
Error (MAE). With the trained model, predictions are made to estimate future
customer spend or revenue, thereby enabling the calculation of CLV estimates for
individual customers or segments.

Following model development, the CLV prediction model is integrated into existing
systems and workflows using deployment capabilities. It can be deployed as a
service, API, or batch processing pipeline for generating real-time or periodic CLV
estimates. Continuous monitoring and optimization of the model's performance are
conducted to ensure accuracy and relevance over time. This involves refining the
model based on new data and insights, as well as optimizing hyper parameters and
feature selection using machine learning tools.

Ultimately, the CLV estimates generated by the model provide valuable insights for
strategic decision-making in areas such as customer acquisition, retention, and
marketing strategies. analytics and visualization capabilities facilitate the
communication of these insights to stakeholders, empowering businesses to make
data-driven decisions and optimize their customer strategies effectively.

ADVANTAGES
Advanced Analytics Capabilities: provides advanced analytics and machine
learning tools that enable sophisticated data analysis and model development.
Leveraging these capabilities allows for the creation of accurate and robust CLV
prediction models.

Ease of Integration: offers seamless integration with existing systems and

workflows, facilitating the deployment of CLV prediction models as services, APIs,
or batch processing pipelines. This makes it easier for businesses to incorporate
CLV estimates into their decision-making processes.

Scalability: The proposed system can scale to handle large volumes of customer
transaction data, making it suitable for businesses of all sizes. scalability ensures
that the CLV prediction model can accommodate growing data requirements and
evolving business needs.

Continuous Monitoring and Optimization: monitoring and optimization

capabilities, the CLV prediction model can be continuously refined and improved
over time. This ensures that the model remains accurate and relevant, even as
customer behavior and market dynamics change.

Actionable Insights: The CLV estimates generated by the model provide valuable
insights for strategic decision-making, such as customer acquisition, retention, and
marketing strategies. 's analytics and visualization capabilities facilitate the
communication of these insights to stakeholders, empowering businesses to make
informed decisions.

Cost-Effectiveness: Leveraging for CLV estimation can be cost-effective for

businesses, as it eliminates the need to invest in expensive infrastructure and
expertise for building and maintaining CLV prediction models. Instead, businesses
can leverage 's cloud-based services on a pay-as-you-go basis, reducing upfront
costs and overhead.
1.3.2 HARDWARE AND SOFTWARE SPECIFICATION

SOFTWARE REQUIREMENTS
• Operating System: Most modern operating systems will suffice, such as
Windows 10/11, macOS, or Linux.
• Python Programming Language
• Visual studio

HARDWARE REQUIREMENTS
Processor : Intel / Ryzen
RAM : 8
Internet Connection
GPU (optional): For faster neural network training (e.g., NVIDIA GPU)
Server: If you plan to deploy a backend for your application, you might need a
server to host it.
 CHAPTER 2

LITERATURE REVIEW

.
Modelling Customer lifetime Value by Sunil Gupta et al.
This paper provides reviews about several CLV models which are useful for
market segmentation and the allocation of marketing resources for acquisition,
retention and cross-selling. There are two categories of models found. One category
of models consists of those that attempt to find the impact of marketing programs on
customer acquisition, retention and/or expansion (or cross-selling). The other
category of models deals with the relationship between various components of CLV.

RFM model gives scores to the customers based on their recency, frequency and
monetary value of their purchases. The customers are then segmented based on the
scores allotted and are targeted with different marketing strategies. Probability
models assume that the consumer’s behaviour varies across the population based on
some probability distribution. Econometric models combine customer acquisition,
retention and expansion by modelling them. Persistence models are used to study
the impact of advertising, discounting and product quality on consumer equity and
to examine differences in CLV resulting from different customer acquisition
methods. Many computer science models are being used like generalised additive
models (GAM), multivariate adaptive regression lines (MARS), classification and
regression trees (CART) and support vector machines (SVM) for their predictive
ability. Diffusion/Growth models can be used to forecast the acquisition of future
customers. There are scopes of future work which are suggested by the authors like
working on data which suggests customers’ attitudes and their share of wallet, can
focus on the portfolio of a customer rather than focusing on one customer’s CLV,
estimation of costs per customer. Understanding the limits CLV possesses,
understanding the limits of theory-based models. Customer Lifetime Value
Measurement by Sharad Borle et al 23 Sharad Borle et al. used a hierarchical bayes
approach to model a customer’s lifetime value. They have modeled the purchase
timing, purchase amount and risk of defection from the firm for each customer.
They have taken the data from a membership-based direct marketing company
where the number of times each customer joined and terminated the membership are
known. This model is then compared with other models on a separate dataset. The
other models include extended NBD-Pareto model, RFM model two models nested
in their model, a heuristic model that takes the average customer lifetime, the
average interpurchase time, and the average dollar purchase amount and uses them
to predict the present value of future customer revenues at each purchase occasion.
They have proved through the results that the hierarchical bayes approach model
performs better than the other models in predicting CLV and in targeting valuable
customers. Customer-Base Analysis with Discrete-Time Transaction Data by Fader,
Hardie and Berger Fader et al. proposed a model to predict future purchase patterns
of customers in discrete-time, which means transactions occur at some intervals.
The model proposed was “beta-geometric/beta-binomial” (BG/BB) which act as a
discrete time analog. Any customer purchase history in discrete time can be
represented as a binary string where 1 represents a purchase and 0 represents not a
purchase. Given this string, the model tries to find a probability that the customer is
still and what are the expectations of future purchasing. They have applied this
model to a dataset of cruise-line transactions for 6094 customers over a period of
five years. They have observed that the customers who took a cruise in 1997 have
the same probability of being alive in 1998. Customers who have taken a cruise in
each of the last 4 years will have a higher probability than others. Similarly, there
have been estimations made about all the categories of users based on their recency
and frequency. 24 Customer Lifetime Value: Marketing models and applications by
Paul D. Berger and Nada I. Nasr Berger and Nasr have presented a series of
mathematical models of customer lifetime value and managerial applications of
these models. The mathematical models are presented in 5 different cases of
different assumptions of the following: (1) The number of times sales take place in a
year. (2) spending to retain customers and the change in customer retention rate. (3)
difference in revenues received per customer. These models are useful to decide
how much a company should spend on promotional campaigns and to check
different profitability among different market segments. The CLV determination can
help us find out the effect of a marketing strategy with its acquisition and retention
rates. These models help to determine in various situations like the effect of price
skimming strategy on acquisition rate. They can also help to decide how much to
spend on the acquisition and how much to spend on retention of customers. A model
to determine customer lifetime value in retail banking context by Haenlein, M et al.
Haenlein, M et al. have proposed a model to find out CLV of retail banking
customers which is based on a combination of first-order Markov Chain model and
CART (classification and regression tree) analysis. They used profitability driver’s
age, demographics or lifestyle, type and intensity of product ownership and activity
level as independent variables, and carried out age-dependent CART analyses to
split customers of similar age into same sub-groups to find out the target variable
contribution margin. These sub-groups were then used as states, among which
customers are allowed to flow, of the first-order Markov model. The transition
probabilities were estimated by transition frequencies. The CLV for each customer
was determined as the discounted sum of state-dependent contribution margins
which were weighted by their corresponding transition probabilities.